Tuesday, February 27, 2018

Liquidation Expected at Toys ‘R’ Us U.K.

Media reports suggest that the Toys ‘R’ Us U.K. subsidiary is likely to go into administration very soon, either today or tomorrow. Despite reaching an agreement with creditors in December to allow it to stay open, the insolvent toy giant has failed to find a buyer. It no longer has any support from its bankrupt U.S. parent company. It has no funds to pay a delinquent tax bill with an effective deadline of March 1. The retailer is currently conducting store-closing sales in a fraction of its stores. With no source of cash, administration is its only option.

The likely outcome of administration is that all Toys ‘R’ Us stores in the U.K. will close by June. All inventory will be sold off, most of it to the public at going-out-of-business sales. Shelves at Toys ‘R’ Us stores in the U.K. are said to be as bare as those I have seen in the U.S., so there is not a mountain of toys to liquidate. Proceeds from the liquidation will pay the tax bill in full, but there will be little left over for pension funds, bondholders, and other creditors. Some 3,000 jobs will be lost.

The prospect of liquidation of the U.K. subsidiary casts more doubt on the parent company which operates Toys ‘R’ Us and Kids ‘R’ Us stores in the U.S. The U.S. company is in the process of closing 20 percent of its stores in bankruptcy, similar to the U.K. store closings. It faces most of the same challenges seen in the U.K. It has given no hint of a business plan that would allow it to emerge from bankruptcy, and time will run out on that process in a matter of weeks, so that a liquidation appears increasingly likely for Toys ‘R’ Us in the U.S.

Friday, February 16, 2018

Bankruptcy Watch for Barnes & Noble

Barnes & Noble is well on its way to closing. I expect that it will go into bankruptcy within a year and that all stores will close.

I come to this unhappy conclusion after looking at the news from Barnes & Noble’s disastrous December and the subsequent layoffs.

I have to start with the layoffs, because it seems the layoffs were twice as extensive as we initially heard. For an inside perspective see The entirely unnecessary demise of Barnes & Noble at Brain Fuzzies, and I have been able to corroborate many of the important details from other reports and my own indirect contacts among (former) Barnes & Noble staff. The number of job cuts was not around 1,000, as it first appeared, but perhaps more than 2,000. Initial news reports said that head cashiers and digital leads were laid off in many stores. Instead, all full-time in-store staff were fired, and it appears the stores from now on will be operated by minimum-wage workers who work no more than 25 hours a week. Certainly the store will still be mostly staffed by book enthusiasts, but you will no longer find anyone in the store for whom books are a career. The few remaining workers probably won’t have time to talk to customers anyway, but if they do have time, they won’t have the in-depth knowledge that might help you find the book you are looking for. With the professional staff gone, buying a book at Barnes & Noble will be almost like buying one at Target: you find the book on the best-seller rack and take it to the cash register. Obviously, there will be more books in the store than 100 best-sellers, but with the job cuts, the retailer is conceding it has little hope of selling them.

If you are a loyal Barnes & Noble customer, you need only imagine your local store staffed by just three workers to realize that the store you loved is already gone.

So the job cuts are pretty drastic and the impact on the customer experience is devastating. It is also a concern that the retailer allowed such misleading press reports about the job cuts. A company can’t expect to keep public-facing changes a secret. Large companies attempt this kind of deception only when things are pretty desperate.

The job cuts are a desperate move in themselves. The cuts are, it seems to me, something the company would only do if there was substantial doubt that they could limp along until the next Christmas season. Barnes & Noble, you must understand, is a company that is profitable only in the month of November during the peak of Christmas shopping. For all other months of the year the company takes a loss. The company’s whole cash-flow strategy, then, has to be all about getting to November. They wouldn’t throw away their future the way they just did by firing their entire staff of book professionals if they thought they could get to November any other way. My hunch, though, is that with the cuts, they feel reasonably confident in making it to November.

Perhaps that depends on some optimistic assumptions, but beyond that, the problem is that just getting to November isn’t a strategy. With the qualified sales staff gone, November 2018 in-store sales can’t possibly resemble those of November 2017. When Home Depot tried a similar strategy many years ago, revenue went down by about a quarter and that retailer barely survived. Barnes & Noble was barely getting by as it was. Imagine its revenue going down by a quarter. Yet there is no avoiding it.

This can only mean bankruptcy for Barnes & Noble, either going into the 2018 Christmas shopping season or, more likely, immediately after. A retailer that faced a crisis when revenue fell 6 percent (comparing December 2017 to December 2016) won’t be able to keep the lights on when revenue falls by a larger amount.

Once in bankruptcy, Barnes & Noble is assured of the same outcome that Borders saw eight years earlier. A rule of thumb is that a retailer can expect to emerge from bankruptcy if its core problems are debt and rent. Barnes & Noble’s worries cut deeper than that. Its entire business model is flawed, often in glaring ways.

As a measure of the operational problems at Barnes & Noble, I must mention the recent high-profile “relaunch” of Barnes & Noble’s digital book publishing platform. Although I have published e-books myself, I have never released one on Barnes & Noble’s Nook platform because the old Nook publishing site made the process virtually impossible. Despite a rebranding, a site redesign, and some technical improvements, when I went to look at the new site it appeared that all the vexing technical hurdles remain. If you have a novel with no typography more advanced than italic text, you can convert the novel to a word processing document and you can publish it on the Nook platform. If a book is anything more complicated than that, you likely won’t be able to get it to display correctly on the Nook via Barnes & Noble’s publishing platform. You may try for several days, as I did, before ultimately giving up. This is so even though the Nook from the beginning has been capable of displaying advanced ebook typography and layout. It is the publishing platform, not the device, that presents the obstacle. To undertake a “relaunch” without addressing any of the real problems looks to me like the same kind of misdirection as the misleading reports about the layoffs. That is, Barnes & Noble is trying to deliver a growth story even as it slowly shuts down.

A company is never more intent on a growth story than when it is hoping to line up financing for its bankruptcy reorganization. Borders did vaguely similar things. But the prospects of a book retailer emerging from bankruptcy are a lot dimmer now than they were when Borders went into liquidation. If Borders could not keep any stores open in 2011, there is nothing to suggest that a bookseller will be able to borrow money in bankruptcy to keep stores open in 2018 or 2019. If the far-fetched scenario of bankruptcy reorganization is what Barnes & Noble’s planning is pointing toward, that means that the company does not see any preferable scenario that has any reasonable chance of occurring.

There are other signs of financial desperation at Barnes & Noble. One recent development is a determined push to reduce inventory. The retailer is shipping books from store shelves to online buyers. It is a relatively quiet, if highly inefficient, way to get more stock out of the stores before it is too late.

So Barnes & Noble gives every indication of going into bankruptcy in a year or less, and the likely outcome is that all stores will close. The aftermath represents a problem for the book industry, as the Barnes & Noble chain represents about half of the remaining bookstores in the United States. My own county, population half a million people, will be left without a traditional bookstore, that is, one that sells popular new books. It will be harder to sell books, and book publishers will have to cut back accordingly. I have to imagine publishers are already drawing up lists of scheduled 2019 book releases that they may have to cancel. Worse, Barnes & Noble operates a significant fraction of college bookstores, it seems like about half but it is probably not as many as that, and I would imagine that those stores too could close in a bankruptcy liquidation. It will be up to each college to find a way to reopen its bookstore, and if the fall 2019 academic season depends on it, it is not too soon for colleges to start to think about what they will have to do.

Then there is the question about what will happen to the Nook e-readers. Nook unit sales have showed rapid decline in the last two years. The Nook devices are essentially orphaned now that Barnes & Noble has fired all its digital leads, the in-store staff who understood in detail how the Nook works. I don’t know the Nook platform well enough to hazard a guess as to which Nook models will continue to work in some fashion after Barnes & Noble goes dark and which will not work at all. I will just say that if a bankruptcy is announced, Nook users should immediately look into the question of how to save their important e-book purchases, because doing so might not be a simple process.

I cannot close without mentioning a story about Barnes & Noble’s local history. The first Barnes & Noble store in my area was on the site of the Valley Forge Music Fair, a concert venue that was harassed into closing by the local government for reasons that were never revealed to the public. It was a very popular place to see music, and as it was demolished, I wondered if the ill will surrounding the forced closing would adhere to the retail stores that took its place. Perhaps to guard against this possibility, the developer did not place a store on the site of the actual venue. Instead the new stores were in the places formerly occupied by the parking lot, with the new parking lot occupying the place where the stage and audience used to be.

Despite this precaution, the stores have not fared well. Linens-N-Things, the largest store, lasted only a few years, and the pet store that took over its spot does not seem to be doing much better. Now my guess is that Barnes & Noble, the second store, will also be closing. It is one of many stories that tell you that tearing down something old to build something new does not carry the promise that the new thing will succeed.