The harsh reasons behind the death of GNC and JC Penney

GNC filed for bankruptcy Wednesday after years of financial struggles and plans to close 1,200 stores.

The vitamin salesman, known for his small mall stores and aggressive sales associates, joins a retail graveyard filled with headstones of favorite places to shop.

Who didn’t like buying AA batteries for a new Sony Walkman in the late 1980s on RadioShack (probably after a trip to CNG)?

And now a new crop of former heavyweight retailers is about to be brought to the cemetery after the coronavirus pandemic closed stores across the country for months. In doing so, the faulty businesses of once iconic retailers GNC, J.Crew, Neiman Marcus, JC Penney, and Lord & Taylor have been exposed through high-profile bankruptcy filings. More busts are inevitable, according to analysts.

“I think there are probably more bankruptcies,” veteran retail analyst Simeon Siegel of BMO Capital Markets told Yahoo Finance.

All of the household goods retailers mentioned above in the last 20 years ask these questions: Why do retail brands die in the first place? Why one day the icons of our childhood go from being on top of the retail world to being buried 6 feet below and relegated to a Wikipedia page in memoriam?

Yahoo Finance looks at three reasons why.

Having a good management in retail is essential to constantly win. And no one in the retail sector exemplified horrible management better than hedge fund manager Edward S. Lampert, better known in many Wall Street circles simply as ‘Eddie’.

Lampert merged Sears and Kmart in a $ 11 billion deal in 2004. He ranked on top of the merged company as CEO despite not having a true retail management experience. Lampert closed Sears and Kmart stores across the United States in a failed attempt to boost profits and fill out his own fat big wallet.

He let the open stores completely crumble. He showed no real interest in coming face-to-face with faster-adapting retail rivals Walmart (WMT), Target (TGT), and of course the mighty Amazon (AMZN).

After years of staggering losses, Sears filed for bankruptcy in the fall of 2018. At one point, the combined company had more than 3,500 stores in operation. Now they are just a memory.

Sears is not the only sad story of inept management ruining a retailer. RadioShack, Circuit City, and Linens N ‘Things offer stories similar to Sears. Even the GNC C-suite has seen a lot of executives go through its revolving door in recent years.

In all cases, terrible management does not anticipate the future of shopping and does not understand the present, which is not a good place to be in the world of retail.

Retailers love living on debt (see GNC’s $ 1 billion debt at the time of your new bankruptcy filing). The inventory is financed on credit. Store leases are a form of debt. Bank debt is used to open new stores and renovate existing stores. This debt becomes almost impossible for a retailer to handle when the economy turns south or a brand falls out of favor with buyers for whatever reason.

The now bankrupt department store Neiman Marcus offers an excellent example of just how deadly debt could be.

A closed Neiman Marcus store is seen at the Garden State Plaza shopping center in Paramus, NJ, on Thursday, May 7, 2020. Neiman Marcus filed for Chapter 11 bankruptcy protection, sounding an ominous note to department stores during the pandemic. of coronavirus. (AP Photo / Seth Wenig)

Neiman Marcus was bought by private equity players TPG and Warburg Pincus in 2005 for $ 5.1 billion. That added a ton of debt to Neiman’s already tarnished books. It was then sold in 2013 to the private equity firm Ares Management and the Canada Pension Plan Investment Board for $ 6 billion.

You guessed it: More debts were added to the company’s books. And in turn, more onerous interest payments that could not possibly be met given the current purchasing climate.

But the way people shop for clothes changed dramatically after that 2005 deal. Unfortunately for Neiman Marcus, due to his excessive debt, he was unable to invest aggressively to transform with the times. Sales and profits increased in smoke. The company filed for bankruptcy in May 2020.

Another good example of the debt burden is clothing retailer J.Crew, which also filed for bankruptcy in May 2020. J.Crew was bought by private equity firms TPG Capital and Leonard Green in 2011 for $ 3 billion The purchase riddled J.Crew with too much debt. The company reduced product quality, lost loyal shoppers once, and was unable to manage its debt due to the disappearance of sales and profits with people who no longer go to shopping malls as often.

The bottom line is, unless you are Walmart or Target, which sells essentials like food that keep the cash flow steady in the business, retail is too fickle for a company to be in excessive debt.

Before Amazon and Walmart existed, there were department stores and small vitamin sellers. These were the places that, for decades, outfitted children with back-to-school clothing and holiday gifts. Or in the case of CNG, I got you some vitamin C pills.

But then came the rapid advancement of technology in the 2000s (thanks Apple), and with it, the ability to buy goods and services in the palm of your hands.

To try to survive in this new world order, department stores have closed underperforming stores and skimped on in-store experiences. Where has the customer service at Macy’s gone, right? But that has only pushed more people to shop online, which has not been good for debt-ridden department stores. They have entered directly into a black vortex of too little sales and profit and too much debt.

As for a CNG, your product is now seen by buyers as a true product that can be purchased instantly online … from numerous computers.

In addition to the evolution of the Internet, fashion preferences simply change over time. While J.Crew was once popular for selling Michelle Obama’s favorite sweaters a year or two later, consumers are on another cool brand. That sucks for a J.Crew, which is expanding too fast to capitalize on its fame and is now stuck with too many store leases and bank debt.

Then the brand dies and many stores remain dark for some time.