Companies rarely come out and tell investors that they're teetering on the edge of disaster until they absolutely have to. In the case of public companies that's generally well after management knew things were wrong and that righting the ship was not that likely.
As J.C. Penney, for example, spiraled toward bankruptcy — a fall that took years — the company focused its earnings call on all the positive things happenings. Maybe sales for the last two weeks of the quarter trended up, or maybe the company's line of suits from Michael Strahan had an especially good quarter.
Related: Another fast-food operator files Chapter 11 bankruptcy
What the company never mentioned until it was on the verge of bankruptcy was that it was stretching out payments to its vendors. A visit to one of its stores painted a less rosy picture. Shelves lacked inventory and sizes seemed to be sold out on popular items.
When a retailer lacks merchandise to sell, it's generally not very long for this world. In most cases, bankruptcies happen when a company's vendors decide they can no longer risk offering credit terms.
That uses up cash faster and hastens a Chapter 11 filing. And since companies don't tell their suppliers, "hey, we may not be able to pay you," many uses outside ratings sources as a way to know when to pull the plug. So, when a retailer has its CreditRiskMonitor FRISK Score be lowered to 1, a Chapter 11 bankruptcy often becomes a self-fulling prophecy.
Image source: Getty Images.
Joann has its FRISK rating lowered
Joann, Inc., JOAN, which many consumers think of as "Joann Fabrics," recently had its CreditRiskMonitor FRISK Score lowered to a 1. Based on past history, companies that get a 1 have between a 10% and 50% chance of filing for bankruptcy.
Those numbers, however, are likely much higher right now given the high cost of raising money due to elevated interested rates. The retailer saw its loss grow from $92 million in the first two quarters of 2022 to $127.5 million during the first half of the current year.
The chain also has about $1.1 billion in long-term debt aside from its $714 million in lease liabilities.
CFO Scott Sekella, who is currently one of the company's two interim CEOs, made the usual upbeat remarks about the company's strategic turnaround efforts.
“In addition to stabilizing our topline, we remain focused on operating as efficiently as possible.” he said. “With another quarter of execution of our Focus, Simplify and Grow initiative, we continue to drive operational excellence with our cost cutting initiatives leading to an over delivery on the targeted $200 million of annual cost reductions."
That all sounds nice, but the company has only $19.1 million in cash and cash equivalents. Inventory has also dropped by 14.4% which could be the company managing it more carefully and/or Joann having to make choices based on its bank account.
Joann faces signifcant bankruptcy risk
"Joann is in a financial mess. Not only does it have a huge debt pile and associated interest, it is not profitable at operating level," GlobalData Managing Director Neil Saunders posted on Retailwire. "
Aptos Vice President believes that Joann needs to make changes quickly and that it can look at a key rival for ideas.
"Michael’s recently invested in revamping stores, streamlining checkout, upping their loyalty game," she wrote. "Joann would definitely benefit, and potentially quickly, by taking a look at their promotional strategy. It’s very confusing and there is a lot of over-promoting and overlapping promotions. Barring anything else, getting smart and streamlined and simple about the offer to customers could help both top and bottom line – at the same time."
Mark Self, CEO of Vector Textiles, put it more bluntly.
"A specialty store specializing in crafts and sewing whose customer base is dwindling, no CEO and $1B in debt...sounds like liquidation time to me," he added.
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