Potential decrease in Allbirds' stock value due to a significant 80% rise in retail bankruptcies in 2024.
Potential decrease in Allbirds' stock value due to a significant 80% rise in retail bankruptcies in 2024.
What sets apart thriving retailers from those that end up bankrupt? Given the surge in retail bankruptcies in 2024, it's crucial for investors and business leaders to closely examine whether their companies possess the necessary resilience.
My examination of recent bankruptcies indicates that each retailer follows a unique path to failure, yet they share several common traits.
For example, some retailers struggle to adapt when consumer demands shift, with agile competitors outmaneuvering them in the market. These businesses fail to offer consumers better value for their money than industry leaders, leading to declining revenues, exacerbated by high costs and potentially mounting debt as their dwindling cash reserves deplete.
A company like Allbirds, based in San Francisco and providing footwear and apparel, seems to embody many of these failing patterns. Following its public debut over three years ago, Allbirds' shares, 11.7% of which are held short, according to the Wall Street Journal, have plummeted, as Google Finance reveals.
On September 5, 2024, Allbirds executed a 1-for-20 reverse stock split, boosting its stock price above the $1 mark required by Nasdaq listing rules. However, since then, its stock value has dropped by approximately 16%.
Despite surpassing its third-quarter revenue and earnings per share expectations, Allbirds' stock price may continue to plunge due to:
- Declining third-quarter revenues.
- Anticipated negative cash flow.
- Diminishing revenue projections.
According to Allbirds' CEO Joe Vernachio, the company looks optimistically to the future, envisioning a resurgence by reinforcing its brand image and reestablishing its cultural relevance.
I have reached out to Allbirds for comment and will update this information if they respond.
Reasons Behind Retail Store Closures and Bankruptcies
Retail store closures and bankruptcies are increasing. According to Coresight's report in the Greenville News, 7,100 stores closed between January and November 2024, a 69% increase compared to the previous year. In addition, 45 retailers filed for bankruptcy protection during the same period, more than double the number from 2023.
Retail companies are experiencing closures due to several factors, primarily declining revenues in the face of a weak consumer value proposition and shopping experience, combined with high operating costs, as suggested by a December 3 report by Neil Saunders, a GlobalData analyst.
As inflation persists, even after the Covid-19 pandemic caused prices to spike, customers at all income levels are seeking the best deals on essentials.
Retailers such as Dollar General and Dollar Tree are thriving, with hundreds of new store openings in 2024, while Family Dollar is grappling with numerous closures, CBS News reports.
Prosperous individuals are not ashamed to save money by purchasing commodities at discount prices. Even luxury car drivers have been spotted shopping at discount stores like Aldi, as the Wall Street Journal personal finance reporter Rachel Wolfe remarked in a podcast.
Exploring The Container Store's Bankruptcy
In the latest instance of retail bankruptcy, The Container Store filed for Chapter 11 bankruptcy on December 22, 2024, intending to finalize a reorganization plan within 35 days, as reported by the Wall Street Journal.
The Container Store's CEO, Satish Malhotra, assured the public of the company's continued existence, emphasizing its strong strategy and commitment to enhancing customer relationships, expanding its reach, and strengthening its capacity.
Using a five-whys analysis, I attempted to uncover the reasons behind the company's filing:
- What led to The Container Store's financial distress?
- Why were revenue and profitability not sufficient to sustain the company?
- What internal factors contributed to its current situation?
- How did external pressures affect The Container Store's performance?
- What changes need to be implemented to ensure the company's long-term success?
Why did The Container Store face bankruptcy worries? In November, Beyond, which owns Bed Bath & Beyond and Overstock, expressed doubts about its plan to invest $40 million to keep The Container Store afloat, as reported by the Journal.
What made Beyond doubt its $40 million investment for The Container Store? Beyond had concerns about The Container Store's ability to meet a condition to secure new financing terms from lenders, according to the Journal.
Why was The Container Store so reliant on Beyond's investment? The company was running out of money due to decreasing sales, increasing quarterly losses, and nearly quadrupled debt of about $232 million at the end of September, as noted by the Journal.
Why did The Container Store's sales drop and losses increase? The Container Store reported losses of $16 million in June with a 12.5% drop in comparable store sales, and it hadn't posted a full-year profit since 2021. After the pandemic, demand decreased due to high interest rates and prices, and competition from Walmart and Target offered lower prices, according to BusinessInsider.
Why did The Container Store maintain higher prices than its competitors? Malhotra, the new CEO of The Container Store, pushed the company's high-end Closet Works line, which could cost up to $1,000 per unit, according to Modern Retail.
This analysis resembles my five-whys analysis of Bed Bath & Beyond's bankruptcy. There, a new CEO joined the company with a strategy that had worked for him at Target, but consumers refused to buy the private label merchandise the new CEO had ordered onto the store's shelves.
Allbirds’ Challenging Q3 2024 Financial Outlook and Forecasts
Allbirds reported a decrease in revenue and a large loss in the third quarter of 2024, as per Retail Dive. During the quarter, net revenue fell by 25% to $43 million, and the company posted a $21.2 million net loss.
Allbirds burned through $11 million in cash, held $79 million in cash and equivalents at the end of Q3, and closed 15 stores within the first three quarters of 2024, as noted by Retail Dive.
For the full year, Allbirds predicted a decrease in revenue and a significant adjusted earnings before interest, taxes, depreciation, and amortization loss. Specifically, the company estimated a 25% drop in revenue to $190 million (at the range midpoint) and an EBITDA loss of $73 million — a $24 million improvement from 2023, according to the Journal.
Allbirds — which is developing new products and recently launched the Tree Glider shoe and Lounger Lift slip-on — is optimistic about future growth. “We’re thrilled with the strong consumer response to these launches, which reinforces our confidence that our upcoming product, set for release in the second half of 2025, will drive future growth,” Vernachio told Retail Dive.
Is Allbirds Stock a Bargain or Overpriced?
Earlier this year, one analyst believed that Vernachio could be beneficial for the company. “We believe that Vernachio will be able to guide the company in a way that is focused on consumers and is dispassionate about internal beliefs and viewpoints,” Saunders said in my March 2024 Our Website post.
In November, analysts had mixed opinions about Allbirds' prospects. Here are two examples:
- The company's underlying performance is unclear. “With everything going on in the model, between store closures and shifting to international distribution agreements, it is hard to read what the underlying business is really doing,” William Blair analysts led by Dylan Carden said in a November client note featured by Retail Dive. He expressed more confidence that the company would post stronger results in late 2025 following Allbirds' cost reduction initiatives.
- Allbirds cannot rely on cost cuts for success. “To bolster the bottom line, Allbirds needs to grow revenue and not just prune parts of its business that are not working effectively,” Saunders told RetailDive. He questioned whether enough consumers would care more about the company's sustainable materials than they do about “design, style, and fit,” he added.
Two analysts who provided 12-month price targets see significant potential upside in Allbirds stock. Their average target of $12 implies the potential for 69% appreciation in the company’s shares, according to TipRanks.
If this target is accurate, short sellers will be in for a rough ride. But if Saunders is correct, Allbirds stock may continue to struggle.
Despite the boost in Allbirds' stock price after the 1-for-20 reverse stock split, the company's struggling financial performance continues, with a 16% drop in stock value since then. This is partly due to declining revenues, anticipated negative cash flow, and diminishing revenue projections.
In the volatile retail markets, companies like Allbirds must carefully manage their financial resources to maintain resilience and stay competitive. High costs and mounting debt can quickly deplete cash reserves, putting the future of the company at risk.