The US is now on pace to having a record 12,000 store closures by the end of 2019.
The reason Forever 21 bankruptcy filing stings so much is that the retail sector has lost nearly 200,000 jobs since the start of 2017.
It seems as if the retail sector is having its own market correction. So many businesses were in a constant state of new store openings, ribbon cutting, and champagne toasts that they failed to stockpile any cash for a rainy day.
With many consumers maxed out after all that easy credit flowed like champagne, it is now time for companies to pay the piper.
However, it not just that companies are bleeding cash due to heavy rents and debt obligations. There also is this little thing called a trade war going on. The trade war between the United States and China isn’t helping any. But if we really think back, most retailers put themselves in this vulnerable position by spreading themselves too thin.
Chasing after never ending profits in the quest for the retail equivalent of the holy grail: increased annual revenues.
Think Subway’s $5 footlong. The world’s largest fast-food chain closed more than 1,000 stores last year (Subway closed 1,100). Subway started its restaurant purge in full force in 2016, when it had more US closures than openings for the first time in its history. It said it plans to keep closing restaurants as it tries to become more profitable.
There is also a restaurant apocalypse going on as many as closing including Pizza Hut, as they are getting out of the sit-down restaurant business. It’s becoming a strictly carryout and delivery pizza chain, like Domino’s and Papa John’s.
However, these companies boxed themselves into a corner. What happens when easy credit dries up and customers are no longer willing and able to shop? It’s kind of like that scene in Indiana Jones. You know the one I’m talking about.
As most companies have no leverage with creditors after a bankruptcy filing, in many cases they lose equity or control over their companies.
Like what happened to American Apparel. The owner went public and was rewarded handsomely with hundreds of millions in stock. Once the company filed bankruptcy in 2011, share prices went from as high as $15.80 in 2007 to being worth less than 80 cents. The owner had over 800,000 shares of his stock and pretty much 100 percent of his net worth locked up in the company. I’m guessing he never heard of a company called Enron. If so, I doubt he would have so much of his fortune in just one stock. Anyway, what happened next is just heinous. The owner went from $500 million to $0 in net worth once the company went bust.
Some people have no idea how invested an owner is in a company until the tide goes out and see who is swimming naked, which basically means in heavy debt.
In recent retail headlines, stores such as Gap, Charlotte Russe, WetSeal, DEB, Rue 21, Gymboree, Charming Charlie, and Toys’R’Us have all thrown in the towel. What makes Forever 21 stand out in this sea of closures is that the retailer is still owned by the founders. However, they too are having profits squeezed by online shopping and e-commerce giants Amazon and Walmart.
Most retailers in these modern times in the age of Instagram are turning more to debt and becoming highly leveraged as a result. This hurts businesses in the long run. Those who manage to avoid piling on too much debt and stay lean are the ones who manage to stay open and profit.
According to Jeff Spross, avoiding the clutches of private equity can make or break a company. For example, after being bought by a trio of private equity companies in 2004, Toys ‘R’ Us’ debt burden rose from $2.3 billion to $5.2 billion in 2017, while its cash stockpile shrank from $2.2 billion to $301 million.
Simply put, private equity firms take the companies cash in the form of fees and replaces it with debt. Once retailers are unable to sustain the high interest payments on this new debt that was supposedly needed in order to expand operations, then the business goes under.
This wave of bankruptcies is therefore not a coincidence as many retailers were highly leveraged but didn’t file for bankruptcy until the interest kicked in and the bills came due starting in 2019, which will continue through 2025.
The retail chopping block is brutal as store closures can hurt stock prices, brand loyalty, consumer confidence, and retailers bottom lines. For instance, many companies are notifying employees in some cases only days before store closures.
That was the case with Dean & DeLuca in Georgetown as they were riddled with debt and couldn’t pay their vendors. The company was so backed up on rent that it racked up $96,000 in back rent and started get hit by lawsuits from angry suppliers. One funny line in this NY Post article read “Can’t afford that $45 box of cookies at Dean & DeLuca? Neither can Dean & DeLuca.” The domino effect and trickle-down economics also lies in the fact that vendors may go out of business due to Dean & DeLuca’s failure to pay them thus putting more employees out of work and out of a job. The company knew it was bleeding money for years, but only informed employees of its closure less than 72 hours before closing up shop for good. Some of these employees had been with the store since it opened in 1993. After 25 years, these employees got no severance. To add insult to injury, they also defaulted on some employee salaries, which is a double-whammy; no paycheck and no job.
This let’s you know that the employee is the sacrificial lamb that gets slaughtered when a retailer takes all the money out of a company. This feels reminiscent of the rumblings I heard about WeWork before their failed IPO.
According to Scott Galloway, WeWork had numerous red flags:
My goddaughter informed me she’s dating a club promoter, a red flag. Occasionally, red flags marry each other, the Biebs and Hailey Baldwin — what could go wrong? So now, imagine red flags the dimensions of Kansas. Buckle up:
— Adam Neumann has sold $700 million in stock. As a founder, I’ve sold shares into a secondary offering to get some liquidity and diversify holdings. Ok, I get it. But 3/4 of a billion dollars? This is 700 million red flags that spell words on the field of a football field at halftime: “Get me the hell out of this stock, but YOU should buy some.”
— Gross margins are a pretty decent proxy for how good or bad a business is. And this is a sh**ty business.
When the CEO (Neumann) wants to sale so many shares, it gives me pause to wonder why? If you don’t believe in your business (they never turned a profit), then why should I?
One retailer that managed to avoid debt, store closures, and heavy job losses due to avoiding debt and private equity is Best Buy.
Therefore, it is a simple recipe, kind of like KFC’s Kentucky Fried Chicken 11 herbs and spices with a secret ingredient (white pepper in case you were wondering), that will keep retailers or yourself out of the evil clutches of debt. I will share it with you. No debt + tons of cash = solvency.
You cannot go bankrupt if you owe no one.
You can put that last sentence on my tombstone. Like Drake and 2 Chainz, when I die bury me inside the casket that paid for with cash, put my money in the grave because in the next life I’m trying to stay paid. But seriously, I’d rather you expand your business or wealth portfolio slowly with cash than quickly with debt.
Always remember that patience is not only a virtue, but it is how you can avoid debt through delayed instead of instant gratification, which is how you get and stay rich.
My goal here is to help you along your wealth journey. I hope this post helps you do just that. You are not alone. Have a question? Drop me a line.
How did a small company that sold shoes out the trunk of a car get this far?
One word: Endurance.
The man behind it all fought through endless money woes,
legal problems, lawsuits, and inventory issues for 20 years, but came out ahead
in the end.
He is now estimated to be worth over $10 billion dollars.
His name is Phil Knight and this is his story.
A RUNNER WITH NO DIRECTION
“If you’re following your calling, the fatigue will be
easier to bear, the disappointments will be fuel, the highs will be like
nothing you’ve ever felt.” ― Phil Knight
Phil Knight was born in Portland, Oregon on February 24,
1938.
In his youth, he liked two things: sports and running.
At the University of Oregon (OU) he earned a journalism
degree in 1959.
After Phil Knight graduated from University of Oregon, he then
earned an MBA from Stanford Graduate School of Business. He graduated from the
school with a master’s degree in business administration in 1962. At the age of
24, he has no idea what to do.
He looks over his final paper he wrote on shoes.
In his small business class, Knight produced a paper,
“Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras
Did to German Cameras?,” which would foretell his eventual foray into
selling running shoes.
WHAT’S IN A NAME
Ford had just paid a
top-flight consulting firm $2m to come up with a name of its new Maverick, I
announced to everyone. “We haven’t got $2m — but we got 50 smart people, and we
can’t do any worse than… Maverick.” – Phil Knight
The company was founded on January 25, 1964, as Blue Ribbon
Sports (BRS), by University of Oregon track runner Phil Knight and his coach Bill
Bowerman, with a partnership by handshake and officially became Nike, Inc. on
May 30, 1971.
The name from Nike, is named after the Greek goddess of
victory.
When they needed to choose a name for Nike, the “Buttfaces”
(an affectionate term for the inner circle) were trying to come up with
something.
That night as Nike legend has it, Johnson, from a dead
sleep, sat upright: “Nike, the winged goddess of victory! That’s IT!”
Jeff Johnson, employee number one of Nike, and fellow
Stanford runner whom Phil hired as he hasn’t met anyone with his passion for
running, suggested calling the firm “Nike,” named after the Greek
winged goddess of victory.
It’s pronounced “ny’-kee.”
The name is Nike and their rival was Adidas.
It met with a lukewarm Buttface reception. In the eleventh
hour, Knight begrudgingly went with it.
“‘What’d you decide?’ Woodell asked me at the end of
the day. ‘Nike,’ I mumbled. ‘Hm,’ he said. ‘Yeah, I know,’ I said. ‘Maybe it’ll
grow on us,’ he said.
FIND A MENTOR
FPhil had a great mentor, Bowerman, a great American running
coach, who was constantly experimenting with shoes.
Bowerman would make then on his waffle iron.
Bowerman stressed that an extra ounce on a shoe added 55
pounds of lifting over one mile. As a mediocre runner, Phil was Bowerman’s
favorite guinea pig (he wouldn’t dare jeopardize the top runners with
experimental shoes).
He trained Olympic athletes so he knew what they needed to
wear on their feet to compete. He trained one of the most prolific Olympic
runners of that time: Steve Prefontaine.
Somebody may beat me,
but they are going to have to bleed to do it. – Steve Prefontaine legendary runner
of the 1972 Olympics
Bowerman was the most famous track coach in America,
training local champions. It was said future Olympian Steve Prefontaine known
as “Pre” did not want to run for anyone, but him.
He was also one of the top paid Nike endorsers before his death
in 1975.
In my personal opinion, I do not think I have ever seen any
runner run like Prefontaine with so much passion. I hold my breath every time I
watch him run. It’s like time is standing still. You don’t want to blink
because you know without a shadow of a doubt that you are witnessing greatness
and what the human spirit could do without limits.
The real Steve Prefontaine
THE BUSINESS OF RUNNING
“Don’t tell people how
to do things, tell them what to do and let them surprise you with their
results.” ― Phil Knight (original quote by George S Patton)
Back in his day, running wasn’t a “thing.” People were
ridiculed for running. There were no real running shoes. So, he set out to
change that.
After graduating, he decides he must travel to figure out a
plan how to see what the Japanese do with the making of shoes. Alas, he has no
money. His only option is to ask his no-nonsense father. However, he feels that
his father will not fund his wanderlust. But in a surprise, his father agrees
and gives him $1,000 to go to Japan.
“How can I leave my mark on the world, I thought, unless I
get out there first and see it?” ― Phil Knight, Shoe Dog
Phil goes to Kobe, Japan, in November 1962.
His father has two friends in Tokyo, and they dispense
business advice – the Japanese are soft negotiators, not fans of the aggressive
American style. Armed with this advice, he sets out.
He discovers the Tiger-brand running shoes, manufactured in
Kobe by the Onitsuka Co. Phil was impressed by the quality and low cost of the
shoes. Knight calls Mr. Onitsuka, who agreed to meet with him. By the end of that
meeting, Knight had secured Tiger distribution rights for the western United
States. Off the top of his head and thinking on his toes, he thinks of the blue
ribbons on his walls in his room he won from running when asked what the name
of his company as he says, “Blue Ribbon Sports.”
SIDE HUSTLE OF SELLING SHOES
SIn the beginning, there was no money.
Phil sent shoes to his old coach to see if they would sell.
Bowerman, who was obsessed with runner performance and making shoes lighter,
not only liked the shoes, but asked to work on product shoe designs and from
there a partnership was born. This was 1964.
His father’s friend advised him to get a CPA. With an MBA
and CPA, he would likely never be out of work. So, he gets his CPA and a job at
a small firm. It had 4 employees. He worked 70-hour weeks.
Phil still worked as an accountant during the day while
trying to get his business of the ground. Finally, in 1969, he quit working for the
likes of firms as Price Waterhouse to work on his business full-time.
So why was selling
shoes so different? Because, I realised, it wasn’t selling. I believed in
running. I believed that if people got out and ran a few miles every day, the
world would be a better place, and I believed these shoes were better to run
in. People sensing my belief, wanted some of that belief for themselves.
Belief, I decided. Belief is irresistible. – Phil Knight
THE RICHES ARE IN NICHES AND PITCHES
TRunning is not a hobby or sport during his time in the 1960’s.
Mostly only student athletes were buying their shoes, as popular
as they were, they appeal to just a small niche
of the population.
He sold shoes at track meets out of the back of his car in
the Pacific Northwest.
The pitch: Japanese shoes are extremely high-quality,
low-cost shoes.
A 300 order of shoes
cost $1k. He got his half $500 from his father and the other was put up by
Bowerman.
They SOLD OUT!
The shoes were so popular that people were showing up at his
house to by them.
PHIL ON MONEY
P“But that’s the nature of money. Whether you have it or not, whether you want it or not, whether you like it or not, it will try to define your days. Our task as human beings is not to let it.” ― Phil Knight, Shoe Dog
Money problems plagued the company.
Distribution rights became an issue so he had to fly to
Japan (ticket paid for by credit card as he has no money) to plead his case to
keep selling and got the green light. He found this out from a letter his
employee named Johnson sent him. The lesson here is to listen to good counsel
and advice. This very well may have saved the company from ever existing today.
However, the company did want a bigger player in the shoe
game to represent them, but Phil said they had offices in both coasts to shore
up the deal.
(He was lying – they didn’t’ have an East Coast office).
No venture capitalist or angel investors in 1965. Phil had
to use banks. They wanted big profits and slow growth. Phil was having none of
it.
BOOTSTRAPPING IT LITERALLY
BThe company was always strapped for cash. They had to stay
lean to survive. And worked mainly in storage rooms and Phil’s apartment.
Meeting the demands of the banks and customers became
equally tougher.
EVERY. SINGLE. YEAR.
Trying to get imports on time, make cash payments to
creditors, and get orders to customers was a logistical nightmare.
Onitsuka is painfully unresponsive as shoe shipments arrived
late, which meant less time to sell, and each loan repayment period to
creditors tougher.
EVERYDAY I’M HUSTLING
EPhil did everything he could do to keep the lights on, make
payroll, and keep the company going. They were growing every year and sales
were doubling, but they still had problems financially.
First year, they made $8,000 in sales in 1964. By 1967, says
had grown to $84,000. They double again in 1968 to $160,000, but Phil still can’t
afford to draw a salary.
So, he did what he and adult has to do when they need money:
get a job.
That’s right, he went back to working in accounting.
He doesn’t love the work, but it pays the bills.
At this point in Phil’s story, I had to give him the slow
clap of praise for doing what needed to be done.
However, sales double again to $300,000 in 1969, Phil is able
to draw a salary of $18,000. He quits his job teaching and is at BRS full-time.
In 1970, doubling again, sales reach $600,000. By 1971, they crossed the
million dollar sales mark at $1.3 million.
Finally, it all came to a head when their Japanese exporter
decided to buy them or give their business to someone else.
AN ACE UP HIS SLEEVE OR SOLE?
A“Have faith in
yourself, but also have faith in faith. Not faith as others define it. Faith as
you define it. Faith as faith defines itself in your heart.” ― Phil Knight
The biggest asset Blue Ribbon has is Bill Bowerman.
He learns that Japanese and American bodies are simply
different, and thus the shoes need to be different, like more arch support. To
have a great chance in the US, he believes Onitsuka needs to customize their
shoes for Americans.
He draws up countless designs and sends them to Japan, only
to receive no response. Occasionally they relent and make a few prototypes, and
indeed they’re far better. Undeterred by Onitsuka’s hesitance, Bowerman even
experiments with producing homemade rubber to make new soles.
You might be able to see where this is going.
OUR SOLES AT KNIGHT LEARN YOYO: YOUR ON YOUR OWN
OThey secretly start manufacturing their own shoes. Having
dreamed about Nike as the name for the company, it was then born and the
sidestepped acquisition.
Their reputation sold their shoes and saved their company.
They also learned how powerful celebrity endorsement is as
well.
When the company was in dire financial straits one of his
top employees (#4 full-time) Woddell and his family gave him their life savings
of $8,000 ($50,000 in 2017 inflation) to keep Nike afloat. A friend indeed.
PHIL ON MANAGEMENT
PHis employee in CA, Johnson, he sends Phil mountains of
letters, detailing his every development, every sale and notable customer.
He sends advertising ideas (Phil doesn’t believe in
advertising), shoe designs (Phil already has enough to deal with Bowerman), and
his insistence on opening a retail shop in Los Angeles.
Phil feels smothered and rarely replies to Johnson’s
letters. From studying war heroes and generals, he holds a virtue: “Don’t tell
people how to do things, tell them what to do and let them surprise you with
their results.”
And Johnson delivers results. His customers love him, depending on Johnson to solve their problems in both running and life. Even when he gets in a car crash and breaks his skull, he’s continuing to sell shoes. Phil even issues him a challenge – sell 3,250 pairs of shoes in a few months, and Johnson could open his retail space in LA. And sell he does – now Blue Ribbon has an official runner mecca in Los Angeles.
MARKS OF VICTORY
MOn his travels, he stopped in Greece. While visiting the temple of Athena, he notices a carving of Athena – bending down to adjust her shoe. She is known to be the goddess of wisdom, battle strategy, and victory or “nike.”
And what’s THIS?
That’s a swoosh.
The hell’s a swoosh?
The answer flew out of me: It’s the sound of someone going past you.
They liked that. Oh, they liked it a whole lot.
The trademarks of “Just Do It” and the Swoosh logo became synonymous with Nike. The logo is also one of the most powerful in the world.
The logo was commissioned for a mere $35 USD from graphic
design student at Portland State University by the name of Carolyn Davidson in
1971. She charged them only $35 for her work.
According to Nike’s website, Knight said at the time:
“I don’t love it, but it will grow on me.”
PHIL ON PRAISE AND CHARITY
PPhil never gave praise or money. But…
He was so pleased with the logo that in 1983 he gifted
Carolyn with an undisclosed amount of Nike stock for her contribution to the
brand. She had worked for the company from 1971 until 1980.
That year, 1980, is the year Nike went public with an IPO.
Phil told Oprah on her show in April 2011, that he gave
Davidson “A few hundred shares” when the company went public.
For years, the value of the stock was unknown.
Well, guess what? You’re about to find out right here, right
now.
What is the cost of helping someone when commissioned with a
task and not thinking it is beneath you?
Counterkicks got a
hold of a recent Nike shareholders meeting transcipt in which Knight reveals
exactly how much stock he gave Davidson and the value of that stock today…
“…we
hired a graphic art student at Portland State University, and told her to come
up with something that connoted speed, and we gave her $75.00 for what she came
up with. When we went public in 1980, we called her back up and gave her 500
shares of stock, which she has never sold, and is worth close to $1 million
this day.”
His top employee’s or the foot soldiers as I like to call
them, Bowerman is worth $9 million; Woodell, Johnson, Hayes and Strasser each
about $6 million; Phil $178 million.
In 2012, it was reported that Knight himself owned
67,097,005 shares of Class A Common Stock and 7,740 shares of Class B Common
Stock in the Nike corporation.
Nike has revenues of $20 billion annually.
In 2018, he is now estimated to be worth $29 billion
dollars. Him and his wife donate $100 million a year.
PHIL ON HELPING OTHERS
P“When goods don’t pass international borders, soldiers will.” Though I’d been known to call business war without bullets, it’s actually a wonderful bulwark against war. Trade is the path of coexistence, cooperation. Peace feeds on prosperity. – Phil Knight
When on travels in his younger years he went all over the
world.
He noticed incredible poverty in places like Vietnam.
When his goal of taking over Adidas as the number one shoe
company in the world, by 1986, total sales hit $1 billion, and Nike surpassed
Adidas to become the No. 1 shoe manufacturer worldwide.
He also was able to fulfill some other dream. He opened
factories in Vietnam so that war would likely stop there due to commerce and
work.
Luck plays a big role.
Yes, I would like to publicly acknowledge the power of luck. Athletes get
lucky, poets get lucky, businesses get lucky. Hard work is critical, a good
team is essential, brains and determination are invaluable, but luck may decide
the outcome. Some people might not call it luck. They might call it Tao, or
Logos, or Jnana, or Dharma. Or Spirit. Or God. – Phil Knight
Knight’s memoir, Shoe
Dog, was released on April 26, 2016 by Simon & Schuster, was rated
fifth on The New York Times Best Seller list for business books in July 2018, and
details the building of the Nike brand.
Knight has donated hundreds of millions of dollars to each
of his Alma Maters including $105 million to Stanford Graduate School of
Business in 2006.
As of 2016, according to Portland Business Journal,
“Knight is the most generous philanthropist in Oregon history. His
lifetime gifts now approach $2 billion.”
It is safe to say that Phil Knight and his Nike business are a running success.
