Too Many Retailers? Mickey Drexler Thinks So

By Will Ashworth | September 14, 2012 AAA
Mickey Drexler, CEO of privately held retailer J. Crew, appeared in an interview on CNBC September 13 as part of Fashion Week in New York. Discussing the state of retail, Drexler suggested that there are "too many retailers, too many brands, too many designers, and too many discount stores." Amen to that, brother! America could lose half the retailers operating today and it wouldn't skip a beat. In fact, we'd be much better off. Who should disappear from the retail landscape? I'll offer up a short list of candidates.

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Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO), and Aeropostale (NYSE:ARO) have a combined total of almost 3,000 stores in the United States, each possessing a similar number of locations. All three companies market to the same younger demographic. It's these kinds of stores that boosted the fortunes of retailers like Chico's (NYSE:CHS), Ann Taylor and even J. Crew. Adults over the age of 30 no longer want to shop in places that cater to high school or university students. They want clothes that make them look good without feeling as though they're 12. Given Abercrombie's sexist past, I don't think the world would miss it.

Great IPO

This next one is a classic Mitt Romney, private equity kind of situation. Body Central (Nasdaq:BODY), a Florida-based specialty retailer was acquired by Westview Capital Partners and other investors on Oct. 1, 2006. The founders (the Rosenbaum family) kept a 17.3% minority stake in the company. As is typical with private equity deals, Body Central had no debt prior to the acquisition and $50 million three months later. By the time it went public at $13 a share on Oct. 14, 2010, it had whittled the debt down to $31.5 million. Its stock hit $25 by May 2011 and went over $30 as recently as April 2012. Then the wheels fell off the bus.

On May 4 it forecast full-year results that were substantially below analysts' expectations; the shares lost 49% of their value that day on the news and another 39% since. What started out as an isolated incident has turned into an operational nightmare that's seen the former CEO, Allen Weinstein, retire. So low was its stock at the end of June that my value radar got the better of me and I recommended Investopedia readers take a look. It might still recover under new management but clearly the damage has been done. Meanwhile, Westview Capital Partners has moved on, selling most of its shares between $13 and $17 for a decent, if not spectacular, return. Body Central spent five years in bankruptcy protection in the mid-1990s. I don't think it will survive a second trip to bankruptcy court. Perhaps we're all better off if it just went away.

Dead As a Dinosaur

It seems like only yesterday that RadioShack (NYSE:RSH) was bragging about its "The Shack" moniker. Today, it's on life support. The ailing electronics retailer launched the fateful branding campaign Aug. 6, 2009. Since then its stock lost 82% of its value. RadioShack bondholders now must pay $3.8 million for a credit default swap to protect $10 million in notes, up from slightly less than $1 million in January. It has an 84% chance of defaulting on the notes within five years. Both Kodak (OTC:EKDKQ) and AMR (OTC:AAMRQ) hit that number within six months of filing for bankruptcy. Given the fact that Best Buy (NYSE:BBY) is also fighting what many think is a losing battle, isn't it time "The Shack" be retired? I mean, do we really need another tired electronics retailer? I don't think so.

Discount Stores

One of Drexler's points in his CNBC interview was that there are too many discount stores. He was actually referring to the fact that retailers discount too heavily, but when you look at the discount store industry itself, he's unknowingly highlighted the obvious - Americans spend too much money on junk. In the last 12 months, Dollar General (NYSE:DG), Family Dollar Stores (NYSE:FDO) and Dollar Tree (Nasdaq:DLTR) generated $31.7 billion in combined revenue. That's about five times the sales of Ralph Lauren (NYSE:RL). Considering all three sell their merchandise at less than $10 an item, we're buying a bunch of things we don't need. If people spent a little more time worrying about the price they pay for a new car or home and less time seeking out a good deal on Post-It notes, the country might be in better shape financially. With Walmart (NYSE:WMT), Target (NYSE:TGT) and Costco (Nasdaq:COST) already providing reasonable prices, these other stores are simply overkill.

The Bottom Line

Some might think Drexler's comments are self-serving. After all, if there's less competition, there's more business for J. Crew. Mickey is 68 years old, however, and not as prone to hyperbole as someone in his or her early 30s. No, Drexler is spot on. Many of today's retailers wouldn't be missed if they went to retail heaven. Hopefully this will happen sooner rather than later.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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