Source: Broker China

Author: Chen Ming

According to the latest news, the well-known US retailer Big Lots (Big Lots) has applied to the court for bankruptcy protection. Currently, Piloto has nearly 1,400 stores and more than 0.03 million employees. Why did it suddenly go bankrupt?

It is worth noting that in the capital market, Bi Lotto also had a bright moment. From mid-March 2020 to early June 2021, Bi Lotto's stock price once surged more than 600%. At that time, the stock price hit a record high of 73 US dollars/share. That is, in 2021, the number of Bilotto stores expanded to 1,500.

However, subsequent high inflation and interest rate increases curtailed US consumer spending, changes in consumer shopping habits, and internal management issues, causing the company's sales to continue to decline and its financial situation to deteriorate. Since mid-June 2021, Billotto's stock price has been adjusted continuously for more than 3 years, plummeting more than 99%.

Pilotto also announced on September 9 that it received a notice from the New York Stock Exchange that since the average closing price of the company's common stock was below $1 for 30 consecutive trading days, it did not comply with the relevant regulations of the “New York Stock Exchange Listed Companies Manual”. However, the notice will not result in the immediate delisting of the company's common stock from the New York Stock Exchange.

Well-known retailers file for bankruptcy

Recently, Pilotto, a well-known US household goods retailer, announced on its official website that the company and its subsidiary have filed a Chapter 11 bankruptcy protection application in Delaware, USA, and are planning to sell their assets and business under court supervision. It is understood that Chapter 11 bankruptcy protection allows a company to continue operating while drawing up a creditor's repayment plan.

Piloto listed in court documents the total amount of assets and liabilities between 1 billion and 10 billion US dollars, respectively. According to Piloto, the company has signed a sale agreement with an affiliate of private equity investor Nexus. Nexus will act as a “fake horse bid,” which means that unless another buyer with a higher bid or better conditions shows up, Nexus will acquire Piloto's business. If Nexus eventually becomes the winning bidder, the deal is expected to close in the fourth quarter of 2024.

Nexus managing director Evan Gluoft said, “We're excited to have the opportunity to partner with Piloto to help this iconic brand restore its position as America's leading discount retailer. The Piloto business has huge potential, and we believe its best days are ahead.”

Piloto also announced that in court-supervised proceedings, the company has obtained financing commitments of $0.7075 billion, including $35 million in new financing from some of its existing lenders in the form of extended credit lines (collectively, “DIP Financing Loans”). With court approval, the DIP financing loan plus cash from the company's continued operations is expected to provide sufficient liquidity to ensure that the company has sufficient working capital during the completion of the sale transaction.

Pilotto has also filed several practice motions seeking court approval to continue to support its operations, including continued payment of employee wages and benefits, and payments to certain key suppliers in the normal course of business. The company expects to receive approval of these requests from the court and is expected to pay the supplier in full for any goods and services provided after the application, in accordance with normal terms.

As part of the court's oversight of the sales process, Piloto will continue to evaluate its operating footprint, which includes closing more stores. The company will also continue to evaluate and optimize its distribution center model. Bruce Thorn, president and CEO of Billotto, added: “While most of our stores are profitable, we intend to move forward with a more focused footprint to ensure that we operate efficiently and provide the best service to our customers. To achieve this goal, we intend to use the tools provided by this process to continue to optimise our store fleet in an orderly manner.”

As of June of this year, Piloto operated about 1,400 stores across the US, with more than 0.03 million employees.

The epitome of traditional retailers

Piloto is an established American retailer founded in 1967. As a discount retailer, Billotto mainly sells household goods, furniture, electronics, and seasonal products. At first, Billitot did some clearance and discount activities in the automotive sector, such as auto parts, and then got involved in the field of daily necessities where demand was higher, selling items such as daily consumables, seasonal products, furniture, tableware, toys, and gifts at prices 20% to 30% lower than those in specialty stores.

At the time, the US was at the peak of immigration. Most immigrants had limited spending power, and various discount stores were very popular. For example, established discount stores such as Dollar Tree and 99 cent stores all emerged at this time. Piloto has taken advantage of this shareholder trend and has become the first choice for many American household purchases due to its advantages in commodity categories such as furniture and miscellaneous goods. In 1985, Piloto was listed on the New York Stock Exchange and became one of the first discount chain giants to enter the capital market.

After the listing, Pilote went on to acquire and expand the size of the company. As of 2021, the company had nearly 1,500 stores in the US and Canada. Pilotto has also established a complete logistics distribution management system in the US. That is, in this year, the stock price of Billitot hit a record high of 73 US dollars. At that time, the market capitalization once exceeded 2.5 billion US dollars. However, the good times did not last long. After the end of the epidemic, high inflation and rising interest rates in the US curtailed consumer spending, and American consumer habits changed markedly, especially spending on non-essential goods. This change directly affected Billotto's sales and profitability. As a result, the company recently fell into financial difficulties that were difficult to ease. The stock price also plummeted, from a peak of $73 in 2021 to around $0.5 today, a drop of more than 99%.

According to recently disclosed financial reports, Pilotto's performance indicators for the first quarter of fiscal year 2024 fell short of expectations. Net sales were 1 billion US dollars, down 10.2% year on year; net profit loss exceeded 0.2 billion US dollars, and adjusted net loss was 0.132 billion US dollars. According to Pilotto, the failure to achieve sales targets is mainly due to core customers continuing to cut expenses, especially consumer spending cuts on high-priced non-essential goods.

Some analysts point out that Piloto is one of many struggling traditional retailers hurt by the slowdown in housing consumption. American furniture and home appliance giant company Conn (Conn) applied for Chapter 11 bankruptcy protection with the US Southern District Bankruptcy Court on July 23 and filed a debt of about 1 billion to 10 billion US dollars; US flooring company LL Flooring also recently applied for bankruptcy protection and will close 94 stores across the US.

The bankruptcy of Pirlotto is seen as a microcosm of the difficulties faced by the traditional physical retail industry in the US, that is, the traditional discount retail model can no longer adapt to the rapid changes in the modern market. With the rise of e-commerce, under the trend of high inflation and high interest rates, American consumers are increasingly biased towards essential consumer goods, and traditional discount retailers that prefer non-essential consumer goods, such as Pilotto, are under tremendous pressure. This pressure comes not only from digital retail giants such as Amazon and strong competitors such as Walmart, which has successfully achieved digital transformation, but also from all-round changes in consumer demand.

Recently, Dollar Tree, an American “one-dollar store” discount retail giant, also lit up a red light of poor spending among low- and middle-income people. According to the financial report disclosed by Dollar Tree on September 4, the company's net sales for the second quarter were 7.37 billion US dollars, up 0.7% year over year, lower than analysts' expectations of 7.49 billion US dollars; adjusted earnings per share (EPS) was 0.67 US dollars, down 26.4% year on year. Previously, analysts expected an increase of 1.05%.

In terms of full-year performance guidance, Dollar Tree expects net sales for the full year to be 30.6 billion to 30.9 billion US dollars, compared to the previous forecast of 31 billion to 32 billion US dollars; the adjusted EPS for the full year is expected to be 5.2 to 5.6 US dollars, and the previous forecast was 6.5 to 7.0 US dollars. Dollar Tree's share price plummeted 22% after the financial report was announced. The company's chief financial officer said that the reduction in sales guidance for the whole year is mainly due to macroeconomic pressure having an increasing impact on the purchasing behavior of middle- and high-income customers, and the company's sales are weakening, especially in terms of sales of non-essential consumer goods.

Earlier, retail discount giant Dollar General revealed second-quarter results that were not as good as market expectations. The company also drastically lowered its full-year results guidance, causing its stock price to plummet by more than 30%, the biggest one-day decline in history.

Dollar General has more than 0.02 million stores, mainly in rural towns. More than 60% of the company's sales come from households with an annual income of less than $35,000. Dollar General shows that rising prices, weak job markets, and rising interest rates are putting pressure on low-income customers. The company's CEO Todd Vasos said in an analyst conference call that more than 60% of customers reported that due to rising prices, they had to make sacrifices to buy basic necessities. Consumers are also paying more in terms of rent, utilities, health care, etc.

Edit/Rocky