Real estate company WeWork (WE) filed for bankruptcy this week, pressured by ongoing deterioration in the commercial real estate market. The company was founded in 2014, and at its peak in 2019, WeWork was valued at $47 billion - making it one of the most valuable start-ups in the world.
As a private company, WeWork raised more than $22 billion across 23 funding rounds. However, a failed IPO in 2019 raised questions over management's ability to lead. Moreover, its negative profit margins and creative accounting practices spooked Wall Street - and the COVID-19 pandemic acted as a further headwind for WeWork, as it accelerated a shift toward remote work environments.
The company ultimately listed on public markets via a special purpose acquisition company (SPAC) merger in 2021, and outlined a strategy to focus on its core markets and reduce its cost base while targeting larger clients.
WeWork’s cumulative net losses totaled $11.4 billion in the last three years. It entered into long-term agreements with landlords, but the properties were leased to tenants on a short-term basis. A flawed business model meant WeWork ended Q2 with $2.9 billion in long-term debt and $13 billion in lease obligations.
With commercial real estate woes still looming large, here's a look at three retail stocks that are at risk and could follow WeWork's footsteps into bankruptcy.
Joann Stock
Down nearly 97% from all-time highs, Joann (JOAN) operates as a specialty retailer of fabrics and crafting supplies in the U.S. Valued at a market cap of just $21 million, Joann has burnt significant investor wealth since it went public in 2021.
In fiscal Q2 of 2024 (ended in July), Joann reported revenue of $453.8 million, a decline of $10 million year over year. Comparatively, it reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss of $21.9 million, wider than its year-ago loss of $8.9 million.
The company ended the quarter with more than $1 billion in debt and just $19 million in cash, suggesting it will have to raise additional capital to support its cash burn rate.
Out of the five analysts covering Joann stock, four recommend “hold,” and one recommends “sell”. The average target price for JOAN is $1.55, which is more than 200% above the penny stock's current trading price.
The Container Store Group Stock
The Container Store (TCS) operates as a specialty retailer of organizing solutions, custom spaces, and in-home organizing services in the U.S. Valued at less than $100 million by market cap, TCS has fallen 96% from record highs.
In Q3 of 2023, TCS reported revenue of $219.7 million, a decline of 20% compared to the year-ago period. While comparable store sales fell 20%, general merchandise revenue declined by 20.4%, and online sales were down almost 22% compared to the year-ago period.
With just $10.2 million in cash, TCS expects to remain unprofitable in 2023, and is in dire need of funds.
Out of the three analysts covering TCS, two recommend “hold,” and one recommends “strong sell.” The average target price for TCS is $2.75, which is 50% above the current trading price.
Big Lots Stock
The final retail stock on my list is Big Lots (BIG), valued at $122 million by market cap. Down 94% from all-time highs, Big Lots is a U.S.-based home discount retailer.
Big Lots rose to popularity due to its “treasure hunt” style, attracting shoppers with enticing discounts. In recent years, Big Lots expanded its furniture business, which is generally a slower-moving product category, compared to consumer goods such as cleaning supplies and food. This resulted in higher inventory levels for the company and lower profit margins.
With $2.2 billion in debt and $46 million in cash, Big Lots is a high-risk investment. Looking ahead, analysts expect its losses per share to more than double to $11.21 in the current fiscal year.
Out of the eight analysts covering Big Lots, four recommend “hold,” one recommends “moderate sell” and three recommend “strong sell”. The average target price for Big Lots is $6.22, which is 57% higher than the current trading price.
