by Scott Ronalds
I’m reading Scott Galloway’s latest book, Post Corona: From Crisis to Opportunity. Galloway is a professor of marketing at NYU, serial entrepreneur, and popular blogger/podcaster.
Early in the book, one paragraph jumped out at me:
“The weak [companies] are not merely falling behind, they are being slaughtered. The list of bankruptcies is long and shocking: Neiman Markus, J.Crew, JCPenney, and Brooks Brothers; Hertz (which owns Dollar and Thrifty) and Advantage; Lord and Taylor, True Religion, Lucky Brand Jeans, Ann Taylor, Lane Bryant, Men’s Wearhouse, and John Varvatos; 24 Hour Fitness, Gold’s Gym, GNC, Modell’s Sporting Goods, and the XFL; Sur la Table, Dean & Deluca, and Muji; Chesapeake Energy, Diamond Offshore, and Whiting Petroleum; California Pizza Kitchen, the U.S. arm of Le Pain Quotidien, and Chuck E. Cheese.”
Since the book’s publication in November, a number of other companies have been knocked out by COVID and can be added to the bankrupt camp, including Loves Furniture, Guitar Center, Christopher & Banks, Superior Energy Services, CBL & Associates, Just Energy and the American division of L’Occitane. The list is by no means exhaustive and doesn’t include many high-profile distressed companies such as AMC Entertainment and American Airlines.
Today marks the 1-year anniversary of the pandemic, and by this point we know all too well the impact the virus has had on both a human and corporate scale. But nonetheless, seeing this list of failed businesses is still astounding.
All the companies on the above roster had one thing in common: a weak balance sheet. They either carried too much debt heading into the crisis, had insufficient cash reserves to survive a prolonged weak period, or hadn’t earned a good enough reputation to tap the capital markets for additional funding.
It’s a good lesson for investors (not to mention households). And it’s why a company’s balance sheet is one of the first things our managers look at when considering a stock for inclusion in one of our funds.
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