Editor's Note: Below is a brief excerpt transcribed from a recent edition of The Macro Show hosted by Retail analyst Brian McGough.
Brian McGough: On this next chart, you’ve had Chapter 11 filings for retailers decelerate over the year-to-date. Why? Everything I just talked about, as far as why sales have been really strong, has accrued to crappy retailers that should’ve gone bust and didn’t.
Now, as we roll through the back half of 2018, you’re going to see a lot more pressure. You’re going to see Chapter 11s accelerating again. You’re going to see a lot competition from E-com and these marginal competitors will hang on and try to do everything they possibly can online to save face.
Subscriber: Which companies will start off the bankruptcy cycle?
McGough: They’ll start off being companies none of us have heard of. These are small companies that haven’t had an E-com business, and they’ve delayed but now say ‘Business is strong, we can invest in a couple of software designers and sell online at a loss.’ Those are the companies that will be the baseline.
You’re actually starting to see more bankruptcies in Europe. That’s interesting because it plays into the whole bearish Europe macro and retail theme.
On the large company side, I’ll tell you, JCPenney (JCP) might beat Sears (SHLD). Sears has been the consensus hedge fund short call since it merged with Kmart and 13-14 years later it's still kicking.
JCPenney could literally go in a year. It could be that fast. I would put JCPenney at the top of that list.
The interesting thing about JCPenney is that it has no asset value. When Ron Johnson almost bankrupted JCPenney, he needed a few billion dollars in order to have working capital and give people free haircuts around school time just to get people in the store.
What happened back then is Goldman Sachs gave them $2.4 billion and they securitized it with the owned stores that JCPenney had. Goldman, right now, is rooting for a JCPenney bankruptcy.
So with Sears you can say it has assets. It can sell Craftsman. It can sell Kenmore. JCPenney has nothing it can sell.
Sign up for The Macro Show to understand the investing implications.