Rundown: More retail bankruptcies, Rare Beauty reportedly halts sale, Amazon Rufus to serve ads

0:04Hey, everyone. Welcome back to the Modern Retail Rundown. I am senior reporter Gabby Barco. I'm here again with our editor in chief Kale Guthrie Weissman. Hey, how are you this week? I'm doing great. Gabby. How are you? I'm doing great. Yeah. It's nice to be back in the swing of things now that you're back off a couple of summits. Anything to report? Digiday Media had our retail media strategies event earlier this week. It was really fun. We spoke, we really went in the weeds about retail media and I learned a lot. And I don't know, it seems like how a lot of brands are thinking about advertising is they're trying to push the funnel.

0:47Like if you always think of retail media as just a way to get conversion, they're talking about it as brand advertising. There were some interesting things. I don't know. I learned a lot. I enjoyed it. But otherwise, always learning stuff in retail. The retail world is never sleeping. Yeah, exactly. Retail media networks seems to be a big topic of ours lately. So excited to see some of that coverage. But yeah, let's get on to this week's episode. We're going to start off by talking about Big Lots, which filed for Chapter 11 bankruptcy earlier this week. And they already have sort of an outline of their plans of what they're going to be doing to turn things around and sort of reemerge with a new ownership.

1:31Then if this is a kind of a fun one, we're going to talk about potential exits with Rare Beauty hitting a pause on a sale that they had in the works for the last few months. We'll talk about why that is. Lots of money involved is hinted. And then we're going to wrap up the episode by talking about Amazon Rufus, who is a new pet of ours, we'll say, pops up here and there. But they're selling ad space. That's what's interesting. And so the new pet is going to be an advertisement. Aren't they always? I'm excited to talk about that. I've been trying to kind of play around with Rufus lately, and it's interesting to say the least.

2:14But yeah, let's talk about Big Lots. So there's been a lot of developments over the last few days, just since they filed the Chapter 11. So we can kind of go over them. But the last report that we saw from this week was that Big Lots received$550 million in financing that they have access to now to start to pay off some of their debt and make sure they can operate as normally as possible, including paying employees and their vendors. But when the Chapter 11 news did come out earlier this week, we spoke about this, which is that this private equity firm, Nexus Capital Management, did place a bid pretty quickly to possibly take over big lots one way or another.

3:04What are your thoughts there? Yeah, well, you can read all about Nexus Capital and modern retail. We did a little rundown because they're really interesting. And right now it's a stocking horse bid. So it's essentially like if no one else swoops in, they will provide this financing and help save big lots. But it's just another sign of a really big retailer that has been flailing for many years now going kaput and then needing to be saved by some bigger financial entity. The big question is, what will happen? For every retailer, when it goes into bankruptcy, there are certain aspects with players like JCPenney.

3:41Often it has to do with real estate. I bet you real estate will play a big role in big lots. But also, it all depends on what types of things they're selling, what assets they have and also what their competitive edge is. And so just looking at who Nexus Capital owns, which is an interesting mix of things, which include the ACT, the standardized test. They also include Dollar Shave Club and then a vegan vitamin gummy company. And so pretty much it's all over the place. It's not your usual traditional PE firm that comes in and buys big retailers and sells it for scraps or tries to get as much leverage out of it as it can.

4:20But we really don't know exactly what the plan with Nexus will be. But it's super fascinating. And I'm interested to see what happens next. Yeah. So with Nexus, all things considered, I think the deal might go through in Q4 if a better offer doesn't come along by then. But right now, the New York Stock Exchange has already begun the process of delisting big lots. So, you know, everything's already sort of in motion. But there will be private ownership, you know, when all things are done and said, but maybe we can zoom out and talk about how this was pretty much inevitable over the last few months.

5:00We've seen some reports come out about just the sheer amount of debt that big lots has. And, you know, back in June, they filed with the SEC showing that they had taken in another$72 million in debt to be able to cover costs. But evidently, that did not really work out. I was actually surprised to see how many stores they have. So they had said 244 of their 13 and 92 stores were underperforming. It's a big chunk of stores. But yeah, also, they had their earnings this week, just coincidentally. So I guess that might be the last one they have. But do you want to tell us what they hinted at? Yeah, I mean, pretty much they've been hinting at filing for bankruptcy for a very, very long time.

5:49Their sales have been dropping. I think at the last earnings, comp sales dropped 14.6 % year over year. The CEO, Bruce Thorne, called it a very challenging environment in which our core lower income customer remains under significant pressure and has limited capacity for higher ticket discretionary purchases, which is a refrain you're hearing from a lot of CEOs. But for big lots, it was especially dire with all the debt. And so for quarter after quarter, pretty much you would see sales not doing well, the company saying it's going to close an unspecified amount of stores, and also hinting that unless something big happened, it was going to file for bankruptcy.

6:30And so what we see this week is just things reaching ahead and the bankruptcy happening. Yeah. And then I guess we can look at the bigger picture of where big lots lands as far as bankruptcy filings go. So it is just the latest retailer in a series of big chains that are going bankrupt to restructure or trying to find a way to turn things around. So in July, there's another discount retailer, Bob Stores. I believe that's a New England special. Correct me if I'm wrong, Kale. They also went into liquidation because they just couldn't figure out, you know, the financing for restructuring. And then last week, we talked about Rite Aid's plans to rebuild, you know, after the bankruptcy last year.

7:16So yeah, there's just, it seems like every other day we hear about a new plan from one of these retailers that we grew up with. Yeah, exactly. Although, I mean, yes, Bob's Stores is New England. It's really funny because this is a huge digression, but I'm just going to say it. So there's Bob's Stores, which is what just went bankrupt. But I always think it's Bob's Discount Furniture, which is another retailer. Two different retailers. Yeah, too many Bobs, if you ask me. And we know no news about Bob's Discount Furniture. Don't get us wrong about that. But there's other Bobs also on the Northeast filed for bankruptcy.

7:52And then, you know, we can't forget the biggest one that we've experienced in the last year, Bath & Beyond. Like, we've sort of been seeing a lot of dominoes fall for these bigger asset-heavy stores that have a lot of locations and were unable to grow their sales or really figure out a turnaround plan. And so that we're still in the midst of it. And I bet you it's not going to end anytime soon. Yeah, with these, it really does focus on just how much sheer space they cover. I mean, these stores are humongous, and it's understandable that it's really hard to keep operating them without taking on more and more debt.

8:29But, you know, the alternative to filing for bankruptcy is to sell off to PE or strategic. So in this case, actually, this week, our reporter, Melissa, wrote a story about Backcountry just selling to TSG Enterprise after just struggling to turn things around. it's really interesting too, because this is an outdoor retailer that's been around for a long time and really benefited from sort of the COVID era, you know, pandemic outdoors item sales. So, you know, I think it hit a billion dollars in sales, it says, but that did not stop it from just underperforming and slowing down enough to have to sell eventually.

9:13Yeah, no, they're not the same. Like backcountry didn't file for bankruptcy, but it is show that a lot of companies that rested on their laurels and were unable to figure out a way to sort of get a new turnaround plan or stay in front of customers are seeking some type of an emergency exit right now. So there's a lot of these stories happening. I'm sure there are a lot of them happening that aren't being reported, which, you know, if you know about these, reach out to Gabby or I, but super interesting. Yeah. Yeah. I think it's the chapter 11 or the alternative, like I said, is some sort of a fire sale, which have been pretty common lately.

9:54But yeah, I believe, you know, if you ever talk to analysts these days, they do say that we should probably expect more of these because a lot of these retailers just can't afford to operate at a loss continuously quarter after quarter. And then of course, you know, debt is just becoming also or has been really expensive to take on too. So it's just a recipe for kind of throwing in the towel and starting over in some cases. So yeah, we'll see how Big Lots reemerges in the new year with that. But next up, let's look at another company that's at a sort of turning point, but this time, you know, from a different angle, Rare Beauty did hit a pause on a sale that they'd been exploring, according to a new Axios report that cited multiple anonymous sources familiar with the matter.

10:45But yeah, earlier this year, I think Bloomberg valued the company at$2 billion. So this is a founder, Selena Gomez, the beauty brand. It's very young. It launched, I remember like it was yesterday, it launched in the middle of the pandemic in this very virtual e-com focused way and just took off from there. And yeah, I mean, it seems like in the last six months, they've been trying to figure out a way to exit. But a$2 billion valuation is really hard to find a buyer for as we always talk about. Yeah. And it's super interesting. Like this report by Axios came out a few days ago. And only a few days before then, there was another story in Bloomberg about Rare Beauty, explaining how this brand had made Selena Gomez a billionaire, and it represents, I want to say, like 80 % of her assets.

11:37But of course, it's valuation and not actual money. And so, you know, it might be valued at$2 billion, but you still need a buyer to actually shell out that cash. And it seems like it has been unable to do that at this time. So interesting timing in terms of those two stories where you had one talking about Selena Gomez's wealth and how she's a billionaire. And this is all thanks to this darling beauty brand. And then a few days later, we get this other report that's like, actually, they can't sell it, or they're not going to sell it right now, allegedly. Yeah, we can get into why that is because this is a pretty beloved brand.

12:10Like you said, it's now reportedly bringing in about$350 million in annual revenue. It's consistently sold out at Sephora, as I've found out firsthand. But yeah, it looks like the strategics are just finding these sort of consumer brands, especially there's the celeb angle too that we'll get into. They seem to be a really big risk to just throw in sort of a concentration of capital into just to be able to own because it's just such a fickle market, right? Like there's always going to be a hot new brand that comes out and they I think they're just kind of spooked about it. So I think that one of the things that like the Axios report said that I found super interesting is that you are seeing strategic spooked.

12:54And there are a couple of reasons. One, the reason why rare beauty is so popular is because it's associated with a celebrity, but also that comes with its own risks. And it's also kind of a monobrand. And so there are all these things where it sort of rests on these specific issues where if it loses its luster, if only the reason why people like rare beauty is because it's associated with Selena Gomez, it might lose the valuation or the prestige that it once had. And so I think a few years ago, it was really important to be a celebrity and influencer and have a brand and that would raise your value.

13:30But also there are risks associated with that where if that is the only association you have with the brand, it will kind of lose its luster after it gets sold away from that celebrity. So I think that's some of the issues we're seeing here. Yeah, the concern I believe is that they don't really know what the involvement is going to be going forward, whether somebody like Selena will continue to really lend. I mean, I think she's one of the most followed celebrity people on Instagram, period. So I can see that. But I do think that's also interesting because we hear about Rare Beauty and Skims, for example, are trying to argue that they are brands.

14:07I hear this a lot. They are the quality of the product. It stands on its own. You don't need the celebrity. But I think that's not really helping in selling at least at this$2 billion price tag, maybe. Yeah. And I think that the quality is important, but it's also that it's associated with a prestigious figure. Like we could talk about Fenty for a while and like people love Fenty, but really it's Rihanna that they love. Yeah. I mean, I think that's, it's kind of the recipe, right? Like it is a really, it's a good product. I mean, you know, I use all of these actually personally and there's a, there's a reason for that, right?

14:40It's like the product is really good quality. Fenty in their case, you know, they really pioneered the sort of expansion of shades, for example. But yeah, of course you know when you have the big a big star attached it is going to help but i keep mentioning two billion dollars but just for context like somebody like kylie cosmetics sold 51 stake uh to cody for 600 million dollars this was in 2020 so and rare beauty launched in 2020 or i think 2021 like in that sort of uh period and so it's just uh really was catapulted But there is a chance that they might pick up the deal, you know, in the new year, see what else they could get their hiring bankers and all of that.

15:23That's been on pause for now. But it's either that or like the alternative exit, as Axios mentioned, is an IPO or a reverse merger. And we're here, you know, we've heard speaking of skims, you know, that was also put on ice for a while. Yeah, exactly. I feel like that has always been, I don't want to say the threat, but like the move that they have been pushing toward, but the market has never been quite right for an IPO. And then once you do it, you kind of can't go back. And so if you don't perform well on the public markets, you know, and so I think probably most of these brands, especially the ones associated with celebrities, they just want a one and done clean acquisition.

15:59Give me$2 billion and we'll call it a day. But they might have to do the other thing and then leave it to the public markets to decide its worth over the long run. Yeah, I guess we're also seeing that the M &A market is just really unstable, even for some of the more successful brands that are expected to exit. I mean, just a callback to Nexus, which actually took off Dollar Shave Club from Unilever. I believe we talked about that last year. That was a billion dollar sale that everybody thought was going to really change the game for a direct to consumer brand. But clearly, it's just it just wasn't scaling enough.

16:36So I think this is probably another reason why, you know, celebrity things aside, putting in all this capital into one brand, especially a startup is seems to be risky right now. And one more point, just because I think this is important and kind of interesting, where if you talk about a sector that is doing well in this unstable market, it's beauty and wellness and skincare. That has been the quote-unquote recession proof, or we're not in a recession, but that's the one that is still being able to see sales. And when you talk to investors, they're definitely interested in that space. And so$2 billion is a big price tag.

17:15So it's not that surprising that Rare Beauty was unable to find a buyer. But the fact that in a sector that is doing well, that is probably doing better on the M &A side than some of the other ones, the fact that it was unable to find a buyer, I think is indicative of just the rocky terrain we're in right now. Yeah, at least for this exact moment. We'll see what happens in the next few months. Okay, well, let's move on to our last story of the day. As you mentioned at the top, Amazon is planning to sell Adspace next to Rufus, which is its generative AI assistant that it launched just a few months ago.

17:53But yeah, what's the latest news on that? So pretty much this came in the form of a message to advertisers, a little pop up like update, pay no mind, but it's telling advertisers that it's going to sell advertisements or pretty much search placement ads alongside Rufus, which is its Gen AI bot. You probably see it on Amazon.com, the Amazon app. It's where it says, ask me a question, and you can ask it a question, which I should ask a question just because I'm a journalist, but I have not yet. It's kind of interesting because advertising is important to Amazon. The way that search advertisements work is that you have them aligned to keywords and queries.

18:33And so if you are, let's use Rare Beauty, for example, if it's beauty products or what I actually don't even know, what kind of products does Rare Beauty sell? Like blush cosmetics? Blush, foundation, lip gloss. Yeah. So let's say lip gloss, for example. Rare Beauty would do a search query for lip gloss, and it would show up in the search results. But I guess now if you ask, what's a good lip gloss to Rufus? Or you ask, why should I wear lip gloss? It might, alongside whatever the AI generated answer is, give like, and why don't you think about this lip gloss from Rare Beauty, for example? I don't even know if Rare Beauty sells on Amazon, so take this example with a grain of salt.

19:19But my point is, there's a lot of interesting things here, which is essentially that it's trying to monetize the new Gen I space, but it has a lot of weird, like there's a lot of unknowns in terms of the types of results they will be sitting next to because it's a computer that's deciding it. And it's not necessarily intent-based, but question-based. And if we've learned anything from generative AI, it's that it can bring up some weird results when you ask certain questions. So really interesting stuff. We'll see how it develops over the next few months. Yeah. And, you know, the thing with ads, which by now we know that Amazon's really maximizing every, you know, wall to wall inch of their site and their app for ads.

20:01It seems like there's really not much organic traffic or algorithm anymore, just like most of it is at this point generated by some sort of sponsored post. But it seems also risky. I mean, I guess if I was a seller or a brand, would I want to advertise there? I think you get into why those ads may be kind of awkward or finicky. Why would that be, I guess? Just let alone the fact that Rufus is only a few months old to begin with. Yeah. And I think it's definitely Amazon just testing to see if it can make it look seamless. should be noted that my understanding, someone can correct me if I'm wrong, is that this isn't like brands are paying specifically to advertise on Rufus.

20:45It's that as part of their search placements, they will also might be in things that are surfaced with Rufus. And so we don't really know what that will look like, how they will differ in terms of the answers Rufus gives. You know, there are some advertisers or agencies who are pretty much like, it's a little worrying because what if someone asks Rufus a question about a certain type of product, but Rufus misunderstands it and brings up an ad for another product that's not at all relevant to it. And that is just sort of a waste of space and just pretty much useless ad space. And so it will need to be very good and very precise in order for this to work.

21:28But then you zoom it out and it also goes to bigger questions of this is kind of a new search engine type of mentality that these tech companies are implementing. And they're probably all striving to be able to sell ad space on there, similar to how Google has been one of the biggest leaders in digital ads in the world. So a lot of stuff there. And from what we know, it doesn't seem like Amazon is going to be supplying sellers or brands with how the ad metrics are going to be working. So that's another interesting point. So it feels a little opaque right now. Yeah, it's opaque. The impression I get is that this is just Amazon testing it out to see if the UI works.

22:08And I imagine it's good for brands. Brands want to know if their search ads are working based on actual search in Amazon and not necessarily Rufus. But maybe over time, Amazon will see that people are engaging with these ads. People are using Rufus more than they were before. And then it'll begin adding new elements, new types of reporting to it. So that's what I imagine is happening here, but I don't know for sure. Yeah. So I think we are going to probably see more ways that these tech platforms are going to try to monetize generative AI separately. We are seeing right now just how expensive it is to build out these tools.

22:45So it doesn't surprise me that somebody like Amazon is trying to get on that really quickly, given how fast its ad business is growing right now. I think it's outpacing some of the other departments. But yeah, we should probably hear more platforms doing this. But it'll be interesting to see what it looks like. I'm sure we'll start to see some ads surfacing on there. Yeah, I'll be keeping an eye out for it. I want I guess I now have to really start using Rufus to see if I can find the ads. Yeah, have you have you played around with it? I mean, it's usually it's pretty straightforward. But yeah, it does kind of get sometimes it leads me down some weird paths.

23:22But maybe that's the point, right? Yeah, I have not played around with it. But I just have no questions. I go to Amazon with an intent, which is I want to buy this. And so I don't, I don't, I don't have any real questions and I, you know, wouldn't trust the answer. Like if I'm like, what is the best product for this? That is not where I would do my product research, but I think I'm different from other people. I imagine other people do do product research on Amazon. So, you know. Yeah. One way I've used it, which is pretty much how I shop on Amazon is that I I'm trying to find an answer in the reviews usually uh so does this uh my favorite recent example I was trying to figure out if a hairbrush is heat proof or you know if it's going to melt if you use it on your hair with a blow dryer and I really couldn't find any answer in the listing so I did ask Rufus can you figure this out just through combing through the reviews and eventually there was one mention of it but that's something I could have just typed in right it's not I don't know, if I needed to go.

24:18But like, that's actually a very good use of it. I like that very specific given an exact query using this is the basis that that was very smart. Yeah, I will do that. Last resort. Yeah, exactly. All right. Well, on that note, that is everything we have on the docket today. That's our show. You can write and review us on Apple podcasts, Spotify, or wherever you're listening. You can listen to the Modern Retail Podcast on Thursdays to hear interviews with industry executives. Kelly, I know you've had a busy week, but do you know who you have on next week? Yeah, next week we talk with an old subscription company, which you actually just wrote about subscriptions companies, but it's called Mantri, the Man's Pantry, and they've been around since 2012 and have been able to grow a sustainable business doing subscription boxes.

25:06and you don't hear about them a lot these days. And so I wanted to check in about how that business model is going. We'll tune into that. Yeah. And next week, I will not be here. So I won't see you, but I will be back the following week. So, you know, come back on Saturdays and you can hear more of our rundown.