You may have noticed that a lot of things that were supposed to happen this year didn’t! Looking at the big picture, we are weeks away from the end of the year, and neither the recession in the U.S., nor the post-pandemic rebound in the Chinese economy, have come to pass. Perhaps the strangest non-event, from the standpoint of the big picture, has been the widely anticipated wave of corporate defaults.
This doesn’t mean that a wave of corporate defaults isn’t coming in the new year. It only means they haven’t happened yet. Bank of America points out that the bankruptcy of WeWork happened “relatively quietly,” even though it was the largest U.S, company to go belly-up since the global financial crisis (GFC) of 2007-2008, while last week the Austrian property group Signa became Europe’s biggest post-GFC insolvency.
The slow-motion crumbling of Signa has taken its U.S. business units with it, including those in the bicycle business, and the D2C channel is now without Wiggle as one of multiple negative results. Some of you in the bike shop channel of trade may applaud the demise of Wiggle, but be careful what you wish for.
What troubles me is the data showing that the financial strength of multinational and domestic companies has been declining for a while, a trend that was only briefly interrupted by the attempted restructuring and stress-testing during the wake of the GFC in 2008.
The economists HPS has looked at have employed U.S. companies’ Altman Z-scores, a measure developed by New York University professor Edward Altman, to estimate how close to bankruptcy a public company is.
In the last century, more than 50 percent of all public companies looked strong and healthy using Altman’s metric. That number has now dropped below 10 percent for the first time.
Many companies in the bicycle industry, both multinationals and U.S. domestic, are privately owned, so the Altman measurement of their financial health cannot be measured. However, it is logical that private companies will generally follow public companies relative to financial health.
HPS readily concedes that the Altman system may be outdated in the new era where intangible assets make up a far greater share of company balance sheets and do have value, but the point is that U.S. company financial strength and credit quality have degraded since the GFC.
We also recognize that the very biggest multinational U.S. companies, often referred to as the “Magnificent Seven” big-tech stocks, don’t need to worry about default, and it’s the large number of smaller companies, including many in the bicycle industry, that worries us.
The single biggest factor helping to push off bankruptcies to date has been the success of company CFOs and financial managers in negotiating long-term debt when they had the chance during the protracted low-interest rates that followed the pandemic.
But even a generous low-interest rate is going to expire, and the debt is going to have to be renegotiated. Companies are balking at renewing debt at much higher rates, but if they have not reached a place of relative financial stability or outright strength based on cost-efficient, JIT inventory that customers want, delivered at disinflationary prices that allow a positive net profit at competitive consumer prices, they have no leverage.
The end result is that they will have to assume debt at higher rates that will force internal changes to generate even modest net profits by reducing expenses and forgoing growth.
Too gloomy for the holiday season? Could be. However, we would rather err on the side of caution and have our clients and the bicycle industry develop business plans that create an attitude of optimism about profitably surviving to be a part of the future of the new, emerging micromobility industry and market.
Happy Holidays to You and Yours!