New Economic Realities   //   January 25, 2023

Following a wave of retail IPOs, delisting notices hit the industry

More retailers are failing to meet the minimum requirements of the stock exchange they are on — and are receiving delisting notices.

Just six months after its shares began trading on the New York Stock Exchange, sustainable consumer products company Grove Collaborative received a delisting warning last month with its stock currently trading at 54 cents at press time. Blue Apron also received a delisting notice from the NYSE in December because of its stock price and market capitalization. Bed Bath & Beyond had also received a Nasdaq delisting notice as the beleaguered home goods retailer has yet to file its quarterly Form 10-Q. 

Companies must check off the listing requirements established to be listed on the exchange, and when they don’t, they will be involuntarily delisted. The NYSE, for example, requires companies to maintain a minimum average closing share price of $1 per share and a minimum average global market capitalization of $50 million over a 30-day trading period. If the company still hasn’t regained compliance with the exchange within the given deadline, it will be forced out of the exchange and may either trade in over-the-counter markets or move to private status.

Investors are losing confidence in some retailers’ ability to perform in an environment where shoppers are pulling back spending, supply chain constraints impact operations and a possible recession is looming, experts said. Being involuntarily delisted comes with a number of negative consequences, including losing access to capital. Several retailers, like Mattress Firm, have already delayed their Initial Public Offering due to the current market conditions.

“It’s a lack of confidence on the part of the investors in these retailers that are driving the share price lower,” said Caleb Silver, Investopedia’s editor-in-chief. “A lot of these big retailers are struggling as consumers start to pull back a little bit.”

Although the sheer number of retailers receiving delisting warnings is “pretty extreme,” Silver said it has happened before in other industries such as tech. In the late ’90s to early 2000s, a number of internet stocks slid below the $1 threshold. Some companies ended up getting delisted, sold or forced to file Chapter 11.

Newly-minted public companies face delisting threats

Over the last two years, consumer-facing brands flocked to go public through methods like SPACs, direct listings or traditional IPOs. Direct-to-consumer brands like Grove Collaborative, online retailer Boxed and wine subscription service Winc were just some of the retailers that went public in recent years. Around the time of their public debut, Grove Collaborative said it expects to be profitable by 2024 and Winc called itself  “one of the fastest growing at scale wineries in the United States.”

The optimism soon came to a halt.

Grove Collaborative inked a deal to go public through a SPAC merger, but just days before making its public debut in June, it lowered its long-term growth expectations by almost half. Much like other DTC brands, Grove Collaborative has yet to hit profitability. The company cites the return of pre-pandemic behaviors as one of the reasons its revenues are down.

Boxed also received a delisting warning from the NYSE because its average market capitalization fell below the $50 million threshold. Boxed is also considering a sale as it faces dwindling liquidity. Meanwhile, Winc had already filed for bankruptcy almost exactly a year following its public debut in November. Winc had debt totaling about $36.75 million.

Chris Stuart, portfolio manager at investment management company Shorepoint Capital Partners, said that there had been too much excitement around some of these newer companies and categories. The allure soon wore off once investors realized some of these firms were far from profitable, he said.

For example, Blue Apron went public back in 2017 when ​​meal kit delivery companies were getting the limelight. Before it went public, Blue Apron was valued at $2 billion in 2015. Years later, the company’s losses are mounting, just recently reporting a net loss of $25.8 million in the third quarter. Adding to its list of problems is the possibility of losing its public status as its market capitalization declined. 

“You just had a lot of these speculative companies that came to market that probably shouldn’t be publicly traded,” Stuart said. “We went from a cycle of hype and speculation to risk-off and being very risk averse and not willing to pay up a premium for these companies that like don’t have any earnings.”

It’s not just newly public retailers that received warnings. Bed Bath & Beyond also needs to regain compliance. The warning from Nasdaq came amid reports that the company might soon file for bankruptcy. In its third quarter earnings, Bed Bath & Beyond reported a loss of $393 million.

“The company recently warned that it might have trouble continuing as a ‘going concern,’” Investopedia’s Silver said. “That is code for we may declare bankruptcy soon because we cannot support our business anymore.”

What the wave of delisting notices signal to IPO hopefuls

Now is not a good time to be booted out of an exchange.

Guido Petrelli, Merlin Investor founder and CEO, said that delisted companies might have trouble finding the resources to stay afloat amid the tough economic conditions. “In a period like this, where access to capital is already difficult, being delisted, for a company that basically needs capital in order to survive, has a very negative consequence,” Petrelli said. “They were already in trouble before when they had potential access to a huge capital market. Now being delisted, all these options will not be available anymore.”

A number of companies have put a pause on their plans to go public as a result of the volatile market. For example, Mattress Firm formally requested to withdraw its initial public offering registration after filing back in September 2021. Instacart and Fresh Market have also pulled back their IPO plans in recent months.

Shorepoint’s Stuart said being delisted could impact the morale of employees. “One day they’re ringing the bell on the New York Stock Exchange, and then a few years later, they’re trading on the pink sheets,” he said. “Anytime you see a significantly depressed share price, that’s going to weigh on your employee base.”