General / Market Analysis

Cut From Similar Cloth, but Not the Same

Joann’s bankruptcy offers a lesson: The economy has a heavy influence on stocks, but the stock market isn’t the economy.

The economy isn’t the stock market. One is a flow of all commerce, public and private. The other is the collective fortunes of publicly traded companies trying to grow and stave off inevitable obsolescence as society changes in the long run. Here, look with me at Joann Fabric and Crafts—which declared bankruptcy this week and will soon delist from the stock market—for a stark example.

The coverage of Joann’s bankruptcy—from which it will emerge as a private firm with restructured debt—pinned it on consumers cutting back on non-essential purchases in a tougher economic environment. Maybe. But I don’t think so. Take a long view, and you see an extended arc of consumers’ gradually changing behavior here. I suspect this bankruptcy was just a matter of when, just as every company is going to die someday, even if that someday is 250 years from now. Joann’s just happened to be sooner.

Once upon a time, America had a lot of large regional fabric chains. These stores flourished when sewing garments was a normal part of life, and they had everything. My grandmother toted me around Cloth World and Hancock’s in the 1980s, and I would reach out and touch all the lovely velvets, silks, wools and suedes. I know, from the fabric stash I later inherited from her, that these were all high-quality natural fibers, not cheap synthetic imitations. Our regional chain, New York Fabrics, was the same.[i] These were all pure fabric stores, not fabric and crafts—for crafts, we had Leeward’s, Craftmart and Michael’s (which eventually ate the other two).

But as the 1980s rolled into the 1990s, the industry consolidated, and Joann did the consolidating, buying regional chains to gain a national footprint. It took over New York Fabrics in 1991. Cloth World got eaten in 1994. These were just those in the Bay Area and South, respectively—there were other such stories nationally.

After Joann took over, the stores weren’t the same. The square footage devoted to fabric slowly shrank, with other crafts taking up more real estate. And—in my opinion!!—the fabric quality nosedived. The natural wools, silks and leathers were gone, replaced by “silky” and “wooly” polyesters and polyurethane. Even the linen was a mostly synthetic blend! Within the cottons, apparel fabric gave way to quilting, and a lot of the prints didn’t match the grain, leading me to some pretty wonky results. I don’t know exactly what transpired in Joann’s boardroom, but it appears to me the company either aimed to cut costs or thought (in my case, wrongly) cheaper price points were what consumers wanted.

Sew (ha) I did what any dedicated sewist would do and chased quality to higher-priced, local stores—stores that are thriving amid Joann’s current plight. These are the places where you can still find the best English linens and cotton lawn, Italian wools and silks and Japanese denim. The cotton prints are more luscious than the mass-market stuff at the big-box competitors, with better feel and drape and more vibrant colors. Their revenues come partly from fabric sales and partly from classes. Some have to move and expand to meet booming customer demand. It reminds me so very much of how quite a few local bookstores specialized, persisted and survived despite the threat of Borders, Barnes and Noble and the Internet, which many once thought doomed them.

These local stores underpin a lot of economic growth, and they have capitalized on changing tastes. They saw the market gap left by the big-box stores’ focus on keeping costs and prices as low as possible, and they took the risk of building businesses to exploit it. And, for some, it paid off! Most of these are family owned, not publicly traded, but they are a key part of the economy. The small transactions that inject money into a local community flow up and down Main Street, the stuff of Bastiat. They hum when times are good and hang on tight in hopes of better days when times are lean. Of course, they don’t always succeed—many fail. But they are central to the local economy—yet they aren’t captured in narratives like “consumer cutbacks killed Joann.”

Joann is the other thing—the stock market. Not as in, Joann going bankrupt means the stock market is troubled. It does no such thing. But rather as in, Joann tried to navigate multiple cycles spanning decades and tried to evolve with certain consumer habits in order to do so, and sometimes it hit and sometimes it missed. It is no different than the sagas of Sears, Borders and other once-ubiquitous retail giants that gradually trended down, other than the fact that for now it is still a going concern. It is the same old story. Business starts. Business grows. Business finds economies of scale. Business buys another business to gain market share. Then another. And another. Soon business is national, huzzah! And then business faces the challenge of staying at the top and fending off competition. Eventually it takes some punches and makes some bad choices. Gradual decline starts. Sometimes there are turnarounds, sometimes not.

Shareholder returns for a company will often follow a similar arc. As it is growing and thriving, its investors make money. Sometimes lots of it! But nothing lasts forever, and every stock will eventually have its final peak. As loads of academic research notes, many—if not most—companies listed in 1924 or 1974 are long gone. In the end, one of two things typically happens. Either a recession kills them, or competition does—competition that is simply better at reaping the fruits of economic growth and trends prevalent at the time.

So no, stocks aren’t the economy. Stocks are the small subset of companies who have listed their shares and let people participate in their evolutionary arc. Which is awesome! And economic activity has a huge influence on stocks. But it takes more than a cursory look at economic trends to really know how stocks are doing. It takes awareness of trends in sectors and industries and knowledge of how different companies are navigating them—the winds at their backs and the challenges in front of them and the degree to which it is all reflected in current sentiment. Understanding this is how you can reap all the big returns that come while publicly traded companies are in their heyday.

[i] Really. Despite the name, it was a Bay Area chain.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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