As retail bankruptcies continue, a look at how well or poorly companies are executing digital transformation strategies can tell investors who might be next

Summary

In the words of one commentator, COVID‑19 has been the final blow for several retailers that were considered ‘the walking wounded’ prior to the pandemic. The two dozen Chapter 11 filings this year have exceeded 2019’s total and show no signs of slowing down as the disruption and uncertainty continues into the second half of the year.

Report

Analysis

Though some market observers consider the retail wreckage an inevitability considering the unprecedented disruptions caused by the pandemic and ensuing recession, some companies have been more exposed to the shocks than others. An important factor in understanding how resilient retail companies were heading into the pandemic stemmed from how well or poorly they were managing their digital transformations. Take Macy’s for example. As we highlighted previously, Macy’s was already dealing with a poorly executed digital transformation strategy that contributed to its chronic underperformance over the past year. Like most 1-Star rated companies heading into the pandemic, Macy’s weaknesses have only been further exacerbated by the demand shocks.

Heavy debts were also cited as a cause of underlying weakness among many bricks and mortar retailers heading into the crisis. Companies with poor cyber governance are generally victims of over-financial engineering. Excessive leverage makes it challenging for these companies to invest sufficiently in cybersecurity at the same time they are trying to play catch up with the fast-moving ecommerce space and digitizing operations.

Companies like J. Crew, Neiman Marcus and Macy’s tell the story of retail losers—traditional bricks and mortar companies slow to make the digital transition. But there have been winners. The Cyberhedge cyber governance indices have outperformed in the US by 19% and in the EU by 41% YTD by predicting the winners and losers in each sector based on how well or poorly they are managing their technology.

Alongside solid financials (good financial reserves, lower leverage, general lack of over-financial optimization), the strong management of digital technology — including well-executed digital transformation strategies—is an ever more important factor in predicting a company’s market performance.

Investors can look at how well or poorly companies are executing on their digital transformations through Cyberhedge ratings for insight into which companies are more likely to add to the record number of bankruptcies in the second half of the year and those that are likely to emerge from the crisis stronger.

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Denis Bolshakov

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These first ever benchmarks prove good cyber governance matters to shareholder value. They measure stock market performance of companies with good and with bad cyber governance scores. Scores are based on Cyberhedge’s proprietary cyber governance rating methodology. Market performance is tracked by an independent firm. The results show that companies with good cyber governance outperform their peers in US, UK, and EU markets.

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