The retail industry is facing a potential wave of bankruptcies – here’s why

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  • Last week, Revlon filed for Chapter 11 bankruptcy protection, making it the first domestic consumer-facing name to do so in months.
  • Now the questions are: Which retailer will be next and how soon?
  • Experts say that after nearly two years of relief, the retail industry may start seeing a rise in bankruptcies later this year.

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The retail industry is facing a possible wave of bankruptcies after a month-long slowdown in restructuring activity.

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Experts say distressed retailers could rise later this year, as price hikes dampen demand for some goods, stores grapple with bloated inventory levels and a potential slowdown looms.

Last week, 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection, making it the first domestic consumer-facing name to do so in months.

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Now the question is, which retailer will be next? And how soon?

“Retail is in flux,” said co-head of investment banking and B. said Perry Mandarino, head of corporate restructuring at Riley Securities. “And within the next five years, the landscape will be very different than it is today.”

The industry saw a dramatic decline in restructuring in 2021 and early 2022, as companies – including those on the so-called bankruptcy watch list – received relief from fiscal stimulus that offered cash infusions to businesses and stimulus dollars to consumers. . The stagnation followed a flurry of crisis in 2020, near the start of the pandemic, with JC Penney, Brooks Brothers, J. Crew and Neiman Marcus headed to bankruptcy court.

According to S&P Global Market Intelligence, there have been just four retail bankruptcies so far this year, including Revlon’s filing. This is the lowest number tracked by the firm in at least 12 years.

It’s not clear exactly when that tally might start rising, but restructuring experts say they are preparing for more trouble in the form of the all-important holiday season across the industry.

An analysis by Fitch Ratings shows that consumer and retail companies most at risk of default include mattress maker Serta Simmons, cosmetics line Anastasia Beverly Hills, skin-care marketing company Rodan & Fields, owner of Billabong Boardriders, men’s suits Including chain men’s warehouse, supplements marketing. company Isagenix International and sportswear manufacturer Outerstuff.

“We have the potential to have a perfect storm,” said Sally Henry, a professor of law at Texas Tech Law School and a former fellow at Schaden, Arps, Slate, Meagher & Flom LLP. “I wouldn’t be surprised to see a rise in retail bankruptcies.”

Still, consultants who have worked on retail bankruptcies in recent years believe that, for the most part, no crisis in the industry should be as intense as the massive shakeout in 2020. Instead, bankruptcy could be more spread, he said.

“What you saw in 2020 was driving a tremendous amount of restructuring activity,” said Spencer Ware, managing director and retail practice leader at advisory firm Riverrun. “Then we got a tremendous boost from 2020 to today. What’s going to happen now? It’s a little bit of a mixed bag.”

Segmentation in consumer behavior can make things more unpredictable. Low-income Americans have been particularly pinched by inflation, while wealthy consumers continue to splurge on luxury goods.

“What we’re predicting at this point in time is far more complicated than what happens next,” said Steve Zelin, partner and global head of the Restructuring and Special Situations Group at PJT Partners. “There are many more variables.”

The latest retail sales data shows that consumers are pulling back the most. The Commerce Department reported last week that advance retail and food service spending fell 0.3% in May from the previous month. Furniture and home furniture retailers, electronics and appliance stores, and health- and personal care chains saw month-on-month declines.

Marshall Cohen, chief retail industry advisor at market research firm NPD Group, said, “Consumers are not only buying less stuff, they’re buying less, which means a loss of the impulse-shopping moments that are vital to retail growth.” “

In a survey released in late May, the NPD Group said that in the first three months of 2022, consumers bought 6% fewer items at retail than in the first quarter of 2021. More than 8 out of 10 US consumers said they plan to make more changes to reduce their spending over the next three to six months.

Competition to stay ahead of rising rates

The threat of future rate hikes — after the Federal Reserve last week raised benchmark interest rates by three-quarters of a percent in its most aggressive hike since 1994 — prompts retailers to tap into debt markets to accelerate those plans. inspired to.

Riverrun’s Ware said businesses were rushing to face future rate hikes. Some bought back the debt or attempted to take out the maturity. For example, department store chain Macy’s said in March that it completed a refinancing of $850 million in bonds over the next two years.

Recently, however, Ware said he has noticed refinancing activity slowing down over the past 12 months, with a large number of deals canceled or pulled. “It looks like the window is closing for more difficult refinancing,” Ware said.

In late 2020, Revlon escaped bankruptcy by persuading bondholders to extend its maturing debt. But less than two years later, the company succumbed to a heavy debt burden and supply chain issues, which prevented it from fulfilling all of its orders.

As has always been the case, retailers that are grappling with the highest debt load are going to be most vulnerable to bankruptcy, said David Berliner, BDO’s head of business restructuring and turnaround exercises.

More distress may start to appear after the upcoming back-to-school shopping season, he said, after families return from the long-awaited summer vacations and may be forced to tighten belts.

A survey conducted by UBS earlier this month found that only 39% of US consumers said they plan to spend more money on the back-to-school season this year than last year, compared to those who said 60 basis points less than the number. Same in 2021.

“Consumers are getting more stingy with their wallets,” Berliner said. “There are winners and losers like we always see. I’m just not sure how soon it’s going to happen.”

Berliner said he was closely watching consumer debt levels, which are close to all-time highs.

“Consumers are willing to spend on credit cards, on mortgages and now on purchase later on payment programs,” he said. “I’m afraid a lot of consumers are going to tap out their credit cards and then suddenly be forced to withdraw.”

If consumer spending slows like this, more retailers could be pushed into bankruptcy at a faster rate, Berliner said. But if spending stays at a reasonable clip, and consumers are able to reasonably pay off their debt, companies will “share a little bit of the pain” with fewer bankruptcy filings, he said.

Either way, Berliner said the crisis will be greater in smaller retail businesses, especially mom and pop shops, which don’t have as many resources when they are having a tough time.

list level on the clock

Rising levels of inventory are also on the radar of bankruptcy advisors because they have the potential to cause huge problems. Retailers from Gap to Abercrombie & Fitch to Kohl’s have said in recent weeks they have too many items after shipments were late and consumers suddenly changed what they were shopping for.

Target said earlier this month that it is planning a markdown and canceling some orders to try to get rid of unwanted merchandise. As other retailers follow suit, profits are going to contract in the short term, said Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners.

And when a retailer’s profit margin shrinks because its inventories are revalued — a routine practice in the industry — those inventories won’t cost as much, Malfitano explained. As a result, the company’s borrowing base may collapse, he added.

“Some retailers are able to cancel orders to not create more bubble on inventory. But a lot of retailers can’t cancel those orders,” Malfitano said. “So if retailers who can’t cancel an order don’t knock it out of the park during the holiday season, their margins will drop.”

“You’re going to have more problems in 2023,” he said.

Ian Fredericks, president of Hilco Global’s retail group, agreed that retail bankruptcy would likely not occur until 2023.

“Retailers are not in trouble because they are still burdened with liquidity… “There is still a lot of runway,” he said.

That only means the upcoming holiday season, which is a crucial time in the retail calendar every year for businesses to break even on profits, can be more than a make-or-break moment for companies.

“I don’t see a great season of holiday spending,” Fredericks said. “Inflation isn’t going anywhere.”

An additional consequence of the economic slowdown could be an increase in M&A activity in the retail sector, according to Mandarino of B Riley Securities.

Larger retailers that are more financially stable may try to buy smaller brands, especially when they can do so at a discount. Mandarino said they will use this strategy to increase revenue quarter over quarter in tough times, even if it happens inorganically.

He said home goods, apparel and department stores are likely to face the most pressure in the coming months.

With the Bed Bath & Beyond banner underperforming in recent quarters, the retailer faced worker pressure to discontinue its BuyBuy Baby chain, which is seen as a strong part of the business. Is. Kohl’s, an off-mall department store retailer, also came under active pressure to consider the sale and is now negotiating an exclusive deal with Franchise Group, the owner of Vitamin Shoppe. A source told CNBC on Wednesday that the franchise group is considering whether to lower its bid for Coles.

“It’s a buyer’s market,” Mandarino said. “Growth will not come organically when consumer spending is down and we go into recession.”

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