Why the retail industry is facing a wave of bankruptcy

Revlon cosmetics are on display at the CVS store on August 9, 2018 in Sausalito, California.

Justin Sullivan | Getty Images

The retail industry faces a potential wave of bankruptcies after a month-long slowdown in restructuring activity.

Experts say the number of distressed retailers could increase later this year as soaring prices dampen demand for certain items, stores grapple with inflated inventory levels and a looming potential recession.

Last week, the 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection, making it the first brand to hit a home consumer to do so in months.

Now the questions are: which retailer will be next? And how soon?

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

The industry saw a restructuring slump in 2021 and early 2022 as companies, including those on so-called bankruptcy watch lists, received relief from fiscal stimulus that offered cash injections for businesses and stimulus dollars for consumers. . The pause followed a wave of disaster in 2020 just before the start of the pandemic, when dozens of retailers including JC Penney, Brooks Brothers, J. Crew and Neiman Marcus filed in bankruptcy court.

There have been just four retail bankruptcies this year, according to S&P Global Market Intelligence, including Revlon’s announcement. This is the lowest the firm has tracked in at least 12 years.

It’s not entirely clear when that figure might start rising, but restructuring experts say they’re bracing for new industry challenges as the all-important holiday season approaches.

Fitch Ratings analysis shows consumer and retail companies most at risk of default include mattress maker Serta Simmons, Anastasia Beverly Hills cosmetics line, skincare marketing company Rodan & Fields, owner of Billabong Boardriders, men’s suit chain Men’s Wearhouse, nutritional supplement marketing. Isagenix International and sportswear manufacturer Outerstuff.

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

However, consultants who have dealt with retail bankruptcies in recent years, for the most part, believe that any looming disaster in the industry should not be as bad as the massive turmoil in 2020. Instead, bankruptcies may be more common, they say. .

“What you have seen in 2020 is a huge amount of restructuring activity,” said Spencer Ware, managing director and head of the retail practice at consulting firm Riveron. “Then we went from 2020 to today with a huge amount of stimulus. What will happen now? It’s a bit of a mixed bag.”

A split in consumer behavior can make the situation more unpredictable. Lower-income Americans have been hit particularly hard by inflation, while more affluent consumers continue to spend money on luxury goods.

“At the moment we are predicting what happens next is much more complex,” said Steve Zelin, partner and global head of restructuring and special situations at PJT Partners. “There are many more variables.”

A rack at TJ Maxx clothing store in Annapolis, Md. on May 16, 2022, as Americans brace for a summer sticker shock as inflation continues to rise.

Jim Watson | AFP | Getty Images

The latest retail sales data shows where consumers are most abandoning a purchase. Preliminary retail and catering spending fell 0.3% in May from the previous month, the Commerce Department said last week. Furniture and home goods retailers, electronics and home appliances stores, and health and personal care chains saw declines from the previous month.

“Consumers aren’t just buying less, they’re buying less, which means losing impulse buying moments that are critical to retail growth,” said Marshall Cohen, chief retail advisor at NPD Group, a research firm.

In the first three months of 2022, consumers bought 6% fewer items at retail than in the first quarter of 2021, according to an NPD Group survey released at the end of May. More than 8 in 10 US consumers said they plan to make further changes to cut their spending in the next three to six months, he said.

Race to stay ahead of rate hikes

The threat of future rate hikes – after the Federal Reserve last week raised benchmark interest rates by three-quarters of a percentage point in its most aggressive growth since 1994 has prompted retailers looking to enter debt markets to accelerate those plans.

Riveron’s Ware said businesses were looking to stay ahead of future rate hikes. Some bought the debt or tried to push back the maturities. For example, department store chain Macy’s said in March that it had completed the refinancing of $850 million in bonds maturing in the next two years.

More recently, however, Ware said he noticed that refinancing activity has begun to slow over the past 12 months, with more deals canceled or cancelled. “Looks like the window is closing for more complex refinancing,” Ware said.

At the end of 2020, Revlon narrowly avoided bankruptcy by persuading bondholders to roll over their maturing debt. But just under two years later, the company succumbed to a heavy debt load and supply chain problems that kept it from fulfilling all of its orders.

As always, retailers that are struggling with the heaviest debt burdens will be the most vulnerable to bankruptcy, said David Berliner, head of BDO’s business restructuring and recovery practice.

He added that even more suffering could begin to emerge after the upcoming school shopping season, after families return from a long-awaited summer break and may be forced to tighten their belts.

A survey conducted by UBS earlier this month found that only about 39% of US consumers said they planned to spend more money for the school season this year compared to the previous year, 60 basis points less than the number of people who said the same thing in 2021.

“Consumers are getting more and more stingy with their wallets,” Berliner said. “There will be winners and losers, as we always see. I’m just not sure yet how soon that will happen.”

Berliner said he is closely monitoring consumer debt levels, which are hovering near historic highs.

“Consumers were willing to spend money on credit cards, mortgages and buy now, pay later programs,” he said. “I’m afraid that many consumers will use their credit cards and then they’ll be forced to give up abruptly.”

If consumer spending slowed this way, more retailers could go bankrupt at a faster rate, Berliner said. But if spending stays reasonable and consumers can pay off their debts sensibly, companies will instead “share a little pain” with fewer bankruptcy filings, he said.

In any case, Berliner said the disaster will be greater among smaller retailers, especially mom and dad stores, which don’t have many resources to get through the tough times.

Stock levels on the watch

Shoppers walk through a mall in Bethesda, Maryland on February 17, 2022.

Mandel Ngan | AFP | Getty Images

Jan Frederiks, president of retail group Hilco Global, agreed that retail bankruptcies are likely not to increase until 2023.

“Retailers are not in trouble because they are still sitting on a boat with liquidity…between the cash left on their balance sheet and an unused revolver,” he said. “There’s still a lot of runway.”

This means that the upcoming holiday season, which every year is a vital time period on the retail calendar for businesses to turn a profit, could be an even more defining moment for companies.

“I don’t see a big holiday spending season. I think people are going to really tighten up and buckle up,” Frederiks said. “Inflation is not going anywhere.”

According to B. Riley Securities’ Mandarino, another result of the downturn could be a surge in M&A activity in the retail sector.

Large retailers that are more financially stable may try to take over smaller brands, especially if they can do so at a discount. They will use this strategy during difficult times to keep revenue growing quarter-on-quarter, albeit in an inorganic way, Mandarino said.

He added that home goods, clothing and department stores could face the most pressure in the coming months.

With Bed Bath & Beyond’s namesake banner down in recent quarters, the retailer has faced pressure from an activist to drop its Buybuy Baby chain, which is seen as a stronger part of the business. Kohl’s, the non-mall department store retailer, has also come under pressure from activists to consider selling and is now in talks for an exclusive deal with Franchise Group, owner of Vitamin Shoppe. The Franchise Group is considering whether to cut its bet on Kohl’s, a source told CNBC on Wednesday.

“It’s a buyers’ market,” Mandarino said. “Growth will not come naturally when consumer spending declines and we enter a recession.”

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