After a two-year reprieve, retail bankruptcies could rise later this year, analysts predict.
A halt in retail reorganisation could lead to a flood of bankruptcies.
As prices rise, companies face bloated inventories, and a recession looming, analysts predict more distressed merchants later this year.
Last Monday, 90-year-old cosmetics major Revlon filed for Chapter 11 bankruptcy, the first in months.
Who is next? When?
Retail is in turmoil, said B. Riley Securities’ Perry Mandarino. The landscape will change in five years.
In 2021 and early 2022, the industry saw a sharp drop in restructurings as companies, particularly those on bankruptcy watch lists, got fiscal stimulus. Near the start of the epidemic in 2020, J.C. Penney, Brooks Brothers, J. Crew, and Neiman Marcus filed for bankruptcy.
S&P Global Market Intelligence counts four retail bankruptcies this year, including Revlon’s. It’s the lowest number in 12 years.
It’s unclear when that number could rise, but restructuring experts expect additional difficulties as the holiday season approaches.
According to Fitch Ratings, the consumer and retail companies most at risk of default are Serta Simmons, Anastasia Beverly Hills, Rodan & Fields, Billabong owner Boardriders, Men’s Wearhouse, Isagenix International, and Outerstuff.
Sally Henry, a law professor at Texas Tech and former partner at Skadden, Arps, Slate, Meagher & Flom LLP, predicts a “perfect storm.” I expect more retail bankruptcies.
Advisors who have worked with retail bankruptcies in recent years anticipate any looming distress won’t be as severe as 2020. They suggested spreading out bankruptcies.
Spencer Ware, managing director and retail practise head at Riveron, said restructuring activities accelerated in 2020. “From 2020 till present, we used massive stimulus. Now what? Mixed bag.”
Consumer behaviour splits could create uncertainty. Inflation hurts low-income Americans while wealthy customers buy luxury products.
“Predicting what will happen next is significantly more complicated,” said PJT Partners’ Steve Zelin. Variables abound.
Retail sales data reveals where consumers are cutting back. The Commerce Department reported last week that retail and food service spending declined 0.3% in May. Furniture, electronics, and health-care retailers also saw month-over-month reductions.
“Consumers aren’t just buying fewer items, they’re shopping less,” said Marshal Cohen, chief retail industry advisor at NPD Group.
In the first quarter of 2022, consumers bought 6% less things than in the first quarter of 2021, NPD Group announced in late May. More than 8 in 10 U.S. consumers aim to cut spending in the next three to six months.
Beating increasing rates
After the Federal Reserve last week hiked benchmark interest rates by three-quarters of a percentage point, retailers eager to enter the debt markets accelerated their preparations.
Ware said businesses were scrambling to beat rate hikes. Others repurchased debt or delayed maturities. Macy’s refinanced $850 million in debts due in two years in March.
Recently, refinancing activity has slowed, with more deals being cancelled or pulled, Ware added. “The time for problematic refinancing is closing,” said Ware.
Revlon avoided bankruptcy in 2020 by convincing investors to extend its debt. Two years later, excessive debt and supply chain concerns caused the company to fail.
As always, merchants with the most debt are most vulnerable to bankruptcy, said David Berliner, head of BDO’s corporate restructuring and turnaround practise.
After the next back-to-school shopping season, when families return from summer vacations, more anguish may surface.
Only around 39% of U.S. consumers said they plan to spend more on back-to-school this year than last, down from 2021.
Berliner: “Consumers are increasingly stingy” Winners and losers will always exist. I just don’t know when.”
Berliner is watching consumer debt levels, which are near all-time highs.
Consumers are willing to spend on credit cards, mortgages, and buy-now-pay-later programmes, he added. “I fear many customers will max out their credit cards, then draw back abruptly.”
Berliner predicted additional retailers could go bankrupt if consumer spending decreased. If spending stays normal and people can pay off loans, companies will “share some of the pain” with fewer bankruptcies, he said.
Berliner predicts that smaller retail firms, especially mom-and-pop shops, would be hardest hit.
Watching inventory
Rising inventory levels might lead to worse difficulties, therefore bankruptcy advisors are also concerned. Retailers from Gap to Abercrombie & Fitch to Kohl’s say they have too much inventory after late shipments and consumer buying shifts.
Target plans markdowns and order cancellations to clear out undesired products. As other retailers follow suit, revenues will fall, says Joseph Malfitano, founder of Malfitano Partners.
Malfitano explained that when a retailer’s profit margins drop as its stocks are reappraised, those inventories are worth less. He stated a company’s borrowing base could drop.
Some businesses have cancelled orders to avoid inventory bubbles. Malfitano said many retailers can’t cancel orders. If shops who can’t cancel orders don’t do well during the holidays, their margins will drop.
He continued, “2023 will be worse.”
Ian Fredericks, president of Hilco Global’s retail group, agrees.
“Retailers aren’t in distress because they still have a boatload of liquidity,” he said. Still much runway.
That means the upcoming holiday season, which is often a make-or-break time for retailers, could be even more crucial.
“I don’t expect large Christmas expenditures. Fredericks said individuals will tighten up. “Inflation won’t stop.”
According to B. Riley Securities’ Mandarino, an economic downturn could boost retail M&A.
Bigger, more financially secure retailers may buy smaller brands at a bargain. Mandarino said they’d employ this method in challenging times to grow revenues inorganically.
Home goods, clothes, and department stores could be hit most, he said.
Bed Bath & Beyond’s namesake banner has underperformed in recent quarters, therefore an activist wants the store to spin off Buybuy Baby, a better component of the firm. Off-mall department shop Kohl’s is also in exclusive partnership talks with Vitamin Shoppe owner Franchise Group. CNBC reported Wednesday that Franchise Group is considering lowering its bid for Kohl’s.
“Buyers market,” stated Mandarino. When consumer spending drops and we enter a recession, organic growth won’t happen.
