Post-Holiday Post-Mortem: The State of Retail Bankruptcies

Here’s the good news for retail: The holidays brought a much-needed boost to shopping centers and malls across the country. Holiday retail sales increased 4 percent in 2016 to $658 billion, according to the National Retail Federation, with online sales growing faster than forecast at 12.6 percent.

Unfortunately, there is significantly more bad news: The big online spike is another sign that the internet is trouncing traditional retail. According to Bloomberg BNA, the brick-and-mortar retail industry could see up to 40 bankruptcies in 2017. Heavy debt loads, rising rents and the loss of brick-and-mortar shoppers to online retailers have eaten away at many clothing companies. Appliance retailers, too, have been hit hard. Debt and the internet are rendering them obsolete also.

Retail Bankruptcies on the Rise

The ongoing saga of Wet Seal may be coming to an end. In January 2015, Wet Seal filed for bankruptcy and sold its assets to Versa Capital, who sold off roughly two-thirds of the retailer’s 511 stores. Now, with liabilities of $50, the long-struggling California tween clothing line has filed a second Chapter 11 in the short space of two years. Waning mall traffic looks to drown its prospects for staying afloat.

A fresh wave of bankruptcies is likely coming. In the last few months, long-struggling American Apparel and The Limited filed for bankruptcy and are closing their doors. And, upscale French fashion house BCBG filed for Chapter 11 on March 1st and is considering closing nearly all of its 200 stores as it collapses under the weight of a $485 million debt. 

No Returns for Creditors 

Now add to slumping sales a practice that has become a major headache for creditors. This is what some analysts have labeled “pulling a J. Crew.” And it is making some investment companies wary of bailing out retail. 

Preppy staple J. Crew and girls’ apparel company Claire's are both struggling with debt from leveraged buyouts. As the Chicago Tribune reports, both companies have created subsidiaries to “hold brands, trademarks, processes and web domains. These units enable companies to insulate assets from creditors while potentially using them as collateral to back new debts.” 
Chapter 11s in Electronics and Appliances

The notorious implosion of Circuit City, once the country’s No. 2 electronics retailer, is less than a decade old, and other electronics and appliances stores have now followed in its wake. The most recent, 61-year old HHGregg Inc., filed for Chapter 11 bankruptcy after disappointing holiday sales. The company has found a buyer, however it will be forced to shutter 88 locations. And the venerable Sears, which has long been grappling with sinking sales, announced in January that it is planning to close another 150 locations. A number of its suppliers have reportedly suspended shipping amid fears the company will not be able to pay its debts.

Meanwhile, analysts and investors are keeping a wary eye on a number of department stores, including Neiman Marcus Group and Macy’s, both of whom have been weighed down by heavy rents as well as diminished foot traffic. According to CoStar Group data, more than 10 percent of U.S. retail space may need to be closed, converted to other uses or renegotiated for lower rent in coming years.

Retail Bankruptcy Outlook for 2017

Given all the doom and gloom above, it may come as something of a surprise that Moody’s Investor Service predicts that the outlook for the retail industry will remain stable through the coming year. Moody’s anticipates that sales will increase by 6 percent to 8 percent, a result of decreased pressure from foreign currency rates, excess inventory (likely due to holiday sales), and of new approaches by some brands that are, apparently, paying off, including direct-to-consumer selling and international growth. Home improvement’s near future is especially rosy, thanks in large part to the rise in home ownership.

The challenges, however, remain for apparel and footwear as discounters and online outlets continue to filch their customers. Despite their troubles, J.C. Penney and Kohl’s are listed among the National Retail Federation’s top performers, signaling changes in their business models that are allowing them to more nimbly respond to trends. Another way forward that is proving successful is spinoff discount stores, such as Saks’s Off Fifth and Nordstrom’s Rack. The lower prices and specially commissioned designer lines are working well enough for both Nordstrom and Saks to expand this year. It may be time for other department stores to suit up, dress down and head for the sales rack – permanently.

Filed under: chapter 11, corporate restructuring

The contents of this article are intended to convey general information only and not to provide legal advice or opinions.

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