Retail Industry Turns to Bankruptcy Due to COVID-19
The COVID-19 pandemic has totally upended the U.S. economy. Businesses have suffered serious financial distress and unfortunately, many will be forced to file for bankruptcy protection. While almost every industry has been affected, some industries have been impacted more severely than others. Industries exhibiting the most distress over these past few months include retail, restaurants, energy, industrial, and hospitality. Retail is probably one of the hardest hit industries to date. Even after business and daily life resumes, restrictions on social interactions and store capacities will remain for the foreseeable future. Those limitations will undoubtedly affect the way Americans shop for goods and services, which will result in people spending less money on non-essential purchases.
Retailers will need to assess their business as well as explore short and long-term strategies in order to evaluate how they will proceed. Depending on the size of the business, hiring additional resources including a financial advisor, and/or an investment banker might be helpful. These seasoned professionals can help a business analyze their financial status and offer advice on how to withstand the economic shockwaves. Companies may file for protection under Chapter 11 of the U.S. Bankruptcy Code to reorganize while for others the businesses might need to liquidate.
Avoiding Corporate Bankruptcy
After a thorough financial assessment, businesses will need to determine if they are financially stable and have enough cash on hand to survive in this troubled economy. Businesses might be able to negotiate rent payments or production costs under other business contracts, which can buy valuable time. In the U.S., the CARES Act has also provided loans and grants to certain businesses that fit some particular criteria as well as businesses in certain industries. If a business is able to take advantage of these loans and grant programs, they could weather the storm, but for others, bankruptcy will be the only option. It is also important that businesses determine the financial state the business before the pandemic and compare to how it is doing currently. If a business was having financial difficulties before the stay at home orders were put in place, they will likely struggle to survive when the economy reopens. After taking these steps and performing a detailed analysis, it will become clear if bankruptcy is a viable choice.
Corporate Bankruptcy Chapter 11 and Chapter 7
Whether a business seeks protection under Chapter 11 or Chapter 7 depends on the financial state of the business, its access to funds, and its probability of survival in these uncertain times. Liquidation will be the optimal route when a retailer wishes to sell off all their assets and completely cease operations and may be the best option to avoid high losses when the business will likely not survive. Businesses that believe they can restructure their debt and continue operating will choose the Chapter 11 option and provides a chance to save the business through reorganization. A Chapter 11 filing is optimal because it offers time to determine whether the business can make it through the effects of the pandemic.
Current and Predicted Retail Bankruptcies
Many experts observe that the pandemic will create a surge of bankruptcy filings in late 2020. In the retail industry, many businesses will file with stores closed during the shutdown. Once stores reopen, rent and salaries become due. If sales are still stagnant and these businesses have limited access to funds, more organizations might explore bankruptcy down the line.
Still, some retailers have already filed for bankruptcy during this time. In fact, corporate Chapter 11 filings increased to a record 560 new cases during the month of April, which is a 26% increase from the 444 filings the previous year. The impact of the pandemic will immediately hit retailers that were already in financial trouble but stayed afloat from low-interest funds prior to the pandemic. Some prime examples are JC Penney, Neiman Marcus, Centric Brands, and J. Crew – all of which filed for bankruptcy the past month to seek protection under Chapter 11. All of these businesses have been struggling for years and the new economic crisis has pushed them over the edge.
Another likely group to be hit hard by the latest economic disruptions are brick and mortar stores since they were already on the decline due to the increase in online sales. Arguably, marginal retailers will likely worse off compared to larger retailers since larger retailers tend to have more resources and brand recognition. Thus, larger retailers could have greater successes in their reorganization opportunity. Smaller companies may have to call it quits and liquidate. Lastly, many online retailers could be okay but still experience financial loss from the interrupted supply chain, lowered credit ratings, and a customer base who is not buying as much due to decreased spending. As such, online retailers may also need to explore bankruptcy options.
Another thing to watch is how retailers who had already filed for bankruptcy before the pandemic are affected. The pandemic has stalled many bankruptcy proceedings. For example, Modell’s is a sporting goods retailer that filed for bankruptcy before the pandemic gained traction. However, the courts have been stalling these proceedings to give the estate an opportunity to recover more money from their going out of business sales. The judge used bankruptcy laws that are not often cited and the hardship from the pandemic to justify freezing the case and not making Modell’s pay rent during this time.
COVID-19 has disrupted the global economy and its effects will be long lasting. As cases decline, more business will fully reopen, but with consumer confidence shaken and high unemployment rates, it will take years for the economy to reach pre-pandemic levels. Retailers will need to be proactive on evaluating if their businesses can survive. If things do not seem promises, business should explore like bankruptcy to assist. If bankruptcy is the best path for a business, there are resources that can help with this process like restructuring consultants who can initially weigh in on the best course of action. Small retailers should look for solutions that offer tools to help with automating and managing the bankruptcy process, which can be a big help with pre-filing and post-filing needs. Mid-size and larger retailers should look into hiring bankruptcy attorneys, financial advisors, investment bankers, and claims administrators that can help with bankruptcy administrative work like claims management and noticing. All of this can help navigate the bankruptcy process and help some retailers successfully reorganize and eventually flourish.
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