Revlon makeup products are on display at the CVS store on August 9, 2018 in Sausalito, California.
Justin Sullivan Getty Images
Retail is facing a potential wave of bankruptcies after a month-long delay in restructuring.
Experts say there may be an increase in troubled retailers starting later this year as rising prices reduce demand for certain goods, stores struggle with inflated inventory levels and a potential recession looms.
Last week, the 90-year-old cosmetics giant Revlon filed for bankruptcy protection under Chapter 11, making it the first name facing household users to do so in months.
Now the questions are: Which retailer will be next? And how soon?
“Retail is changing,” said Perry Mandarino, co-head of investment banking and head of corporate restructuring at B. Riley Securities. “And in the next five years, the landscape will be very different from today.”
The industry saw a dramatic retreat in restructuring in 2021 and early 2022 as companies – including those on so-called insolvency lists – were relieved by fiscal stimulus that offered cash infusions to businesses and stimulated consumer dollars. The break followed the flood of disaster in 2020, near the start of the pandemic, as dozens of retailers, including JC Penney, Brooks Brothers, J. Crew and Neiman Marcus, went to bankruptcy.
Including Revlon’s filing, there have been only four retail bankruptcies so far this year, according to S&P Global Market Intelligence. This is the lowest number the company has tracked for at least 12 years.
It is unclear exactly when that number could start to rise, but restructuring experts say they are preparing for more problems in the industry as the crucial holiday season approaches.
Fitch Ratings analysis shows that consumers and retailers most at risk of default include mattress maker Serta Simmons, cosmetics line Anastasia Beverly Hills, skincare marketing company Rodan & Fields, owner of Billabong Boardriders , men’s suit chain Men’s Wearhouse, accessories marketing company Isagenix International and sportswear manufacturer Outerstuff.
“We have a potentially perfect storm,” said Sally Henry, a law professor at Texas Tech Law School and a former partner at Skadden, Arps, Slate, Meagher & Flom LLP. “I would not be surprised to see an increase in retail bankruptcies.”
Yet advisers who have worked on retail bankruptcies in recent years believe for the most part that any impending disaster in the industry should not be as intense as the massive turmoil in 2020. Instead, bankruptcies would could be more common, they said.
“What you saw in 2020 was a huge amount of restructuring work that was pulled forward,” said Spencer Ware, managing director and head of retail practice at Riveron, a consulting firm. “Then we went from 2020 to today with a huge amount of incentives. What will happen now? It’s a bit mixed.”
A split in consumer behavior can make things more unpredictable. Lower-income Americans are particularly pressured by inflation, while wealthier consumers continue to squander on luxury goods.
“We are at a time when we predict that what will happen next is much more complicated,” said Steve Zelin, partner and global leader of the restructuring and special situations group at PJT Partners. “There are many more variables.”
The rack at the TJ Maxx clothing store in Annapolis, Maryland, on May 16, 2022, as Americans prepare for a summer shock of stickers as inflation continues to rise.
Jim Watson AFP | Getty Images
The latest retail data shows where consumers retreat the most. Advance spending on retail and food services fell 0.3 percent in May from a month earlier, the trade ministry said last week. Retailers of furniture and home furnishings, electronics and appliance stores, and health and personal care chains are declining month by month.
“Consumers don’t just buy less, they shop less, which means losing momentum, which is crucial to retail growth,” said Marshall Cohen, NPD’s chief retail adviser. Group, a market research firm.
In the first three months of 2022, consumers bought 6% fewer retail items than in the first quarter of 2021, the NPD Group said in a study published in late May. More than 8 out of 10 consumers in the United States said they plan to make additional changes to reduce costs over the next three to six months, it said.
Race to overtake rising rates
The threat of future interest rate hikes – after the Federal Reserve raised base interest rates by three-quarters of a percentage point last week in its most aggressive increase since 1994 – has prompted retailers to seek to take advantage of debt markets. to accelerate these plans.
Riveron’s Ware said companies are vying to anticipate future interest rate hikes. Some bought back debt or tried to push back maturities. For example, Macy’s department store said in March that it had completed refinancing $ 850 million in bonds to fall over the next two years.
Most recently, however, Ware said he had noticed that refinancing activity had begun to slow over the past 12 months, with more transactions canceled or terminated. “The window seems to be closing for more difficult refinancing,” Weir said.
In late 2020, Revlon narrowly escaped bankruptcy by persuading bondholders to extend their debt by maturity. But a little less than two years later, the company succumbed to heavy debt and supply chain problems that prevented it from fulfilling all its orders.
As always, retailers struggling with the biggest debts will be most vulnerable to bankruptcy, said David Berliner, head of business restructuring and restructuring at BDO.
More suffering may begin after the upcoming shopping season to return to school, he added, as families return from long-awaited summer vacations and may be forced to tighten their belts.
A UBS survey earlier this month found that only about 39 percent of U.S. consumers say they plan to spend more money on the school return season this year than last year, compared to the number of people who said the same in 2021.
“Consumers are becoming more expensive with their wallets,” Berliner said. “There will be winners and losers, as we always see. I’m just still not sure how soon that will happen.”
Berliner said he was closely monitoring consumer debt levels, which are moving close to the highest values ever.
“Consumers are willing to spend on credit cards, mortgages and buying to pay for later programs,” he said. “I’m afraid that many consumers will run out of credit cards and then be forced to give up abruptly.”
If consumer spending slows down in this way, more retailers could be pushed into bankruptcy at a faster pace, Berliner said. But if costs remain at a reasonable level and consumers are able to pay off their debts wisely, companies will instead “share some of the pain” with fewer bankruptcy claims, he said.
In any case, Berliner said the disaster would be greater among smaller retailers, especially mothers’ and pop shops, which do not have enough resources to withstand more difficult times.
Clock inventory levels
Rising stock levels are also on the radar of insolvency advisers because they have the potential to lead to much bigger problems. Retailers from Gap to Abercrombie & Fitch to Kohl’s have said in recent weeks that they have too many things after shipments arrived late and consumers changed dramatically for what they were shopping for.
Target said earlier this month that it was planning discounts and canceling some orders to try to get rid of unwanted goods. As other retailers follow suit, profits will shrink in the near future, said Joseph Malfitano, founder of restructuring and restructuring firm Malfitano Partners.
And when a retailer’s profit margins shrink as its inventories are revalued – a routine industry practice – those inventories won’t cost that much, Malfitano explained. As a result, a company’s loan base could fall, he said.
“Some retailers have managed to cancel orders so as not to create more inventory bubbles. But many retailers cannot cancel these orders, “Malfitano said. “So if retailers who can’t cancel orders don’t take it out of the park during the holiday season, their margins will drop significantly.”
“You will have more problems in 2023,” he added.
Buyers are seen at a shopping center in Bethesda, Maryland on February 17, 2022.
Mandel Ngan | AFP | Getty Images
Ian Fredericks, president of Hilco Global’s retail group, agreed that retail failures are unlikely to occur until 2023.
“Retailers are not in trouble because they are still burdened with liquidity … between a little money left on their balance sheet, plus an unpulled revolver,” he said. – There is still a lot of track.
This only means that the upcoming holiday season, which is a vital period of time in the retail calendar each year so that businesses can run out of profits, can be an even bigger time to create or break up for companies.
“I do not see a big holiday season. “I think people will really tighten up and fasten,” Fredericks said. “Inflation is not going anywhere.”
An additional result of the economic slowdown could be increased activity in mergers and acquisitions in the retail sector, according to Mandarino of B. Riley Securities.
Larger retailers who are more financially stable may seek to absorb smaller brands, especially when they can do so at a discount. They would use this strategy in difficult times to continue growing revenue quarter after quarter, albeit inorganically, Mandarino said.
Home goods, clothing and department stores could face the greatest pressure in the coming months, he added.
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