Revlon makeup products are on display at a CVS store on August 9, 2018 in Sausalito, California.
Justin Sullivan | Getty Images
The retail sector is facing a possible wave of bankruptcies after a slowdown in restructuring activity for months.
There could be an increase in troubled retailers from the end of the year, experts say, as rising prices lower demand for certain goods, stores are struggling with inflated inventory levels and a possible recession is approaching.
Last week, cosmetics giant Revlon, 90, applied for Chapter 11 bankruptcy protection, becoming the first household consumer name to do so in months.
Now the questions are: which retailer will be next? And when soon?
“Retail is on the move,” said Perry Mandarino, co-director 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 what it is today.”
The industry had seen a dramatic decline in restructuring in 2021 and early 2022, as companies, including those on the so-called bankruptcy watch lists, were relieved of the fiscal stimulus offered by cash infusions. business and consumer stimulus dollars. The break came after a flood of anxiety in 2020, near the start of the pandemic, as dozens of retailers, including JC Penney, Brooks Brothers, J. Crew and Neiman Marcus, went to court. bankruptcies.
Including Revlon’s presentation, there have only been four retail failures so far this year, according to S&P Global Market Intelligence. This is the lowest number the company has tracked in at least 12 years.
It is unclear when that number could start to grow, but restructuring experts say they are gearing up for more problems in the industry as the major holiday season approaches.
A Fitch Ratings analysis shows that consumer companies and retailers most at risk of default include mattress maker Serta Simmons, cosmetics line Anastasia Beverly Hills, skin care marketing company Rodan & Fields , the owner of Billabong Boardriders, the men’s clothing chain Men’s Wearhouse, supplement marketing. Isagenix International company and Outerstuff sportswear manufacturer.
“We potentially have a 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 wouldn’t be surprised to see an increase in retail bankruptcies.”
However, advisers who have worked on retail bankruptcies in recent years believe, for the most part, that any impending anguish in the industry should not be as intense as the massive shock of 2020. Instead, bankruptcies could be more widespread, they said. .
“What you saw in 2020 was a lot of restructuring activity going on,” said Spencer Ware, CEO and leader in retail practices at Riveron, an advisory firm. “Then we came from 2020 to today with a huge amount of stimulus. What will happen now? It’s a bit mixed.”
A split in consumer behavior could make things more unpredictable. Lower-income Americans have been particularly affected by inflation, while richer consumers continue to be overwhelmed with luxury goods.
“We’re at a time when we’re preaching that what’s going to happen next is much more complicated,” said Steve Zelin, partner and global leader of PJT Partners ’restructuring and special situations group. “There are many more variables.”
The liquidation shelf at the TJ Maxx clothing store in Annapolis, Maryland, on May 16, 2022, as Americans prepare for the summer sticker clash as inflation continues to rise.
Jim Watson | AFP | Getty Images
The latest retail sales data shows where consumers are withdrawing the most. Advance spending on retail and food services fell 0.3% in May from a month earlier, the Commerce Department reported last week. Retailers of furniture and home furnishings, electronics and home appliance stores and health and personal care chains experienced declines month after month.
“Consumers not only buy less stuff, they buy less, which means a loss of momentum buying momentum that is critical to retail growth,” said Marshal Cohen, chief adviser to NPD’s retail industry. Group, a market research company.
During the first three months of 2022, consumers bought 6% fewer retail items than in the first quarter of 2021, NPD Group said in a survey released in late May. More than 8 in 10 U.S. consumers said they plan to make more changes to reduce their spending in the next three to six months, he said.
A race to stay ahead of rising rates
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 rise since 1994, has caused retailers looking to take advantage debt markets to accelerate these plans.
Riveron’s Ware said companies had been struggling to cope with future rate hikes. Some bought debt or tried to take out maturities. For example, Macy’s department store chain in March said it had completed refinancing $ 850 million in bonds that would sell over the next two years.
More recently, however, Ware said it has noticed that refinancing activity over the past 12 months has begun to decline, with more bids canceled or withdrawn. “It looks like the window is closing for more difficult refinancing,” Ware said.
In late 2020, Revlon escaped bankruptcy to persuade bondholders to extend their overdue debt. But just under two years later, the company succumbed to a heavy debt burden and supply chain problems that prevented it from fulfilling all its orders.
As has always been the case, retailers facing heavier debt burdens will be the most vulnerable to bankruptcy, said David Berliner, head of BDO’s restructuring and business transformation practice.
More anxiety could begin to appear after the next shopping season back to school, he added, after families return from the long-awaited summer vacation and may be forced to tighten their belts.
A UBS poll earlier this month found that only 39% of U.S. consumers said they planned to spend more money on the back-to-school season this year than the previous year, for below the number of people who said the same thing in 2021..
“Consumers are increasingly stingy with their portfolios,” Berliner said. “There will be winners and losers as we always see. I’m still not sure how far it will go.”
Berliner said he has been closely monitoring consumer debt levels, which are close to all-time highs.
“Consumers have been willing to spend on credit cards, mortgages and purchase programs now to pay later,” he said. “I’m afraid many consumers will take advantage of their credit cards and then be forced to make an abrupt withdrawal.”
If consumer spending slows this way, more retailers could push for bankruptcy at a faster rate, Berliner said. But if spending stays at a reasonable level and consumers can reasonably pay off their debts, companies will “share some of the pain” with fewer bankruptcy filings, he said.
Either way, Berliner said the distress will be greatest among smaller retailers, especially mom and pop stores, which don’t have as many resources to withstand harder times.
Guard inventory levels
Rising inventory levels are also on the radar of bankruptcy advisors because they have the potential to cause much bigger problems. Gap retailers at Abercrombie & Fitch and Kohl’s have said in recent weeks that they have too many things after shipments arrive late and consumers abruptly change what they were buying.
Target said earlier this month that it is planning sales and canceling some orders to try to get rid of unwanted goods. As other retailers follow suit, profits will shrink in the short term, said Joseph Malfitano, founder of transformation and restructuring company Malfitano Partners.
And when a retailer’s profit margins shrink as their inventories are revalued, a common practice in the industry, those inventories won’t be worth as much, Malfitano explained. As a result, a company’s debt base could fall, he said.
“Some retailers have been able to cancel orders so as not to create more bubbles in the inventory. But many retailers cannot cancel those orders,” Malfitano said. “So if retailers who can’t cancel orders don’t do it outside the park during the holiday season, their margins will go down a lot.”
“You will have more problems in 2023,” he added.
Buyers are seen inside a mall in Bethesda, Maryland, on February 17, 2022.
Mandel Ngan | AFP | Getty Images
Ian Fredericks, chairman of Hilco Global’s retail group, agreed that retail bankruptcies are unlikely to pick up until 2023.
“Retailers are not in trouble because they are still sitting on a ship laden with liquidity … amidst a bit of cash left on their balance sheet plus an unremoved revolver,” he said. “There’s still a lot of clues.”
This just means that the upcoming holiday season, which each year is a vital time period in the retail calendar for companies to come to balance profits, could be even more of a breaking point for companies.
“I don’t see a big holiday season. I think people are going to tighten up and get tanned,” Fredericks said. “Inflation is going nowhere.”
An additional result of an economic slowdown could be an increase in mergers and acquisitions activity in the retail sector, according to Mandarino of B. Riley Securities.
Larger retailers that are more financially stable may try to swallow smaller brands, especially when they can do so at a discount. They would use this strategy in difficult times to continue to grow revenue quarter after quarter, albeit inorganically, Mandarino said.
Household items, clothing and department stores could face greater pressure in the coming months, he added.
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