Revlon makeup products are displayed at a CVS store on August 9, 2018 in Sausalito, California.
justin sullivan | fake images
The retail industry is facing a possible wave of bankruptcies after a months-long slowdown in restructuring activity.
There could be a surge in struggling retailers from the end of this year, experts say, as rising prices reduce demand for certain products, stores grapple with inflated inventory levels and possible recession looming.
Last week, the 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection, becoming the first consumer-facing household name 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 within the next five years, the landscape will be very different from what it is today.”
The industry had seen a dramatic pullback in restructurings in 2021 and early 2022 as companies, including those that had been on so-called bankruptcy watch lists, received relief from fiscal stimulus that offered cash injections to businesses and stimulus dollars to consumers. The pause followed a spate of heartbreak in 2020, near the start of the pandemic, when dozens of retailers including JC Penney, Brooks Brothers, J. Crew and Neiman Marcus headed to the bankruptcy court.
Including the Revlon filing, there have only been four retail bankruptcies so far this year, according to S&P Global Market Intelligence. That’s the lowest number the firm has tracked in at least 12 years.
It’s not exactly clear when that account might start to grow, but turnaround experts say they’re bracing for more trouble in the industry as the all-important holiday season approaches.
An analysis by Fitch Ratings shows that the retail and consumer companies 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 suit chain Men’s Wearhouse, the supplement marketing company Isagenix International and the sportswear manufacturer Outerstuff.
“There’s possibly a perfect storm brewing,” said Sally Henry, a law professor at Texas Tech School of Law and a former partner at Skadden, Arps, Slate, Meagher & Flom LLP. “I wouldn’t be surprised to see an increase in retail bankruptcies.”
Still, advisers who have worked on retail bankruptcies in recent years believe, for the most part, that any impending distress in the industry shouldn’t be as intense as the massive reorganization in 2020. Instead, bankruptcies could be more spread out. they said. .
“What you saw in 2020 was a tremendous amount of restructuring activity being pushed forward,” said Spencer Ware, managing director and retail practice leader at Riveron, an advisory firm. “Then we come from 2020 to today with a tremendous amount of stimulus. What’s going to happen now? It’s a bit of a mixed bag.”
A split in consumer behavior could make things more unpredictable. Lower-income Americans have been hit particularly hard by inflation, while wealthier consumers continue to splurge on luxury items.
“We’re at a point where we’re predicting what’s going to happen next is much more complicated,” said Steve Zelin, partner and global head of PJT Partners’ restructuring and special situations group. “There are a lot more variables.”
The clearance rack at the TJ Maxx clothing store in Annapolis, Maryland, on May 16, 2022, as Americans brace for the shock of the summer label as inflation continues to rise.
JimWatson | AFP | fake images
The latest retail sales data shows where consumers are pulling back the most. Anticipated spending on food and retail services fell 0.3% in May compared to the previous month, according to the Commerce Department. reported last week. Furniture and home goods retailers, electronics and appliance stores, and health and personal care chains all saw month-over-month declines.
“Consumers are not just buying less stuff, they’re buying less, which means a loss of the impulse buying moments that are critical to retail growth,” said Marshal Cohen, principal retail industry adviser at NPD Group, a firm of market research.
In the first three months of 2022, consumers bought 6% fewer items at retail than in the first quarter of 2021, the NPD Group said in a survey released in late May. More than 8 in 10 American consumers said they planned to make more changes to cut their spending in the next three to six months, it said.
The threat of future rate hikes, after the Federal Reserve last week raised benchmark interest rates by three-quarters of a percentage point on his most aggressive walk since 1994 – has prompted retailers looking to tap into debt markets to accelerate those plans.
Riveron’s Ware said the companies had been racing to get ahead of future rate increases. Some repurchased debt or tried to advance maturities. For example, department store chain macy’s in March it said it completed the refinancing of $850 million in bonds due in the next two years.
More recently, however, Ware said he has noticed refinancing activity in the past 12 months has started to slow, with more deals being canceled or withdrawn. “It looks like the window is closing for a more difficult refinancing,” Ware said.
In late 2020, Revlon narrowly escaped bankruptcy by persuading bondholders to extend their overdue debt. But a little less than two years later, the company succumbed to a heavy debt load and supply chain problems that prevented it from fulfilling all of its orders.
As has always been the case, retailers dealing with the heaviest debt loads will be the most vulnerable to bankruptcy, said David Berliner, head of BDO’s business restructuring and turnaround practice.
More angst could start to show after the upcoming back-to-school shopping season, she added, after families return from long-awaited summer vacations and are forced to tighten their belts.
A survey by UBS earlier this month found that only about 39% of American consumers said they plan to spend more money this year compared to the previous year, down from the number of people who said the same thing in 2021. .
“Consumers are becoming more stingy with their wallets,” Berliner said. “There will be winners and losers as we always see. I’m not sure how soon that will happen yet.”
Berliner said he has been closely watching consumer debt levels, which are hovering near record highs.
“Consumers have been willing to spend on credit cards, mortgages and buy now pay later programs,” he said. “I’m afraid that many consumers will use their credit cards and then be forced to back off abruptly.”
If consumer spending slows that way, more retailers could go bankrupt at a faster rate, Berliner said. But if spending stays at a reasonable pace and consumers can pay their debts reasonably, businesses will instead “share a little bit of the pain” with fewer bankruptcy filings, he said.
Either way, Berliner said the angst will be greatest among smaller retail businesses, particularly mom-and-pop stores, which don’t have as many resources to weather tough times.
Rising inventory levels are also on bankruptcy counselors’ radar because they have the potential to lead to much bigger problems. retailers of Gap a Abercrombie & Fitch a Kohl’s they have said in recent weeks that they have too much stuff after shipments were late and consumers abruptly changed what they were buying.
Goal said earlier this month that is planning sales and canceling some orders to try to get rid of unwanted merchandise. As other retailers follow suit, profits will shrink in the short term, said Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners.
And when a retailer’s profit margins are squeezed as its inventories are revalued, a routine practice in the industry, those inventories won’t be worth as much, Malfitano explained. As a result, a company’s loan base could fall, he said.
“Some retailers have been able to cancel orders so they don’t create an inventory bubble anymore. But a lot of retailers can’t cancel those orders,” Malfitano said. “So if retailers that can’t cancel orders don’t knock it out of the park during the holiday season, their margins are going to go down considerably.”
“You are going to have more problems in 2023,” he added.
Shoppers are seen inside a shopping center in Bethesda, Maryland on February 17, 2022.
Mandel Ngan | AFP | fake images
Ian Fredericks, president of Hilco Global’s retail group, agreed that retail bankruptcies probably won’t increase until 2023.
“Retailers aren’t in a bind because they’re still sitting on a pot full of liquidity … between some cash left on their balance sheet plus an undrawn revolver,” he said. “There’s still a lot of clue.”
That just means that the upcoming holiday season, which each year is a vital window of time on the retail calendar for companies to break even in profits, could be even more of a defining moment for businesses.
“I don’t see a big holiday spending season. I think people will really get tough and buckle up,” Fredericks said. “Inflation is going nowhere.”
An additional result of an economic slowdown could be an increase in M&A activity in the retail sector, according to Mandarino of B. Riley Securities.
Larger retailers that are more financially stable may look to gobble up smaller brands, particularly when they can do so at a discount. They would use this strategy in tough times to keep growing revenue quarter after quarter, albeit in an inorganic way, Mandarino said.
Household goods, clothing and department stores could face the most pressure in the coming months, it added.
With Bed bath and beyondunderperforming namesake banner in recent quarters, the retailer has faced pressure from an activist to get rid of his Buybuy Baby chain, which is considered a stronger part of the business. Kohl’s, a department store retailer outside the mall, was also pressured by activists to consider a sale and is now in exclusive talks with Franchise Group, the owner of the Vitamin Shoppe. Franchise Group is considering reducing its offer for Kohl’s, a source told CNBC on Wednesday.
“It’s a buyer’s market,” Mandarino said. “Growth will not come organically when consumer spending declines and if we go into a recession.”