Revlon makeup products are on display at a CVS store in Sausalito, California on August 9, 2018.
Justin Sullivan | Getty Images
The retail industry is facing a potential wave of bankruptcies after months of slowing restructuring activity.
Experts say there could be a surge in distressed retailers from the end of this year as rising prices hurt demand for certain goods, stores struggle with bloated inventories and a potential recession looms.
Last week, 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection, becoming the first consumer-facing name to do so in months.
Now the questions are: Which retailer is next? And how soon?
“Retail is on the move,” 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 than it is today.”
The industry had experienced a dramatic setback in restructuring in 2021 and early 2022 as companies – including those on so-called bankruptcy watch lists – were relieved by tax incentives offering cash injections to companies and stimulus dollars to consumers. The hiatus followed a spate of hardship in 2020, just before the pandemic hit, when dozens of retailers including JC Penney, Brooks Brothers, J. Crew and Neiman Marcus went to 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 company has recorded in at least 12 years.
It’s not clear exactly when that number could grow, but restructuring experts say they’re bracing for more trouble across the industry as the all-important holiday season approaches.
An analysis by Fitch Ratings shows that consumer and retail companies include mattress maker Serta Simmons, cosmetics line Anastasia Beverly Hills, skincare marketing company Rodan & Fields, billabong owner Boardriders, men’s suit chain Men’s Wearhouse, and dietary supplement marketing company companies most at risk of default are Isagenix International and sportswear manufacturer Outerstuff.
“We’re potentially brewing 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 if personal bankruptcies went up.”
Still, advisers who’ve worked on retail bankruptcies in recent years largely believe any looming hardship in the industry shouldn’t be as intense as the massive shakeout in 2020. Instead, bankruptcies could be more widespread, they said.
“What you saw in 2020 was a tremendous amount of restructuring activity going forward,” said Spencer Ware, managing director and head of retail practice at Riveron, a consulting firm. “Then we came from 2020 to today with a tremendous amount of momentum. what will happen now It’s a bit mixed.”
A split in consumer behavior could make things more unpredictable. Lower-income Americans are particularly hard hit by inflation, while wealthier consumers continue to buy luxury goods.
“We’re a lot more complicated in a moment of predicting what’s going to happen next,” said Steve Zelin, partner and global head of the restructuring and special situations group at PJT Partners. “There are many more variables.”
The clearance shelf at the TJ Maxx clothing store in Annapolis, Maryland May 16, 2022 as Americans brace for a summer sticker shock as inflation continues to rise.
Jim Watson | AFP | Getty Images
The latest retail sales data shows where consumers are withdrawing the most. Headline retail and hospitality spending fell 0.3% mom in May, the Commerce Department reported last week. Furniture and homeware retailers, electronics and appliance stores, and health and personal care chains all saw month-on-month declines.
“Consumers are not just buying less stuff, they’re shopping less, which means a loss of the impulse buying moments that are critical to retail growth,” said Marshal Cohen, chief retail industry advisor at the NPD Group, a market research firm.
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 US consumers said they will make more changes to reduce their spending over the next three to six months, it said.
A race to stay ahead of rising interest rates
The threat of future rate hikes – after the Federal Reserve last week hiked interest rates by three-quarters of a point, the most aggressive hike since 1994 – has prompted retailers to tap into debt markets to speed up those plans.
Riveron’s Ware said companies were trying to anticipate future rate hikes. Some repurchased debt or attempted to defer maturities. For example, department store chain Macy’s announced in March that it had completed the refinancing of $850 million of bonds maturing in the next two years.
More recently, however, Ware said he had noticed that refinancing activity had begun to slow over the past 12 months, with a greater number of deals being canceled or drawn. “It appears the window is closing for more difficult refinancing,” Ware said.
In late 2020, Revlon narrowly avoided bankruptcy by convincing bondholders to roll over its maturing 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 always, retailers struggling with the heaviest debt burdens are the most vulnerable to bankruptcy, said David Berliner, head of BDO’s business restructuring and turnaround practice.
More stress could come after the upcoming back-to-school shopping season, he added, after families return from long-awaited summer holidays and may be forced to tighten their belts.
A survey by UBS earlier this month found that just about 39% of U.S. consumers said they will spend more money on back-to-school this year compared to last year, compared to the number of people who said so in 2021.
“Consumers are becoming increasingly stingy with their wallets,” said Berliner. “There will be winners and losers, as we always see. I’m just not sure yet how soon it will happen.”
Berliner said he has been closely monitoring consumer debt, which is hovering near all-time highs.
“Consumers were willing to spend money on credit cards, mortgages and buy it now programs,” he said. “I fear many consumers will dump their credit cards and then be forced into an abrupt exit.”
If consumer spending slowed in this way, more retailers could be bankrupted faster, Berliner said. But if spending stays at reasonable levels and consumers are able to pay down their debts reasonably, companies will instead “share a bit of the pain” and file fewer bankruptcy filings, he said.
In any case, Berliner said the hardship will be greater at smaller retailers, especially corner shops that don’t have as many resources to weather tougher times.
Stock levels on the clock
Rising inventories are also on the radar of bankruptcy advisors 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 they have too much stuff after deliveries have been delayed and consumers have abruptly changed their purchases.
Target said earlier this month that it plans to discount prices and is canceling some orders to try to get rid of unwanted merchandise. As other retailers follow suit, profits will shrink in the near future, said Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners.
And if a retailer’s profit margins shrink when its inventory is revalued — a routine industry practice — that inventory won’t be worth as much, Malfitano explained. It could lower a company’s debt base, he said.
“Some retailers have been able to cancel orders to avoid creating another bubble in inventory. But many retailers cannot cancel these orders,” Malfitano said. “So unless the retailers that can’t cancel orders don’t get it out of the park during the holiday season, their margins are going to drop badly.”
“You will have more problems in 2023,” he added.
Shoppers are seen at a mall in Bethesda, Maryland on February 17, 2022.
Almond Ngan | AFP | Getty Images
Ian Fredericks, president of Hilco Global’s retail group, agreed that retail bankruptcies are unlikely to increase before 2023.
“Retailers aren’t distressed because they’re still sitting on a boatload of liquidity … between some cash left on their balance sheet and an undrawn revolver,” he said. “There’s still a lot of runway left.”
It just means that the upcoming holiday season, which is a key time in the retail calendar for companies to break even each year, could be even more of a pivotal moment for companies.
“I don’t see a big holiday season. I think people are really going to pull together and break down,” Fredericks said. “Inflation is going nowhere.”
According to B. Riley Securities’ Mandarino, another outcome of an economic slowdown could be an increase in M&A activity across the retail sector.
Bigger retailers, who are more financially stable, may try to gobble up smaller brands, especially if they can do it at a discount. They would use this strategy during tough times to keep growing revenue quarter after quarter, albeit inorganically, Mandarino said.
Household goods, apparel and department stores could come under the most pressure in the coming months, he added.
With Bed Bath & Beyond’s eponymous banner underperforming in recent quarters, the retailer has been pressured by an activist to spin off its Buybuy Baby chain, which is seen as a stronger part of the business. Kohl’s, a department store retailer located outside of malls, also came under pressure from activists to consider a sale and is now in exclusive deal talks with Franchise Group, which owns Vitamin Shoppe. The franchise group is considering lowering its bid for Kohl’s, a source told CNBC on Wednesday.
“It’s a buyer’s market,” Mandarino said. “Growth will not come by itself if consumer spending falls and we enter a recession.”