After one month slowdown in restructuring, the retail industry is encountering a potential wave of bankruptcy.
According to experts, there could be a surge in the number of troubled retailers towards the end of this year as increasing prices reduce demand for some products. This has made stores argue with inflated inventory levels and could trigger a recession.
Recently, 90-year-old cosmetics giant, Revlon Chapter 11, filed for bankruptcy protection, becoming the first major consumer-oriented name file in just a few months.
The questions now are: which retailer will be next? And when will the retailer file?
Perry Mandarino, Head of corporate restructuring at B Relay Securities and vice president of investment banking said: “Retail flows are ongoing. And in the next five years, the landscape will be much different than it is today.”
The industry witnessed a dramatic pull in restructuring in 2021 and early 2022 when companies were relieved by the stimulus package that offered cash injections to businesses and consumer stimulus dollars. The break happened after a flood of misery around the onset of the epidemic in 2020 when many retailers, including Jesse Penny, Brooks Brothers, Jay Crew and Neyman Marcus, were bankrupt.
S&P Global Market Intelligence revealed that so far this year, there have only been four retail bankruptcies, including Revlon’s filing. This represents the lowest number the firm has reported in at least 12 years.
There is no clear indication as to when this number will start rising but restructuring experts say they are bracing up for more problems across the industry as the holiday season nears.
Fitch ratings analysis reveals that customers including mattress maker Certa Simmons, cosmetics line Anastasia Beverly Hills, skin-care marketing company Rodan & Fields, and Bilburn owner Bilbang are facing the risk of default.
said Sally Henry, a law professor at Texas Tech Law School and a former partner at Scaden, Arps, Slate, Cloud and Flum LLP said: “We’ve potentially created a perfect storm. I wouldn’t be surprised to see an increase in retail bankruptcy.”
However, advisers who have worked on retail bankruptcy in recently strongly believe that any worrying issues in the industry should not be as bad as the massive turbulence in 2020. They said bankruptcy could spread further instead.
Spencer Wire, Reverend, managing director of a consulting firm and leader in retail practice said: “What you see in 2020 is a massive restructuring process. So we’ve got a lot of stimuli from 2020 to date. What’s going to happen now? It’s a bit of a mixed bag.”
A change in consumer behavior can make things more unexpected. Low-income Americans have been specifically hit by inflation as wealthy consumers keep splurging on luxury goods.
Steve Jelin, a partner at PGT Partners’ Restructuring and Special Situations group and global head said: “We’re in a moment where we’re predicting what’s going to happen next. There are many more variables.”
The current retail sales data reveals where buyers are returning the most. The Commerce Department reported recently that advance retail and food service spending dropped by 0.3% in May compared to that of April. Furniture and home furniture retailers, electronics and electronics stores, and health- and personal-care chains have all witnessed monthly declines.
Marshall Cohen, chief retail industry adviser at NPD Group, a market research firm said: “Consumers are not only buying less, they’re shopping less, which means the loss of persuasion-shopping moments that are critical to retail growth.”
According to a survey published by NPD Group recently, buyers retailed 6% fewer items in the first quarter of 2022 than in the first quarter of 2021. The survey said over 8 out of 10 U.S. consumers reveal they plan to make additional changes in the next three to six months to regain their costs.
The threat of future rate hikes
Following the recent hike in interest rates by three-quarters to a quarter of its most aggressive growth since 1994 by Federal Reserve, retailers have been prompted to tap into the debt markets to speed up those plans.
According to Revenge Wire, businesses are racing to get ahead of future rate increments. Some have bought loan repayments or attempted to push maturity. For instance, department store chain Messi said two months ago that it had completed $ 850 million bond refinancing over the next two years.
More recently, Weir said he discovered that refinancing activity has started to slow over one year with many contracts being cancelled or pulled. Wire said: “It looks like the window is closing for more difficult refinancing.”
Revlon was temporarily spared bankruptcy by persuading bondholders to expand its mature debt towards the end of 2020. But in less than two years, the company encounters a huge debt burden and supply chain problems that made it impossible to fulfil all its orders.
David Berliner, head of BDO’s business restructuring and turnaround practice, says that, as usual, the retailers that are highly indebted are the ones that are most prone to going bankrupt.
He added that more problems may follow the forthcoming back-to-school shopping season as many families come back from the long-awaited summer vacation and may be forced to be more shrewd.
A recent survey by UBS revealed that only 39% of U.S. consumers said they want to spend more money in this year’s back-to-school season than the previous year, which is 60 basis points below the number of people who said the Same in 2021.
Berliner said: “Consumers are becoming more stingy with their wallets. There are going to be winners and losers as we always see. I’m still not sure how fast this will happen.”
Berliner says he will keep close tabs on consumer debt levels, that are near all-time highs.
He said: “Consumers are willing to spend on credit cards, mortgages and the next programs to buy now. I’m afraid a lot of consumers are going to tap their credit cards and then they’ll be forced to pull back abruptly.”
He added that if consumer spending reduces like this, it is possible for more retailers to go bankrupt at a faster pace but if spending is reasonable and consumers are able to pay off their debts reasonably, companies will “share a little trouble” with less bankruptcy filing.
Berliner says the difficulty will be exacerbated by small retail businesses, especially mom-and-pop shops that do not have the resources to weather the storm.
Inventory level under watch
Rising inventory levels are under the bankruptcy advisers’ watch because they are likely to have bigger problems. Retailers from Gap to Abercrombie and Fitch to Kohls have revealed in recent weeks that they have a lot more to part with after shipments came late and consumers unexpectedly change what they are buying.
Recently, Target revealed it was planning a markdown and cancelling some orders in a bid to get rid of unwanted merchandise. As other retailers follow suit, Profit will make deals in the near future, says Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners.
Malfitano explained that when a retailer’s profit margins reduce because its inventories are re-evaluated, those inventories will not be as valuable. According to him, this can reduce a company’s debt base.
Malfitano 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. So if retailers can’t cancel orders they don’t drop out of the park during the holiday season, their margins will go down a lot.”
He added: “You’re going to have more problems in 2023.”
Ian Fredericks, president of Hilco Global’s retail group, feels that the likelihood of retail bankruptcy will not rise until 2023.
He said: “Retailers aren’t in trouble because they’re still sitting on the liquid load bottleneck … some of the cash that’s left on their balance sheets and in a drawn revolver. There are still a lot of runways.
“I don’t see a big holiday season. I think people will get really tough and go down.”
According to Mandarino of Riley Securities, an extra consequence of the economic drop could trigger an increase in M&A activity all over the retail sector.
Bigger retailers that are more financially stable may witness smaller brands fold up, especially when they make that happen at a discount. Mandarino said they would employ the strategy in difficult times so as to maintain quarter-on-quarter increasing revenue, albeit inorganically.
He added that home goods, clothing and department stores may witness the most stress in the coming months.
Mandarino said: “It’s a buyer’s market. Growth will not come biologically when consumer spending falls and we go into recession.”
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