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Retailers that have no business still being in business are starting to go out of business.
The party is over for struggling retailers that enjoyed a pandemic-era boost of cheap loans and stimulus-driven spending.Unfortunately, it’s about time. This year is on track to be the worst year for retail bankruptcies since 2020, with strip-mall mainstays like Bed Bath & Beyond, Tuesday Morning, Party City and David’s Bridal all filing for Chapter 11 in the last several months.
“These are companies that have been in trouble for a while,” said Neil Saunders, managing director at research firm GlobalData. “It was almost a matter of when, rather than if, they went under.” The spate of bankruptcies comes at a time when Americans have pulled back on discretionary spending and begun socking away more in savings as the cost of gas, groceries and other staples becomes more expensive, talk of a potential recession continues and major companies conduct layoffs. Consumer spending is watched closely since it accounts for more than two-thirds of the nation’s gross domestic product. Shoppers have shifted spending sharply in different directions over the pandemic, including pivoting away from categories like home goods after an early-pandemic buying spree. However, while the economy isn’t helping and may be acting as a catalyst, the retailers who are teetering now have long had major problems. Retail spending remains “surprisingly robust” in some ways, said Saunders. More often a retailer’s downfall can be traced to shabby stores or an uninspiring online presence. Plenty more retailers could go bankrupt before the year is over. The ones that look the most vulnerable to default include Rite Aid, Jo-Ann, Belk, At Home and 99 Cents Only, according to ratings companies Moody’s and S&P Global. This watchlist skews toward specialty stores with exposure to the pressured home goods sector.These retailers are saddled with increasingly high levels of debt compared with earnings . The pandemic bought many retailers more time. Consumers spent freely, flush with cash from stimulus checks and unable to put it toward vacation or dinner and a movie. Retailers were also able to borrow money on the cheap. “Covid masked some of the weak players,” said Steve Dennis, founder of SageBerry Consulting. “It staved off the reckoning.” Now that the pandemic is over, at least officially, it’s back to reality and retailers are confronting the sins of the past: too many stores, too much debt and too few customers. Retailers who loaded up on debt are having a harder time making payments as they watch sales and profits deteriorate. For instance, discount home goods retailer Tuesday Morning referenced its “exceedingly burdensome debt” in February when filing for bankruptcy for the second time in two years. Its net debt has increased tenfold, jumping from $23 million in 2019 to some $250 million last year. Sales during that time fell by 25%. Christmas Tree Shops also cited its “burdensome liabilities” when filing for bankruptcy earlier this month. Its owner, Handil Holdings, listed liabilities of as much as $100 million in court documents. Twelve percent of retailers now have a Triple-C rating from S&P Global, meaning there’s a 50-50 chance that things get so bad they’ll default on their loans. That’s double the figure from last year and triple the year before. “A lot of these companies were essentially zombie companies pre-Covid,” said Craig Ganz, an attorney at Ballard Spahr who has handled retail bankruptcies for several decades. “They were primarily surviving on debt, and now debt has become simply too expensive for them to afford.” The Federal Reserve’s rapid rate hikes have made it much costlier for retailers to take on new debt, whether it’s to finance investments in growth areas or give themselves some breathing room, said Sarah Wyeth, who leads the retail and consumer sectors for S&P Global Ratings. “Any issuer that’s very stressed and needs to go to the market in the next year or so is going to be very challenged,” said Wyeth. Meanwhile, the bills must be paid. Overhead is especially vexing for retailers stuck with large, lumbering brick-and-mortar fleets from an earlier era who aren’t drawing enough shoppers to cover the costs of paying workers, stocking shelves and keeping the lights on. The home furnishing sector is notorious for having too many stores, said Craig Johnson, founder of Customer Growth Partners, a retail research firm.MORE FROM FORBES
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