Tag Archives: retailer liquidation

Soaring Retail Stores Bankruptcy, Chapter 11, Reaching Record Levels: Fierce Competition and New Realities in Strategy…

Retail stores are closing at record numbers, and the number of retailers filing for Chapter 11 bankruptcy protection is headed for record year. In only three months this year and already the retail battlefield is littered with the corpses of nine brands that have filed for bankruptcy, which is about the same number that filed in all of 2016... At this rate, the retail industry is on pace to far surpass the high-water mark of 18 major retail bankruptcies set in 2009… The rate of Chapter 11 bankruptcy filings is often an indicator of an industry’s health, which is bad news for retailers… According to Ian Wenik; number of large-liability retail Chapter 11 filings (at least $250 million in liabilities) nearly doubled in 2016 and that trend shows no signs of slowing down… 

So why is 2017 shaping-up to be bad for retailers? The issues seem to be multi-fold, e,g.;  middle-class consumer population is shrinking, shifting shopping habits to online shopping… plus more subtle issue according to AlixPartners is that more than half filings to date come from retailers that were purchased by private equity firms, which is up average 31% over prior five years… These leveraged buyouts use a combination of equity and debt to purchase a firm, and that often saddles companies with massive debt… Hence this year is shape-up as– ‘year of retail bankruptcies’.

In the article Retail Business is the New Oil and Gas by Tonya Garcia writes: The future of traditional retail is looking increasingly gloomy, with trimming store locations, lagging revenues amid declining foot traffic is setting the stage for a spate of bankruptcies, restructurings. The Fitch Ratings’ ‘Bonds of Concern List’ is filled with retailers, and it’s expecting the default rate for the retail sector to jump to 9% in 2017 from 1% over the last 12 months… The retail sector had $38.9 billion in outstanding debt as of end of 2016… Hence this may very well be a  ‘tipping point’ for retail with more bankruptcies heading in the near future…

According Moody’s ‘Distressed List’; there are 19 retail companies with a credit rating of ‘Caa’ or below… this is the highest number of highly distressed retailers since the recession… According to S&P Global Ratings; majority of business outlooks across retail sector are reasonable stable, but ratings trends are negative... Shifting consumer preferences, and patches of global economic and policy uncertainty are contributing to the increasingly negative outlook bias…

In the article Big Retail Bankruptcies Equal To Post-Recession High by Mary Beth Quirk and Krystina Gustafson write: Regardless of the reason for filing for bankruptcy, more retailers who enter Chapter 11 are ending up in liquidation… According to Rieger-Paganis; as chains liquidate or restructure the store footprints are reduced, i.e.; hundreds and even thousands of retail stores are closed… And store vacancies produce a ripple effects that runs through the entire industry, i.e.; consumers don’t like to shop where there’s a lot of vacant space…

Closed stores have a tainting effect especially for ‘malls’ and ‘grand shopping centers’… too many store vacancies means less foot traffic for the stores that remain… According toTyler Durden; malls were once shining beacon of capitalism but now they are failing at alarming rates due to combination of shifting consumption patterns, years of under-investment by mall owners, and retailer bankruptcies over the past 12 months… The net result is there are large swaths of once prime real estate empty…

In the article Year of the Retail Bankruptcies by Jacob S. Frumkin and Felice R. Yudkin writes: Each bankruptcy case has its own unique set of facts. Several themes, however, recur in retail bankruptcies that are important to revisit given the filing trend, e.g.; gift cards… When well-known retailers files for bankruptcy often there are big liabilities outstanding with respect to unredeemed gift cards that were purchased prior to petition date, e.g.; RadioShack’s bankruptcy filing had about $44 million in unused gift cards outstanding…

Although retailers in Chapter 11 often seek authority from bankruptcy court to continue to honor ‘customer programs’, such as, allowing gift card holders to use the gift cards post-petition, but not all retailers seek such relief… Additionally, courts are inconsistent in the treatment of gift card holders, e.g.; in ‘Sharper Image’ bankruptcy cases, the claims of gift card holders were entitled to priority treatment, subject to court-approved claims process, however in the ‘Borders’ bankruptcy cases, certain gift card holders who did not timely file proofs of claim were denied… When retailers close stores and declare bankruptcy– courts attempt to balance the interests of all the stakeholders but unfortunately there are always winners and losers…  

Many chain retailers spent the 1990s, early 2000s investing heavily in expanding their brick & mortar stores, while ignoring the coming threat of online retail… Although many retailer will suffer, many will survive and in some cases even thrive, in this changing retail shopping environment… And at some point the market will reach something akin to an equilibrium where online and offline segments stabilize… but for some it will be awfully painful getting there… A few experts suggest that retail sector is going through what might be called- ‘canary in a coal mine’ phase, i.e.; advanced warning of impending danger… But according to Michael Cannivet; every market cycle has its ‘canary in a coal mine’: Ten years ago it was real estate, then banking & finance services, and before that it was disruption in the technology sector…

All these dislocations start small and  grow then spread and become major events. Yes, it’s customary to see retailers go belly up when economic conditions are poor, but currently the economy is growth positive, yet there is serious carnage in the retail space... According to David Silverman; despite the massive number of stores being closed, the situation in retail is hardly bleak… but the challenge for retailers is to profitably align their retail strategy– embracing online & offline… with the powerful structural and cultural changes that are being spawned by the Internet and changing buying habits of consumers…

One key challenge in this digital environment is the coordination of in-store selling and various e-commerce channels into an ‘omni-channel’ approach… According to David M. Katz; moving to an omni-channel approach is an imperative for most retailers– the necessity of retailers to craft a well-conceived omni-channel strategy that provides seamless coordination to consumers through multiple touch points, e.g.; e-commerce (smartphones, computers…), in-store kiosks, social media… A well-integrated and globalized outreach is a big determinant for retail success going forward…