J.Crew Group Inc. has become the first retailer to file for bankruptcy since the coronavirus pandemic forced the closures of stores across the United States.
Although some regions have started easing stay-at-home orders, many store locations remain shuttered — threatening brick-and-mortar sales and subsequently retailers’ bottom lines. Now a big question remains: Which company will be next?
Over the past few weeks, JCPenney, Gap and Neiman Marcus have joined an expanding list of retailers on bankruptcy watch. While the health crisis has exacerbated their financial struggles, the writing has been on the wall for these companies for some time.
“The reality is that, for retailers that were already heading for bankruptcy, all this has done is accelerated it,” said Farla Efros, president of consulting firm HRC Retail Advisory. “A lot of stores that probably should have already been closed are going to use this pandemic to as an opportunity to get out: Many retailers are going to leverage this opportunity to file for Chapter 11, restructure their debt and open up in a different way.”
For a number of these retailers, the root is in the debt: JCPenney and Neiman Marcus each owe about $4 billion, and both recently skipped on scheduled interest payments amid liquidity concerns. While the former has reportedly considered entering into discussions with its creditors, the latter is already said to be in the latter stages of negotiating a loan worth hundreds of millions of dollars.
Gap has also opted not to make payments — particularly April’s rent in North America, worth roughly $115 million. It is in the midst of seeking other avenues to continue funding its operations, including a combination of new debt financing or other short-term credit facility. (A little over a week ago, it informed the Securities and Exchange Commission that it had burned through half of its cash reservoir and warned that it might not have enough money to survive the next year.)
“Ultimately, cash is king. For some of these retailers who don’t have strong balance sheets and whose debts are so high, it’s almost impossible [to operate business as usual]” Efros added. “Unless they were able to restructure their debt, a Chapter 11 [filing] would be their only way to start over.”
Experts are also pointing to other potential retail casualties amid the COVID-19 outbreak, including Francesca’s, which now has a market capitalization of just under $7.5 million; J.Jill, which was recently said to have hired advisers to help straighten out its balance sheet; and Lord + Taylor, following reports last month that suggested the century-old retailer was seriously considering a post-pandemic liquidation.
According to Eric Snyder, partner at New York City-based law firm Wilk Auslander and chairman of its bankruptcy department, retailers that are mulling bankruptcy have two options: liquidating their assets or securing a refinancing deal to eliminate their debts. However, as lockdowns keep majority of stores closed across the country, liquidations have become near-impossible to execute.
“It doesn’t even matter if a retailer is doing well if it takes on too much debt,” Snyder explained. “The only thing the pandemic did was take away one less option. You can [typically] liquidate and sell off assets through a going-out-of-business sale or you can do a debt-for-equity swap. But with businesses closed, you can’t do any sort of liquidation, so the only thing you can do is this [debt-for-equity] exchange.”
Even if they manage to survive the pandemic, these already-beleaguered retailers might not even be able to afford business as usual. Beyond paying exorbitant rents, companies will have to factor in other operating expenses, including payroll and employee benefits; advertising costs; and accountancy and legal fees.
“Retailers have gone from total panic to acceptance,” said Gabriella Santaniello, founder and CEO at A Line Partners. “[Some of them] will have to undergo a restructuring, whether it’s getting rid of unprofitable stores, fine-tuning the product or reconnecting with the customer. They’re just going to have to reposition or rebrand in general.”
In the case of J. Crew, analysts have been down on the company in recent years as it navigated a business rife with executive turmoil and disappointing financial results — following its $3 billion purchase a decade ago by private-equity firms TPG and Leonard Green & Partners.
The apparel and accessories chain had been unable to overcome shifts to fast fashion and e-commerce as it took on expansion and attempted to cater to a more upscale audience. A new loyalty program, collection launches and a third-party marketplace could not fix J. Crew’s missteps, which started with the retailer’s lack of identity.
In its bankruptcy filing, J. Crew announced that it had reached a deal with its lenders to convert about $1.65 billion of its debt into equity, as well as secured commitments for a debtor-in-possession financing facility of $400 million.
“J.Crew’s struggles started when they went private, and this was unfortunately the last straw for them,” Santaniello added. “Retailers that were struggling to find their foothold [pre-pandemic] are now ‘out of sight, out of mind.'”