Over the past few months, a ramped-up COVID-19 vaccination program, federal fiscal stimulus and pent-up consumer demand have led retailers to see improved foot traffic and sales trends, with an increasing number reporting better-than-expected quarterly financial results. But experts have suggested that not all companies are in the clear — and some might just be on the way to the chopping block later this year.
According to a report this month from S&P Global Market Intelligence, 46 companies across a variety of industries — including consumer discretionary, real estate and industrials — entered bankruptcy proceedings last month. It was a marked drop from the 61 recorded in March and less than the 54 in the year-ago period. At the end of April, 183 companies filed for Chapter 11 protection — fewer than the 207 filings at the same time in 2020 and a slower pace than all but four of the prior 11 years (2014, 2015, 2017 and 2018).
For apparel and footwear, specifically, only three retailers have recently gone bankrupt: women’s clothier Christopher & Banks, department store Belk, as well as Joie and Equipment parent The Collected Group. While the number of Chapter 11 filings might not catch up to 2020 levels, some experts suggest that the pace could soon pick back up to a normal pace — somewhat like a seesaw effect.
“There’s no doubt that the number of filings has dramatically slowed down from the pace we had in 2020,” said David Berliner, a BDO USA partner who leads the company’s restructuring and turnaround services practice. “There’s going to be a short-term boost, with stimulus checks, unemployment benefits and low interest rates all working through the economy. [However,] we’re going to likely see the pendulum swing back into a more normal situation maybe later on in the summer or early fall — and then we’ll begin to see the winners and losers.”
One of the more apparent catalysts for bankruptcies later in the year is a weak balance sheet — particularly one that’s overburdened with debt or short on liquidity. Already coming out of a COVID-19-plagued year, retailers that face cash flow challenges, said experts, will not be able to invest in product development, marketing efforts, omnichannel services and other aspects of their business that have become critical to staying relevant with consumers in a post-pandemic world.
Another factor that could contribute to a retailer’s downfall is an overabundance of stores at a time when e-commerce has taken a larger share of many companies’ overall revenues. For one, according to BDO, the U.S. is currently “over-stored,” with an average of 24 square feet per person, compared with Western Europe’s four square feet per person, for example. Plus, even as the economy reopens, the recent decision by some nationwide chains to drop their mask mandates could make shoppers more reluctant to return to brick-and-mortar shopping.
What’s more, retailers are facing pressures from the bottleneck situation still happening at major United States ports such as Los Angeles and Long Beach, which account for nearly half of total imports from Asia. The supply chain predicament — a culmination of heightened shipment volumes due to increased consumer demand as well as a shortage of workers — could put further strain on struggling retailers ahead of bigger sales days later in the year.
“If certain retailers didn’t commit early enough to lock in that supply, they might be limited in those goods,” added Berliner. “The retailers that have those goods will benefit, and the ones that don’t will be hurt just because they’re going to lose sales. It could be an interesting wild card to keep an eye on over the next couple months.”
Retailers at risk
This month, researchers from the S&P Global identified 15 public retailers with probability of default scores that ranged from 11.7% to 32.8% — representing the odds that a company could default on its debt within a year, based on financial reports and accounting for various macroeconomic factors.
Among the apparel and clothing retailers that made the list was J.Jill Inc., which completed a restructuring in October that not only allowed it to continue to meet obligations to vendors and maintain business operations, but also kept it out of bankruptcy court. Big and tall men’s chain Destination XL Group Inc., Express Inc. and Vince Holding Corp. — parent to its namesake brand and Rebecca Taylor — were also included in the list.
As for categories, the research firm found that department stores led the group of consumer companies that have seen their odds of default spike in recent months. A separate report, released last month, showed that the category, at 42.1%, had the highest median one-year probability of default of any consumer industry.
“Retailers dependent on foot traffic at malls as well as hotels and casinos that rely on leisure travelers were among the groups that saw their odds of default tick up the most,” said analysts Alexander Bitter and Chris Hudgins. “Even companies that were facing financial trouble before the virus hit are likely to survive the coronavirus-spurred economic downturn in the U.S. … but that could change if businesses shut down due to the virus remain closed well into summer.”
According to Farla Efros, president of HRC Retail Advisory, two critical events in the coming months have the ability to determine a company’s longevity in the post-pandemic era: the back-to-school season and a broader return to offices this fall.
As consumers shift their spending on goods to formerly restricted experience-driven activities like traveling and dining out, they’ll already have less to spend on discretionary items like shoes and clothing. In addition, while athleisure remains robust, some companies have seen signs that the dress category is rebounding — and retailers that have a balanced inventory will likely be able to emerge in a better position than those unable to stock up on high-demand merchandise.
“Those two seminal events are really going to dictate what the future of retail will look like,” Efros explained. “That will be the turning point to see who succeeds and who doesn’t.”
But even retailers that have benefited during the health crisis are not necessarily in the clear: Last year, grocery stores, mass merchandisers and home goods purveyors largely benefited from the pandemic-induced shift to non-discretionary purchasing and, in some cases, their statuses as essential retailers. Now, as they line up this year’s financial figures with last, they’re expected to see distorted sales comparisons, such as lower-than-usual comps.
“A lot of the other retailers that significantly gained from the pandemic need to prepare for the fact that they’re never going to see the growth numbers they achieved in 2020,” Efros said. “Managing their cash flow could be even more important than it was last year. I think you’re going to see some retailers that have just unbelievably benefited, unless they’re planning from a cash-flow perspective, start to crater.”