Why the Pandemic's Negative Impact On Retailers Has Exceeded Forecasts

Retailers were already struggling to compete with ecommerce, were overleveraged due to private equity buyouts and were subject to the vagaries of the global supply chain as China and the US ramped up their trade war.

As if that weren't enough, the breadth of the pandemic - and its resurgence in the US - were too much for many non-essential retailers. JL

Aisha Al-Muslim and Soma Biswas report in the Wall Street Journal:

With a resurgence of coronavirus cases, some companies that were healthy before the pandemic are showing signs of buckling. Bankruptcies in the sector are piling up, with more retailers seeking chapter 11 protection so far in 2020 than in all of last year. Two dozen public and large private retailers in the U.S. have filed for bankruptcy. Heavy debts, a glut of stores and a struggle to keep up with changing consumer tastes and habits are nothing new for many retailers, but the mix proved to be disastrous during the pandemic.

The financial pain for U.S. retailers is worsening beyond what retail executives and analysts anticipated when the coronavirus began to spread, foreshadowing an unrelenting pace of store closures and bankruptcies.

With a resurgence of coronavirus cases across much of the country, some companies that were relatively healthy before the pandemic are showing signs of buckling. Bankruptcies in the sector are piling up, with more retailers seeking chapter 11 protection so far in 2020 than in all of last year.

Two dozen public and large private retailers in the U.S. have filed for bankruptcy this year, according to BankruptcyData.com. The total for all of 2019 was 20 retailers.

“Overall, 2020 retail bankruptcy filings will likely exceed initial forecasts set during the early stages of the pandemic,” said David Berliner, a partner in the business restructuring and turnaround services practice of professional-services firm BDO USA LLP.

The bulk of the bankruptcy filings came after government restrictions in March forced most retailers to shut their doors, including storied names such as department-store chain J.C. Penney Co., luxury retailer Neiman Marcus Group Ltd. and apparel seller J.Crew Group Inc. All three filed for bankruptcy in May.

“Most of the businesses filing for bankruptcy were deemed nonessential retailers, so they were shut,” said Matthew Katz, managing partner at SSA & Co., an advisory firm. “While the pandemic may have accelerated these filings, these businesses were likely on this path anyhow.”

Investors are debating how much more of the retail sector will fall into bankruptcy as shoppers’ fear of contagion keeps them out of stores. The longer the pandemic drags on, the more vulnerable that makes middle-tier companies that may not have been heavily indebted but had only middling performances in better times.

“You’re going to see, as time goes on, how the dominoes fall,” said Michael Appel of Appel Associates LLC, a turnaround consulting firm to retailers and consumer-goods companies. “The big question for any retailer is if they close tomorrow, would anyone care?”

Some retailers that filed for bankruptcy this year will be doing business as usual. Neiman Marcus, Penney and J.Crew plan to emerge from bankruptcy with most stores intact. Apparel company Brooks Brothers Group Inc. hopes to leverage its strong brand name to keep stores open. Others, such as the parent company of women’s apparel chain New York & Co., are shutting down all locations permanently. Some retail brands are going online-only, sometimes by selling their e-commerce business out of bankruptcy, such as Pier 1 Imports Inc.

Bankruptcy filings and debt defaults typically go hand in hand. Fitch Ratings Inc. has forecast a 19% default rate for leveraged loans backed by retailers by year-end, up from the 7% pace recorded last year. By this month, the retail default rate is poised to reach a record 18% with the expected bankruptcy of Ascena Retail Group Inc., the parent company of Ann Taylor and Lane Bryant, and a potential filing by Men’s Wearhouse owner Tailored Brands Inc., according to Fitch senior director Eric Rosenthal.

On Tuesday, Tailored Brands said it planned to close up to 500 stores over time and cut 20% of its corporate workforce by early August.

Heavy debts, a glut of stores and a struggle to keep up with changing consumer tastes and habits are nothing new for many retailers, but the mix proved to be disastrous during the pandemic, which decimated sales.

Other retailers at high risk of defaulting by 2021 include department-store chain Belk Inc., crafts and fabrics retailer Jo-Ann Stores Inc. and clothing and home décor retailer Lands’ End Inc., Mr. Rosenthal said.

This year started with a steady stream of retailer bankruptcy filings even before the pandemic. Pier 1, Art Van Furniture Inc., Modell’s Sporting Goods Inc. and greeting-cards retailer Papyrus all sought court protection before the Covid-19 outbreak was declared a national emergency in mid-March.

Others that have filed since the virus-related lockdowns include department-store chain Stage Stores Inc., discount home-goods retailer Tuesday Morning Corp. and vitamin seller GNC Holdings Inc. More recently, courts had filings from high-end kitchenware retailer Sur La Table Inc. and Japanese home-goods brand Muji USA Ltd.

The pace doesn’t seem to be ebbing. Many more retailers have warned they are on the brink of a bankruptcy or debt restructuring, including clothing and accessories chain Francesca’s Holdings Corp. and women’s clothing retailer J.Jill Inc.

To give their businesses a fighting chance, retailers are considering “closing stores, obtaining additional debt, revisiting the supply chain, pivoting to e-commerce, reducing workforce as well as executive compensation,” said Deirdre O’Connor, managing director for corporate restructuring at legal-services firm Epiq Systems Inc. Others have held back on rent payments to landlords, hoping for forbearance.

Department-store giant Macy’s Inc. raised billions of dollars in loans and said in June that it was laying off thousands of workers to weather the prolonged decline in business. Shares in Express Inc., a clothing chain catering to working women, have collapsed since the pandemic hit in March.

Although stores in many parts of the country had reopened, companies such as Macy’s have scaled back bricks-and-mortar options again in recent days and weeks as coronavirus cases surged in some states.

Retailers will likely decide to close as many as 25,000 U.S. stores in 2020, which would be a record, and more than double the 9,832 stores that closed last year, according to global market-research firm Coresight Research. So far this year, major U.S. chains have announced more than 5,400 permanent closures.

With little or no customer traffic, some retailers have conserved cash by holding back on months of rent payments. As of July 15, about 69% of tenants had paid their rent for the month, down from 88% paying March rent by the middle of that month, according to data from Datex Property Solutions, which tracks payment trends for tens of thousands of retailers nationwide.

For the “walking wounded,” Covid-19 may have been the final blow, said Datex Chief Executive Mark Sigal. “But critically, it very well might still be for many more,” he said.