Last year Retail Dive ran its first list of companies in the industry that were most at risk of filing for bankruptcy. Much has changed since then. For one, we've run three more watch lists, as Chapter 11 filings reached recession-era proportions. This year, though, each list has gotten shorter, in part because the general aura hanging over retail has changed. It's become considerably less gloomy. One might even say partly sunny. But one factor has been constant since mid-2017: Sears has appeared on every watch list we've run.
Not this time. It's happened before that we've moved a retailer from our watch list to our yearly list of major retail Chapter 11s. But Sears is an odd case. It stayed on our watch list and off our Chapter 11 tracker because it had managed to evade bankruptcy for so long and in so many creative ways. It was starting to seem as though Sears might always manage to stay out of court. The company and former CEO Eddie Lampert — who is one of the department store operator's largest lenders as he's funneled hundreds of millions through his hedge fund to keep Sears solvent — were like Wile E. Coyote, forever dodging disasters arguably of their own making.
But Chapter 11 finally came for Sears in October as the company ran into a multimillion-dollar payment on its debt and failed to strike a deal with lenders.
Sears wasn't alone. The bankruptcies have slowed this year compared to 2017, but they haven't stopped. In October, one of the biggest players in the mattress space filed for bankruptcy, with plans to close 700 stores. While Mattress Firm's Chapter 11 wasn't altogether surprising, given the competitive mattress category and the stagnant pace of change at traditional retailers, it did hint at a larger theme in retail: of younger, disruptive brands breaking the mold and making traditional players think on their toes.
With those major retail bankruptcies as a backdrop, we're looking again at who in the industry might be vulnerable in a world that keeps shifting. In putting together this list, we relied on data from CreditRiskMonitor, which estimates the risk of a company with publicly traded debt or bonds filing for bankruptcy within 12 months based on several streams of data. Those include financial ratios, credit ratings, a commonly used form of credit analysis (the "Merton" model) and aggregated data patterns from its own subscribers.
CreditRiskMonitor uses all that data to assign a proprietary rating, called a "FRISK" score, that weighs the probability of bankruptcy. A FRISK score of one indicates a 9.99% to 50% chance of bankruptcy within 12 months, and a score of two corresponds with a 4% to 9.99% chance of bankruptcy. (The scores continue to 10, which indicates risk near zero.) While CreditRiskMonitor issues scores for a large chunk of major retailers, many companies don't have a FRISK score. David's Bridal, for instance, doesn't appear on our list, though the retailer missed a debt payment in October and is preparing a possible Chapter 11 filing, a source told Retail Dive this week.
The following was culled from lists of retailers with FRISK scores of one or two as of Oct. 30.
FRISK score: 1
J.C Penney's slow-rolling turnaround seems to never end, and executives have signaled that it won't end anytime soon as the retailer once again tries to nail its apparel assortment and inventory levels.
This year, after a string of disappointing quarters, Marvin Ellison left the CEO spot for Lowe's, further complicating Penney's prospects for a successful turnaround this year. Replacing Ellison is Jill Soltau, former chief of Joann Stores, who the company hopes can reinvigorate the department store's merchandising. There's been other executive turnover as well, including the chief of finance slot.
Already in 2018, the retailer, which has around $4 billion in debt on its books, has axed more than 1,000 jobs and closed a distribution center. With uncertainty hanging over its prospects, analysts at both S&P Global and Moody's downgraded Penney's credit in August rating after a weak second quarter.
FRISK score: 1
Neiman Marcus has put together a string of winning quarters, with healthy top-line and comparable store sales. To boost profit and sales, the company has cut jobs and developed a "Digital First" strategy to engage customers more deeply. So far, it appears to be paying off, but the company's interest expenses on more than $4 billion in debt are still dragging it into the red.
Multiple outlets have reported that Neiman is in talks with creditors about extending major debt maturities, which start to come due in the next two years. If successful, a deal with lenders could stave off bankruptcy. Meanwhile, one of its lenders has threatened legal action after Neiman's MyTheresa e-commerce unit moved to a separate part of the organizational hierarchy controlled by the retailer's private equity owners.
Last year, Neiman Marcus, held by a group of private equity firms, reportedly talked with Hudson's Bay about an acquisition and also floated plans for an IPO that never materialized. In January, CEO Karen Katz, who had served in the chief executive spot since 2010, stepped down and was succeeded by Ralph Lauren executive Geoffroy van Raemdonck. The company has seen additional turnover in its CMO, CFO and CIO spots.
"We are executing on a compelling growth plan and pleased to recently deliver our fourth consecutive quarter of positive sales growth," a Neiman spokesperson told Retail Dive in an emailed statement, adding that all stores reported positive earnings and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was up 16.4% year over year. The company ended the previous period with $800 million in liquidity, leaving "ample runway to refinance our debt with no near-term maturities," the spokesperson also said.
FRISK Score: 1
J. Crew underwent a massive expansion and tried to go upscale as consumers were changing their tastes and spending habits. The result: Declining sales, the departure of a longtime CEO and a $2 billion debt problem. Last June, J. Crew announced it had some relief in the form of a debt exchange.
Net losses for 2017 (which included a benefit for income taxes of $105.5 million) widened to $125 million from $23.5 million the year before. In the second quarter, sales at the retailer's flagship brand fell 5%, but the Madewell unit lifted the entire company, with sales growth of 29%. Also in Q2, J. Crew narrowed its loss year over year to $6.1 million, but it is still operating at a loss. In June, the company brought in West Elm's creative director to be J. Crew's new chief design officer, and the company has made several moves since then to try and get the company back on track.
Included in those are: a new loyalty program, extended sizing at Madewell and J. Crew, a men's collection at Madewell, a third-party marketplace and a new effort to sell its cheaper Mercantile label through Amazon. Only time will tell if those efforts bear fruit — and whether they will be enough to get the company out of distress.
99 Cents Only
FRISK score: 1
Owned by private equity consortium, 99 Cents Only has to contend with the likes of Dollar General, Family Dollar and Five Below, not to mention mass merchants and Amazon. Nearly $1 billion in debt leftover from a leveraged buyout does not help things.
In February, the retailer named a new CEO and projected strong sales improvements. The company at the time posted positive same-store sales growth for several quarters going. Yet 99 Cents Only has still been losing money. In December, the last time the discounter reported earnings, it posted a third-quarter net loss of $27.1 million. That came on top of a $33.6 million loss in the second quarter and an $8.8 million loss in the first quarter. In December, the retailer announced it had completed a distressed debt exchange that S&P analysts said improved the company's liquidity "somewhat."
FRISK score 2
Early last year, Hudson's Bay Co. was reportedly shopping for a deal in the struggling department store sector, marked as a potential suitor for Macy's and Neiman Marcus. By the end of the year, the Canadian retailer seemed to be in turmoil. Its CEO at the time, Jerry Storch, left abruptly. Sales at key units, including Lord & Taylor and the company's off-price business, were down. In the company's periphery was an activist investor agitating for change and a sell-off of the company's most valuable real estate assets.
Hudson's Bay made a lot of moves to free up cash, including the sale of Gilt to Rue La La for about $31 million in U.S. dollars, the sale of flagship properties and a joint venture deal for its European business. Early this year, the retailer brought in Helena Foulkes as CEO. Foulkes, a former CVS executive, took a preliminary look at the company and declared, "Things need to change." By September, Hudson's Bay was still struggling but said it was committed to turn around its North American sales. Top-line sales decreased 2% year over year to $2.2 billion, while comparable sales declined 0.4%, driven in part by a 3.8% comps decrease at the unit that includes the company's eponymous banner and Lord & Taylor. As of August, the company's total debt stood at about $3.8 billion.
FRISK Score: 2
The list of areas where Pier 1 needs to improve is long. As Jeffries analysts led by Daniel Binder put it in a June note, the company is in for a "heavy investment year" as it addresses "sourcing, merchandising, pricing, marketing, store ops, e-com and supply chain." Net sales in Q2 fell 12.8% year over year, and comparable sales fell by 11.4%, according to a company release. Its net loss widened dramatically — by 555% — to $51.1 million from $7.8 million in the year-ago period.
In May, S&P Global analysts downgraded the company's credit rating. Analysts wrote at the time that "[Pier 1] will continue to face operating performance pressure through at least the next year amid a transformational turnaround plan under new management." The company has a turnaround plan to deal with all that, but it will take time and money, and there is no guarantee of success in the hotly contested home goods space.
FRISK Score: 2
Fred's Pharmacy traces its roots back more than 70 years. With around 600 stores, the drug store aimed to grow bigger by pursuing nearly 1,000 stores that were up for grabs as Walgreens was trying to get a deal with Rite Aid past anti-monopoly enforcers. But the deal fell through after Walgreens, facing pushback from the Federal Trade Commission, nixed its initial deal with Rite Aid.
The company's CFO left in February, and the retailer then appointed a former media executive to the chief finance spot. This spring the retailer said it was focused on executing its "Plan B." It went on to sell its specialty pharmacy unit to CVS for $40 million and put the rest of its pharmacy business up for sale, with Walgreens taking over the pharmacy inventory and patient prescription files of 185 stores.
In September, Fred's said its net sales fell 4.3% year over year, and comps fell 3.5%. Its net loss was $22.9 million, up from $28.9 million in the year-ago quarter.
FRISK Score: 2
Rite Aid has had a string of disappointing earnings recently. Fourth quarter revenues this year fell 8.6%, while retail pharmacy segment sales fell 10.1% and pharmacy services fell 4.3% — trends that have not fully righted themselves. For the company's most recent earnings, in September, the drugstore retailer recorded a same-store sales decline of 0.1% while its retail pharmacy same-store sales increased 1%. More importantly, though, the retailer's second quarter revealed a net loss of $352.3 million, a steep decline from the year-ago period's net income of $188.4 million.
Things have been tough for the drugstore retailer for some time now, as its attempt to merge with rival Walgreens was abandoned last summer and even the 2,000 stores Walgreens did acquire don't seem to be all that promising. Walgreens in October of last year said that it would be closing 600 of the Rite Aid locations it had acquired. While rumors swirled for a time that Amazon would be a good acquirer for the drugstore retailer, no deal has yet materialized and the company seems to be falling behind CVS and Walgreens, both of which have made efforts recently to invest in popular categories like beauty to help drive sales.