- In a survey conducted in November, 40% of retail executives said they expect bankruptcy filings in the sector to increase in 2018, according to a new report from accounting and consulting firm BDO.
- Another 54% of executives said they expect the level of bankruptcy filings to stay consistent with last year, which surpassed 2008 in retail bankruptcies. The year has already seen four major retail bankruptcies, including that of department store Bon-Ton. Others, including Claire's and Nine West, are said to be readying filings, and there are many more at risk.
- The report authors pointed out that rising consumer debt levels, combined with anticipated interest rate rises, "may put the brakes on consumer spending as consumers pay down credit card tabs." In turn, distressed retailers with large debt loads were likely to face higher interest payments, "limiting their ability to remodel stores to adapt to changing consumer preferences or to develop more meaningful in-store experience offerings and services," according to the report.
There could be no end in sight for what has colloquially (if somewhat dramatically) been dubbed the "retail apocalypse."
In the report, BDO counted more than 2,300 stores slated for closure in the second half of 2017. (That figure included retailers that planned to close at least 20 stores in the period.) The firm also cited Cushman & Wakefield projections that 12,000 retail stores could close in 2018, up from 9,000 last year, and that at least 25 major retailers would file for bankruptcy this year.
BDO's report follows one from S&P Global earlier in the month that cautioned retail defaults "could match or exceed" those in 2017. S&P analysts led by Robert Schulz pointed to several danger points, including approaching debt maturities ($5.6 billion in 2018, $13 billion in 2019 and $18 billion in 2020), shifting consumer spending, the "dangerous lag" of some retailers behind their competitors, a surplus of stores and highly leveraged balance sheets — dating back to "dozens of private equity buyouts over the past decade."
S&P analysts also warned that business liquidations in retail could pick up this year, with Bon-Ton (which filed for bankruptcy in February) being potentially "the first department store to liquidate in a number of years."
That most retail executives — 94% — expect bankruptcies to keep apace with 2017 or even surpass it, is an ominous sign. As David Berliner, leader of BDO's restructuring and turnaround practice, noted to Retail Dive in an interview, executives keep a careful watch not only over their own businesses but those of their competitors — and not necessarily out of compassionate concern for their peers. "A stronger retailer is willing to lower prices to a loss if it will hurt their competitor," Berliner said.
Of course, not every bankruptcy ends in retail death. Several filings last year were orderly affairs that included debt reduction and store closures, spanning just a few months. In that category were Payless, Gymboree, rue21 and True Religion, to name a few. Whether those and other Chapter 11 survivors go on to succeed depends largely on whether they truly just had a balance sheet problem, or if they had other operating issues that did not get mentioned and addressed in court, according to Berliner.
"If all you do is cut debt and close a few stores, you don't have enough time [to fix other issues]," he said. That means store projections might not live up to models — and closing stores outside of bankruptcy can be much more expensive than doing so in court, he added.
But it's not all doom and gloom: Berliner pointed to discounters and dollar stores, which are building out their store base.