Following the 2008/2009 recession, major retail bankruptcies reached historic highs in 2010, setting the record with 48 filings. Through September this year, we are still 16 filings short of matching that record, after some 32 retailers have filed to date.
BDO’s David Berliner, who leads the firm’s business restructuring and turnaround practice, predicts the 2010 record may stand, since there is a seasonality to bankruptcy filings.
“If you don’t file by Labor Day, you can’t do your going-out-of-business sales before Christmas, which typically takes 90 days,” he says. “It’s October now and I think a lot of on-the-edge retailers are saying, ‘Let’s get one more holiday season under our belt. Maybe we can get a good holiday somehow.’”
That is looking less and less likely with Covid-19, not to mention the predictable flu season. The election could throw the economy and consumers into a tizzy, especially if it is contested as in 2000.
Unemployment and financial uncertainty are still holding back many American consumers from spending and there is no stimulus money coming to tied them over. And for retailers in major cities like New York and Los Angeles, tourist spending is nowhere to be found.
Add to those headwinds, many retailers, especially mall-based retailers in the fashion sector, are entering the holiday season short on inventory from orders canceled in the spring. Further, what they have on hand may not appeal to consumers who may have permanently retired their business wardrobes in favor of casual, comfortable styles.
It all adds up to a toxic mix that may leave many retailers underwater with only one way out in 2021: bankruptcy.
“Even if retailers have a strong November and December, the true results aren’t in until the dust settles in January when all the returns are back,” Berliner says. “By then, a bunch of retailers are going to realize they don’t have the liquidity to make it through the rest of the year.”
Big names, big pains
So far this year, the retailers that have fallen include some big legacy brands, like Neiman Marcus, J.C. Penney, Lord & Taylor and Brooks Brothers. BDO’s mid-year Retail in the Red report gives the details. Add to that list recent filings by It’Sugar with 100 stores and Century 21 with 13 stores.
In addition, these retailers didn’t make BDO’s list but filed for bankruptcy protection as well, including G-Star-Raw, closing most of its 30 luxury denim stores; Centric Brands, a fashion clothing and brand licensing company with also owns Swims and Zac Posen brands; Canadian Aldo shoe stores with over 400 locations in the U.S.; Roots USA , the U.S. arm of the Canadian outdoor apparel retailer with 7 locations; and DTC Bluestem Brands, including Fingerhut and Haband.
Some of these troubled retailers have emerged, notably Neiman Marcus and J.C. Penney; some have been acquired, like Brooks Brothers, Lucky Brand and Sur La Table; and others have closed for good, like Stein Mart, Century 21 and Art Van Furniture.
Fashion apparel and department stores took the worst hit this year. “When you look at the numbers, those types of stores accounted for over 50% of the bankruptcy store closings, and almost 60% of the non-bankruptcy store closings as well,” Berliner says.
On the plus side, those retailers that may have dodged the bankruptcy bullet this year enter 2020 fourth quarter with less competition. But on the other hand, the remaining retailers may suffer less seasonal foot traffic from consumers’ fear of contagion. Those in malls are the most at risk, since shoppers will have fewer reasons to venture out as mall anchors abandon ship and in-line vacancies grow.
Next in line
Looking over the horizon for what 2021 may bring is RapidRatings, which assesses the financial health of companies using a “stress test” model. Two scores are calculated: a company’s short-term resiliency and liquidity through a Financial Health Rating (FHR) and mid-term risk and efficiency in a Core Health Score (CHS).
Taking the FHR and CHS scores together, CEO James Gellert says, “They indicate what’s happening to the company from an efficiency perspective and how that correlates to short-term risk. It’s a more complex story that’s not often discussed.”
The predictive power of RapidRatings model was proven earlier this year when Neiman Marcus, Pier 1, J.C. Penney, Tailored Brands, Ascena Retail Group and Tuesday Morning topped its list of high-risk candidates. Gellert notes that over the past 20 years, over 90% of companies that defaulted across all sectors have been classified as “high risk” with an FHR score under 40.
When a company’s FHR falls under 40, it’s a measure of extremely weak financial health, similar to blood pressure and blood sugar levels that measure people’s overall health. Healthy companies like healthy people with no underlying weaknesses are better able to fight off shocks to the system, like this pandemic.
Across the board, retailers have faced tremendous disruptions to business in 2020. Going into 2021, they are already in a weakened state. Hearkening back to the last major shock retailers faced, the Great Recession that ended June of 2009, the retailer fallout didn’t peak the year of, but the year after, in 2010.
History may repeat itself in 2021. Here, according to RapidRating’s stress-test measures are the most at-risk public retailers for future bankruptcy filings, along with those at medium risk:
Apparel companies most at-risk
As in 2020, prospects are poor for many fashion retailers in 2021. Topping RapidRatings list of most at-risk fashion retailers are:
- Destination XL
- L Brands
- Christopher & Banks
- Children’s Place
- Genesco (Journeys and Johnson & Murphy among others)
- Boot Barn
Included in its medium-risk category are Chico’s, Burlington Stores, Urban Outfitters, Gap, American Eagle Outfitters, Abercrombie & Fitch and Zumiez.
On the other hand, Foot Locker, TJX Companies and Ross Stores are going into 2021 strong.
Macy’s tops RapidRatings’ list of highest risk to fold, followed by Nordstrom Kohl’s and Dillard’s are ranked as medium risk.
Sears is and remains high risk too.
While BDO’s Berliner believes home furnishings stores may get a reprieve in 2021 due to consumers’ shift to spending on home improvements and redecorating, RapidRatings sees weakness in At Home Group and Wayfair that puts them in the high-risk group.
Bed Bath & Beyond and Lumber Liquidators Holdings have a medium risk of folding.
Williams Sonoma, Lowe’s and Home Depot remain strong.
Internet DTC retailers
Shutterfly, iMedia Brands, Overstock.com and Farfetch are holding on by a thread, as they all are rated high risk. The RealReal is rated medium risk.
By contrast, Etsy and 1-800-Flowers are at low risk, not to mention the all-powerful Amazon.
Albertson’s is the only grocery store that gets a very high risk of default by RapidRatings’s measures.
On the other hand, Publix Super Markets is low risk.
High-risk retailers in the specialty category include:
- Barnes & Noble
- Office Depot
- Big 5 Sporting Goods
- Build-A-Bear Workshop
Medium-risk specialty retailers include Sally Beauty Holdings Dicks Sporting Goods and Hibbett Sports.
Within this category, Five Below and Tractor Supply are going into 2021 strong.
In 2021 retailers will get their real test
Making it through 2021 will be the real test of retailers’ resiliency. On the horizon, BDO’s Berliner sees a future of fewer and smaller stores where operational costs can be better managed.
“Retailers realize they don’t need all those big stores now that consumers have been forced by the pandemic to buy just about everything online and have discovered they like it,” he says.
He also foresees retailers making better use of their inventory and omnichannel capabilities so that every store doesn’t need to stock every product, but can rely on overnight shipping to get the customers exactly what they want in cases where the size, color or model are not in the store. Buy-online-pickup-in-store and curbside pickup are also services that more retailers will need to offer.
RapidRatings’ Gellert is quick to point out that the retailers that are going into 2021 with the weakest financial position aren’t all going to go bust, but they need to rapidly make adjustments to their operating structure to stay financially viable through next year.
“Some companies have failed this year, but that isn’t the entire story,” he concludes. “What we have seen is a tremendous amount of business degradation. The question for a lot of companies is how can they move forward operating a strong business and what adjustments do they need to make in the long term to stay afloat.”