Retail bankruptcies in 2020 hit the best ranges in additional than a decade, and consultants say there are extra to come back

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There were dozens of retail bankruptcies in 2020, and experts say the pain is not over yet.

S&P Global Market Intelligence saw 49 retail bankruptcies in mid-November, including Ann Taylor parent company Ascena Retail Group Inc.ASNAQ, -9.35%,
Luxury department store Neiman Marcus, household goods specialist Sur La Table Inc. and Brooks Brothers Group Inc.

This is the largest number of bankruptcies since 2009 during the financial crisis.

COVID-19 was the straw that broke many ailing retailers. Companies that have already struggled to keep up with trends, invest in necessary digital upgrades, and move to modern customer experiences just couldn’t handle the added pressures of store closures, a massive shift to e-commerce, security protocols, and other side effects of just that Coronavirus.

“The pandemic has accelerated what will happen in less time in a few years,” said Mickey Chadha, Moody’s vice president. “The names that filed for bankruptcy were likely preferred.”

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In addition to store closings due to bankruptcy and restructuring, many retailers have taken advantage of the pandemic to rethink their store fleets. Gap Inc. GPS (-2.60%) and Children’s Place Inc. PLCE (-1.03%) are just two of the retailers who have spoken of “rightsing” their retail fleets.

Coresight Research counted 8,401 store closures since the beginning of the year in a report from December 4th.

With the proliferation of vaccines and the year 2021 approaching, a retail recovery won’t happen like the flick of a switch. Instead, experts and analysts say more retail bankruptcies are around the corner before it gets better.

“There are still many names that are in need and weak in retail and clothing,” said Chadha. “The pandemic will accelerate trends, making the weak weaker and the strong stronger.”

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On the positive side, the bankruptcy process is designed to give companies that need it a second chance.

“In general, bankruptcy could be a stigma. We see the bankruptcy process as a tool to help companies restructure their businesses and balance sheets, ”said Dan Guyder, partner at Allen & Overy international law firm.

“And it’s positive for investors to help a company get back to growth. There may be broken glass along the way, but this is the lifecycle for some companies. “

In the past few weeks, JC Penney Co. Inc. has JCPNQ + 5.56%,
For example, it has emerged from bankruptcy and has a number of plans to grow the business, including a new women’s brand and a beauty strategy.

Consumers also need to recover

It’s not just retailers who have to recover from the economic slump caused by coronavirus. Buyers too. With government protections against foreclosure and eviction expiring, and additional government stimulus measures still very uncertain, consumers now need to rethink their personal budgets and potentially tighten their spending habits.

This could mess up even the retailer’s best plans.

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“There is more pressure on consumers to divert available cash to meet these obligations,” said Guyder.

Under normal circumstances, retail is very organized, which may make the uncertainty caused by the pandemic and bankruptcy more difficult for retailers to deal with.

“Retail is a business of seasonality. Depending on the category and time of year, you will see growth or deterioration in margins,” said Matt Katz, Managing Partner at Global Advisory SSA & Co. “Bankruptcy has no season.”

Taking into account that consumers will also take time to recover is something that retailers need to consider.

“People need to replenish savings and nest eggs. You will likely owe landlords and other obligations, ”said Katz. “[T]Here is some catching up to do to get their finances back on track. It will take some time. We build this thought process into customer plans. “

Controlling the balance sheets will be vital in 2021

While some retail categories flourished during the pandemic, including major retailers like Walmart Inc. WMT (-0.10%) and Target Corp. TGT (-0.48%) (warehouse plus 22.8% and 33%, respectively), warehouse retailers such as Costco Wholesale Corp. COST, -0.89% and BJs Wholesale Club Holdings Inc. BJ, + 0.68% (stocks are up nearly 25% and 68.5% respectively) and housewares retailers including Wayfair Inc. W, -2.92 % and At Home Group Inc. HOME, -3.83% (up 206.2% and 188% respectively).

The Amplify Online Retail ETF IBUY (+ 0.13%) is up 126.1% year-to-date, and the SPDR S&P Retail ETF XRT (-0.35%) is up 37.1% over the reporting period. Both outperformed the benchmark index S & P 500 SPX with -0.35%,
that gained 14.8%.

And experts see improvements in 2021, especially for the categories that had a huge hit in 2020.

Moody’s is forecasting next year operating profit growth of 516% year over year in department stores to reach $ 1.2 billion. operating profit increased 489% for off-price retailers to $ 4.9 billion; and apparel and footwear retailers operating profit growth increased 114% to $ 3.2 billion.

However, November retail numbers show that this path to recovery is not going smoothly. Despite the holiday shopping season, sales fell 1.1% and October sales were revised downwards.

See: Retail sales drop 1.1% in November as COVID-19 restaurants and the economy boggles

“For those retailers who excelled during the COVID-19 pandemic,” wrote analysts at Bank of America, headed by Elizabeth Suzuki, “comparisons will be particularly difficult in mid-2021. The relatively disadvantaged retailers (not essential and non-home categories) will have easier year-over-year comparisons in 2021 and could see oversized growth compared to the 2020 winners. “

It will be important for retailers to keep their balance sheets under control going forward.

“Many names that are weak in this space are privately owned,” said Chadha of Moody’s. “The leverage from these names is high. The only way to avoid an emergency swap or bankruptcy is to improve profitability, which will be difficult. “

The other option is to reduce debt that requires cash. Either way, these companies “need to revise their balance sheets to be sustainable,” said Chadha.

When a company needs to take on more debt, Greg Portell, director of global consumer industry and retail at global management consultancy Kearney, says the “intentionality of debt” matters.

“If you want to put debt on your balance sheet, you want to make sure that it is what drives expansion and growth,” he said. “Many who filed for bankruptcy had debt, which was funding mechanism, not growth.”

Portell believes disappointing vacation income will lead to more bankruptcy filings.

“We’re going to see another wave in the first and second quarters based on the aftermath of the holiday season,” he said. “Consumer spending is strong and contributing, but not everyone will win.”

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And while many are waiting for things to get “normal” again, it may be more accurate to look to a “new normal”.

Looking ahead, retailers hope that the introduction of the vaccine will bring some ‘normal’ to our lives by 2021 so that retailers can recoup their losses by 2020, “said Marwan Forzley, managing director of Veem, a payment platform who works with thousands of US retailers.

“Although brick and mortar stores may regain popularity as things look ‘more normal’ again, the pandemic has certainly changed the way we shop forever and e-commerce will still be a major source of income for retailers, regardless of their size. “

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