A Scary Number of Retail Companies are Facing Bankruptcy Amid the Coronavirus Pandemic

The sign outside the J.C. Penney store is seen in Westminster, Colorado February 20, 2009. Department store operator J.C. Penney Co Inc posted a 51 percent drop in fourth quarter profit on Friday, and said its loss in the current quarter would be deeper than Wall Street estimates as shoppers hold off on spending. REUTERS/Rick Wilking (UNITED STATES) – GM1E52L0AQI01

The retail death march persists. Somewhat under-the-radar, Italian luxury goods retailer Furla filed for Chapter 11 on Friday after being hit hard from the COVID-19 pandemic. The company is looking to close stores and cut debt as part of the reorganization. The retailer, founded in 1927, plans to emerge from bankruptcy with a greater focus on e-commerce.

Furla joins a long list of well-known retailers that have buckled during the health crisis.

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New York City-based department store chain Century 21 filed for bankruptcy in September and said that it will shut 13 locations that for years served up deep discounts on designer wares. The company pinned the blame on the COVID-19 pandemic and uncooperative insurers who were supposed to help provide the company with fiscal support during tough times.

Bankrupt J.C. Penney, meanwhile, received a bailout in September from landlords Simon Property Group and Brookfield. The consortium valued the century old department store — which went bust back in May — at some $1.75 billion. A total of 650 stores will stay open, down from the more than 1,000 pre-pandemic.

“It takes a long time to kill a retailer,” Forrester retail analyst Sucharita Kodali told Yahoo Finance Live “So as long as they are able to pay their bills, which if they have an owner they will — they can absolutely be around. But that doesn’t mean death for J.C. Penney is totally off the table.”

Kodali added that J.C. Penney “may not be a great customer experience, but at least it’s alive and open. They can figure out what the plan B over five to ten years could be for that space.”

‘That’s a scary number’

States have allowed malls and retailers to reopen, but the situation remains precarious as COVID-19 infections are now back on the rise. Consequently, it’s reasonable to expect malls and stores are shutdown — or shopping times restricted —again before year end. That will raise the prospect of a fresh wave of bankruptcies in early 2021 after what could be a lackluster holiday shopping season.

“I think many of these companies will file [for bankruptcy], and it’s not a handful. It’s several dozen. And that’s a scary number,” Stifel managing director Michael Kollender, who leads the consumer and retail investment banking group for the firm, told Yahoo Finance. “It’s far more than we have seen over the last several years combined.”

Kollender and his colleague James Doak at Miller Buckfire — Stifel’s restructuring arm, where Doak is co-head — have worked on dozens of consumer and retail bankruptcies in recent years, including Aeropostale, Gymboree and Things Remembered.

“We will see some major chains go away and not come back,” Kollender added. “These are chains that were struggling before the situation. COVID-19 will put them over the ledge.”

The pandemic has toppled several household names this year. Stein Mart, a 112-year-old discounter, filed for bankruptcy in early August and will look to close most of its nearly 300 stores. The company cited significant financial stress brought on by the COVID-19 pandemic for its decision.

August also saw Lord & Taylor — the oldest U.S. department store founded in 1826 — file for Chapter 11 bankruptcy protection after being crippled by COVID-19 store closures. The company was purchased for $100 million from Hudson’s Bay by fashion startup Le Tote in 2019. Le Tote also filed for Chapter 11.

Men’s Wearhouse-owned Tailored Brands also filed for Chapter 11 in August, too. The company said it had received $500 million in debtor-in-possession financing from existing lenders.

Meantime, Ascena Retail Group, the owner of Ann Taylor and Lane Bryant, finally filed for bankruptcy protection in late July. The company, which has been circling the bowl for years, will look to the courts to help it shave $1 billion in debt. But it’s likely the retailer will be far slimmer post bankruptcy than its current 2,800 store count.

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Regional retailer Paper Store filed for Chapter 11 in July as well. The operator of 86 stationary and card stores in the Northeast said it’s looking for a buyer.

New York & Co. parent company RTW Retailwinds also filed for Chapter 11 bankruptcy protection in July after years of growing irrelevance in malls. The women’s apparel company — which changed its name to the bizarre RTW Retailwinds as part of a rebranding in 2018 — operates 378 outlet and and mall-based stores across 32 states. It may close all of its stores as part of the filing.

“The combined effects of a challenging retail environment coupled with the impact of the Coronavirus (COVID-19) pandemic have caused significant financial distress on our business, and we expect it to continue to do so in the future. As a result, we believe that a restructuring of our liabilities and a potential sale of the business or portions of the business is the best path forward to unlock value. I would like to thank all of our associates, customers, and business partners for their dedication and continued support through these unprecedented times,” said RTW Retailwinds CEO Sheamus Toal in a statement.

And the list of now defunct retailers is almost endless.

Brooks Brothers filed for bankruptcy in July. It has been dealt a twin blow to its finance from closed malls and a shift away from preppy clothing. The company would up being sold to the duo of Authentic Brands Group and Simon Property Group for $325 million.

GNC has walked through death’s door after knocking on it for years. The 85-year-old vitamin seller filed for bankruptcy in late June after years of battling waning sales and a debt load north of $1 billion. GNC plans to shutter up to 1,200 stores across the U.S. The company operates more than 5,800 stores.

NEW YORK, NEW YORK - AUGUST 07:  A person wears a protective face mask outside the GNC store as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on August 7, 2020 in New York City. The fourth phase allows outdoor arts and entertainment, sporting events without fans and media production. (Photo by Noam Galai/Getty Images)
A person wears a protective face mask outside the GNC store as the city continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on August 7, 2020 in New York City. (Photo: Noam Galai/Getty Images)

“Some companies are just not going to survive this,” says McGrail, who is the COO of one of the world’s largest asset disposition and valuation firms, Tiger Capital Group. Its McGrail’s team — which often includes store associates of a stricken retailer — that hangs the “Everything must go” signs and works to fetch top dollar on fixtures and other inventory.

Such is the current life for McGrail and others in the retail bankruptcy and restructuring fields. In talking to a host of experts, one thing is abundantly clear: more retail bankruptcies are very likely over the next twelve months.

Even for those retailers emerging from bankruptcy, vendors are likely to be tepid to ship them product while at the same time tightening payment terms as the pandemic rages on.

That one-two punch usually kills a wounded retailer for good.

Then there is the general uncertainty on how people will view going back to the mall in the new normal of social distancing. That fog of war is poised to persist well beyond the coming holiday season.

“We are in a retail tsunami,” Kollender said.

This story was originally published on June 24, 2020, and has been updated.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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Hindsight: Unnecessary Recession? Foresight: “Deep & Permanent Damage” (Bernanke & Yellen)

The number the media, and apparently much of the population, fixates on daily is the new virus case count in the U.S.  While cases have clearly skyrocketed, deaths from the virus continue to fall. Perhaps the case counts are a function of the level of testing. First Trust’s economists recently published some interesting statistics:

  • on Monday, July 6th, deaths were -86% below the Monday, April 20th peak.;
  • hospital capacity, nationwide, still appears manageable – albeit some specific locations may have hospital capacity issues;
  • The skew of deaths toward the elderly is also significant. The total percentage of deaths/confirmed cases (138,782/3,630,587 as of July 18) is 3.8%. Of those that have died, 33.2% were 85 years old or older, and 92.5% of deaths are in people over 55 years old.

Consider that confirmed cases represent just over 1.1% of the total U.S. population, but field tests are now showing that up to 20% of those tested are positive for the virus. While there are issues in assuming that 20% of the population have already had the virus (some think that there are a huge number of asymptomatic carriers), if that is anywhere close to reality, then the overall probability of dying from the virus is 0.04% (.0004), and if one is under 55 years old (most of the working aged population), then that probability falls to .003% (.00003, i.e. 3 per 100,000 who contract it). Even within this younger demographic, only those with compromised immune systems have any real risk. The 20% assumption may be high (there are reasons people get tested), but even at 10%, the younger demographic has little death risk.

The Economy

Market observers are now using high frequency data markers to gauge the state of the economy. Sometimes, even small deviations from expectations in the economic data results in outsized financial market reaction.

  • Retail Sales: While falling -5.5% from the week ending July 4th (holiday week) to the week ending July 11th, retail sales were still +4.7% higher than the same 2019 week, and up +7.5% M/M in June (May was still in the depths of business closures). On the surface, this looks promising. But, let’s not forget that consumer income has not yet been impacted because of government money drops. As discussed below, there are still 32 million people unemployed, and there will likely be a large negative impact when government largesse returns to “normal” (perhaps after the elections);
  • Hotel Occupancy (week ended June 27th): While up from the April lows, there is only 46.2% occupancy vs. 84.9% a year earlier;
  • Open Table (July 13): this indicator shows a -66.2% Y/Y change. The M/M change was -1.2%; looks like the daily media drumbeat on new cases has had an impact;
  • TSA checkpoint data (July 13): This shows the number of air travelers, and it was up 5.2% W/W and 61.7% M/M. But, because the denominator is so small, the percentage changes become almost meaningless. Y/Y traffic is still off -73.2%. No wonder United and American Airlines AAL are throwing in the towel and have pre-announced significant layoffs.

The conclusion here is that, after an initial pop, and especially with renewed business restrictions, the Recovery, at best, has flattened.

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Employment

As I have maintained in this blog, employment is the most important gauge of the health of the economy. The more reliable state data from the traditional unemployment insurance programs is still showing significant Initial Claims each week (1.300 million the week of July 11th). There now is almost no downward slope, as the prior two weeks were 1.310 and 1.413 million. And, while Total Claims, as shown in the table and chart (sum of Initial Claims and Continuing Claims) have declined eight weeks in a row and in nine of the last ten, the chart shows the deceleration in the rate of decline in unemployment.

When the less reliable data on the temporary PUA program (Pandemic Unemployment Assistance – via the CARES Act) (less reliable because not all states are reporting and some states report more detail than others) is added to the state data, as shown in the next table and chart, one gets a flavor of just how deep the unemployment hole has become. Worse, beginning in June, total unemployment (or at least the claims) began to rise again. One of the emerging trends is that large companies, which had been hoping for the promised “V”-shaped recovery, have now given up and will start laying off. United and American Airlines are good examples. In addition, the approaching end of PPP may have a similar effect for mid-size and small businesses that are still alive.

Debt – The Fed Continues to be Nervous

For the banks, defaults haven’t yet become a huge issue due to forbearance. That will soon be ending. In the past week, the major banks reported Q2 results, and all significantly bolstered their loan loss reserves. In May, more than 100 million debt payments were missed. The consumer loan industry says it takes 180 days to deal with and resolve delinquent accounts, so we really won’t know the extent of consumer issues until Q4/Q1. I suspect the same is true of commercial loans.

Meanwhile, the Fed continues to worry. In recent Congressional testimony, former Fed Chairs Bernanke and Yellen warned that “the U.S. economy is facing deep and permanent economic damage” (i.e., certainly no “V,” and perhaps no “W”) without further significant fiscal and monetary stimulus including the expanded unemployment benefit program and providing aid to state and local governments.  In fact, Yellen worried out loud about probable large layoffs at the state and local levels without such aid. Bernanke, echoing those famous words of former ECB President Mario Draghi, said Congress and the Fed should do “whatever it takes.”

The Fed’s Beige Book, a report on local conditions by the 12 Regional Federal Reserve Banks (published eight times per year) emphasized “uncertainty” emanating from businesses in their purview. Here are some excerpts:

“Most Districts reported that manufacturing activity moved up, but from a very low level;”

“Outlooks remained highly uncertain…;”

“Employment increased on net in almost all Districts…However, payrolls in all Districts were well below pre-pandemic levels. Job turnover rates remained high with contacts across Districts reporting new layoffs;”

“Contacts in nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.”

Bankruptcies and Debt Concerns

As I’ve shown over the past few blogs, bankruptcies continue to trend up. It will take years for the damage done to the economy by the lockdowns to be recouped.  The lives and livelihoods of millions of citizens have been transformed (many ruined) overnight.

We are just beginning to see the early symptoms of debt destruction, and we are going to see the impacts of such debt destruction on many of the traditional sectors, including the financial ones. These impacts will have long lasting effects. Meanwhile, the Fed has convinced market participants that there is no risk, and that the Fed has their backs. The result is that yield differentials between safe and highly risky assets have all but disappeared – at least their spreads have come way in. In the table and chart below, bankruptcies (from the Bloomberg database) are trending up.

The implications for interest rates are clear. More and more debt (corporate America including the zombies and the federal government) means that future interest rates can’t rise lest interest payment burdens become unmanageable and turn the economy south.

Conclusions

  • With hindsight, the probability of death from the virus for most of the working aged population appears remote (minuscule);
  • The economy hit zero in April, and the May/June re-openings led to the early up-leg of a “v,” but this nascent recovery now appears to be stalling as governors decide to re-restrict businesses;
  • Employment numbers, too, are stalling. Companies are beginning to give up hope for a rapid recovery and are setting up for a long period of economic softness (i.e., they are starting to think about major layoffs);
  • Debt issues are just beginning to emerge and will come front and center in Q4/Q1. The Fed sees this as do former Chairs Bernanke and Yellen.
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Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. http://www.fourstarwealth.com.

Source: https://www.forbes.com

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