VOGUE BUSINESS | KATI CHITRAKORN
Lands’ End, Lord & Taylor and Tailored Brands are among the retailers at growing risk, based on analysis from Moody’s and Lowenstein Sandler.
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From iconic department stores to small mom-and-pop retailers, the coronavirus has spared few in its devastation of the US economy. The number of companies that have filed for bankruptcy in the wake of the pandemic is set to keep rising, despite having already hit a 10-year high.
S&P Global recorded that 40 retail companies have filed for bankruptcy in the US, as of 23 July, already outpacing the total last year and in 2018. “The last time we saw this many bankruptcies was during the 2008 financial crisis,” says S&P Global’s data analyst Chris Hudgins.
Experts expect to see more bankruptcies in the latter part of 2020, especially if a wider second wave of Covid-19 were to occur during the fourth quarter, when retailers make the majority of their profits for the entire year, says Jeffrey Cohen, vice-chair of Lowenstein Sandler's bankruptcy department. On his retail bankruptcy watch list: Tailored Brands, which owns Men’s Wearhouse, a suit retailer, and Lord & Taylor, the mid-priced department store chain. The casualisation of fashion and dwindling department store foot traffic are to blame, he says. (Both brands filed for Chapter 11 bankruptcy protection on 2 August.)
In the US, companies in distress turn to Chapter 11 bankruptcy filings to shed debt, close unprofitable store locations and reorganise. Many survive. Still, pandemic casualties in American fashion so far this year include Ascena Retail Group, J.Crew, Neiman Marcus and JCPenney and more are expected to follow. But as cases continue to rise in the country, retailers are up against a mounting set of challenges, including excess inventory and a shift to e-commerce that bricks-and-mortar reliant retailers weren’t set up to properly navigate, reducing their chance of survival.
A closing down sale. © Jeffrey Greenberg/Universal Images Group via Getty Images
As of July 2020, Men’s Wearhouse, apparel and home retailer Lands’ End, retail group Premier Brands, and Belk, the department store chain, all received a Moody’s rating lower than B3, which suggests they are at high risk of bankruptcy. “I don’t think any of these names are a great surprise,” says Moody's vice president Christina Boni, noting that the companies were already “near tipping point” and “weren’t well positioned to compete” prior to Covid-19. Premier, formerly Nine West, had just re-emerged from bankruptcy in March 2019.
While bankruptcy isn’t always a death sentence, the companies that will struggle to emerge are the ones that don’t have a strong strategy, says Robert Burke, founder of consulting firm Robert Burke Associates. “In order to succeed there has to be a new strategy; you can’t just say, ‘we have less debt now and therefore we are going to be successful.’”
Worryingly, it could be smaller, albeit healthy brands next, Burke warns, as their wholesale accounts and department store orders are cut back. “Many brands that have filed for Chapter 11 are bigger and frankly have quite a lot of debt,” he says. The smaller brands that could be hit next are “important to the ecosystem of fashion” but are operating on just enough margin to get by.
Neiman Marcus, JCPenney and J.Crew all had high debt levels prior to Covid-19, and the pandemic has only accelerated what would have happened over the next few years, says Boni. Consumer habits have also changed, and more people have become accustomed to shopping online. “It puts more pressure on companies that have lots and lots of stores. You may not need as many stores.” With more than 3,400 stores, Ascena, which owns women’s brands Loft, Ann Taylor, Justice and Lane Bryant, has failed to pay rent to its landlords since the stay-at-home orders were issued.
Experts say that mid-market retailers will be squeezed the hardest and will have to pivot and scale back in order to survive. This includes managing a tight inventory and cutting back on stores that aren’t cash-flow positive. “There has to be much more austerity in terms of spend,” says Boni.
Some can survive and be revived with opportunistic acquisitions like Ann Taylor, says Cohen. “We’re losing iconic names that resonate with consumers, not only in brand recognition, but also in allegiance and loyalty,” he says.
Authentic Brands Group and Simon Property Group, for example, have been bidding simultaneously for Brooks Brothers and Lucky Brand. If successful, Authentic Brands would own the IP, while Simon would be able to maintain some stores in their malls. Private equity firms also see an opportunity to acquire struggling retailers. Sycamore Partners, for example, has shown interest in buying JCPenney, according to Reuters. But such takeovers can be risky, and often end in high debt levels.
Acquisitions are harder to see through in this climate. “Buyers want to know that once they own a brand, it’s going to trend back upwards. It’s hard to do that now when you’re potentially facing a shutdown a few months later if we get a second wave,” Cohen says.