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Retail Woes Mount as List of Troubled Companies Grows

The state of brick-and-mortar retail in the United States is dismal. Companies are firing workers, closing stores, and filing for bankruptcy. In-store customer traffic is down, while online purchases are up. For big retail chains, the situation will worsen before it improves.

Many retailers have too much debt as a result of leveraged buyouts and other deals that can create liquidity problems. According to Moody’s, 19 retail chains are rated at the distressed Caa or CA levels, with debt totaling more than $4 billion. Before 2019, 30 to 40 percent of that will come due and defaults will rise. The situation hasn’t been this bad for retailers since the start of the Great Recession of 2008-09.

The list of troubled retail companies is long. Since 2013, Abercrombie & Fitch has closed 20 percent of its stores and plans to shut 60 more. Macy’s and Sears plan to close 218 stores before July. In March, Sears, and its companion store Kmart, announced that “substantial doubt exists related to the company’s ability to continue as a going concern.” The company has lost money for seven straight years. Its suppliers are cutting inventory and imposing shorter payment terms. The company also faces huge upcoming debt payments, with $596 million coming due this year and $1.29 billion in 2018. 

JCPenney plans to close 140 stores. American Apparel and The Limited will shut multiple locations as well. BCBG Max Azria Group filed for bankruptcy in March and will close 120 stores. Payless filed for Chapter 11 protection in April and announced that it would close 400 stores in the U.S. and Puerto Rico immediately. Bebe Stores Inc. announced that it will shut its 170 stores and just sell online. The total store closings in the United States this year could reach 1,500, and thousands of employees will lose their jobs. 

And certain retail segments have been hit especially hard, such as sporting goods chains. The Sports Authority filed for bankruptcy in March 2016 and closed more than 400 stores. Golfsmith filed for bankruptcy last September, closed two-thirds of its stores, and sold the others. Eastern Outfitters filed for bankruptcy in February. Sports Chalet, a chain in California, last year closed its 47 stores. Gander Mountain, a St. Paul, Minnesota-based chain, filed for Chapter 11 and will shut 32 of 162 stores.

Many stores that will go dark are in malls, where the closing of a department store can trigger a chain reaction of trouble for the remaining lessees and ultimately devastate a mall. According to Retail Metrics, department store earnings growth has been lower than all retail since early 2012. Cushman & Wakefield reports that between 2010 and 2013 mall visits in the U.S. decreased from 35 million to 17 million a year. The top-rated A and B malls should survive, but the 30 percent ranked at the lower C and D levels will suffer. 

According to the International Council of Shopping Centres, the United States has more than five times the amount of retail square footage per person than the United Kingdom, France, or Japan. This stems, in part, from too much growth in the 1990s. Forbes has reported that “since 1995, the number of shopping centers in the U.S. has grown by more than 23 percent and the total gross leasable area by almost 30 percent, while the population has grown by less than 14 percent.”

The exception to all of this retail devastation is Apple. Apple brings more than 1 million people into its stores each day and sells more goods at retail stores than any other store anywhere. And an Apple store in a mall will increase sales 10 percent for the other stores located there.

The irony for retailers is that the United States is in a long yet weak expansion. The nation’s unemployment rate was 4.4 percent in April. Annual inflation might hit the Federal Reserve’s goal of 2 percent this year. Retail sales were actually up in early 2017 due to online purchases. 

But that’s also a big part of the problem for brick-and-mortar stores. More than two-thirds of consumers in the United States will buy online in 2017. Of those, 65 million Americans will buy at Amazon.com, which had $20 billion in revenue for apparel sales last year. And Amazon has also been hurting brick-and-mortar stores both by offering shoppers a credit card with a cash-back incentive and by adding new private-label brands. 

Another concern for retailers is that in December and March the Federal Reserve raised interest rates—and it plans more increases later this year. Tightened liquidity will inflict more pain on brick-and-mortar retailers. Troubled retailers will try to compete by cutting prices or creating a viable online presence. Stores that end up squeezed and that can’t fix their balance sheets or product lines will consider filing for bankruptcy as a last resort. 

In the retail world, however, bankruptcy no longer is used successfully to reorganize businesses. The 2005 amendments to the U.S. Bankruptcy Code force debtors to deal with leases at too fast a pace to afford ample time for reorganization. Debtors must decide to assume or reject leases within 120 days of a bankruptcy filing. This has proven too short a time period to permit reorganization in Chapter 11. And asset-based lenders often will not lend to a company in bankruptcy beyond 180 days. 

Retailers that have tried recently to reorganize in Chapter 11 have failed. In 2015, RadioShack filed for bankruptcy, restructured, but filed again this year. The company, now owned by General Wireless Operations, will liquidate all of its stores. Wet Seal filed for bankruptcy two years ago, emerged, but is back in a proceeding and will liquidate as well. American Apparel filed for bankruptcy in October 2015, emerged, and filed again last November. As a result, debtors use bankruptcy to sell assets in Section 363 sales, reject leases, and conduct going-out-of-business sales. 

Retailers, therefore, cannot count on bankruptcy as a last resort to help them survive. By the time retail chains file, the chances they can stay in business are remote. So what can brick-and-mortar chains do to avoid bankruptcy? They need to watch debt levels, manage inventory and overhead, control the pace of store expansion, develop shopping experiences that offer more than just products (think Apple), and balance store locations and online options that will appeal to consumers of various ages and tastes. These suggestions will not help certain chains that will be part of the 2017 retail debacle. Yet over the longer term, U.S. retailers must adjust to a changing world where just having large stores in malls and shopping centers with merchandise on racks won’t be sufficient to compete. 

Daniel A. Lowenthal

Daniel A. Lowenthal

Patterson Belknap Webb & Tyler LLP

Daniel A. Lowenthal, chair of Patterson Belknap’s Business Reorganization and Creditors’ Rights practice, has earned recognition as a skilled advocate for clients in bankruptcy, creditors’ rights, and corporate restructuring matters for work on behalf of creditors’ committees, trade creditors, indenture trustees, and bankruptcy trustees and examiners. He also has achieved numerous favorable results for clients in trial and appellate courts and in commercial arbitration. Lowenthal holds a law degree from George Washington University, with honors, and a bachelor’s degree from Duke University, magna cum laude.


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