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The Retail Apocalypse: Fact or Fiction?

Retail Apocalypse and Amazon Effect have become common vernacular over the last few years. The catchphrases certainly grab the attention of not just the general public but of the finance and turnaround communities as well. In an article headline, they serve as surefire clickbait. And as panel topics, these terms are a great way to draw a crowd. But a deep dive into recent retail industry trends and bankruptcy filings reveals that what’s happening in the retail industry, like most things, is more complicated than simple catchphrases can convey.

The general narrative goes like this: Retail is dying. Amazon and online sales are dominating the market and putting brick-and-mortar stores out of business. Millennials do not want to spend money on things, only experiences. Retail is a relic, and it’s too far gone to save. The apocalypse has begun—run for the exits!

This has become the generally accepted narrative, but does the data back it up? According to the U.S. Census Bureau, retail sales were up 5 percent for the first half of 2018 compared to the same period in 2017 and up 10 percent over 2016. It’s not just e-commerce driving the growth. Sales at brick-and-mortar stores were up 4 percent and 8 percent, respectively, compared to the last two years. In fact, brick-and-mortar retail sales have increased every quarter over the equivalent quarter the prior year for more than six years running. That hardly feels like an apocalypse.

Still, the effect of Amazon and e-commerce generally on the retail landscape is undeniable. E-commerce sales have increased every quarter since the economic crisis of 2008. Online sales gained a greater share of the total retail market every quarter since the turn of the century. And while brick-and-mortar sales showed a single-digit increase in the first half of 2018 over the prior two years, e-commerce has increased 16 percent over 2017 and a staggering 33 percent since 2016.

These are headline grabbing statistics for sure; the growth and importance of e-commerce on the retail landscape is undeniable. But it is also part of the misconception of the Amazon Effect. While the growth of online sales is impressive and represents a trend that is sure to continue, that segment still represents less than 10 percent of all retail sales.

A Deep Dive into the Data

What does all this say about the health of retail? In the midst of this evolving and tumultuous retail landscape, bankruptcy data can help separate facts from fiction. According to Creditntell, there were more than 6,800 bankruptcy filings in the United States in 2017 and through the first three quarters of 2018. Of these filings, fewer than 1,600 were in the retail space. And excluding restaurants and entertainment, core retail accounted for only about 10 percent of all bankruptcies during this period.

Diving deeper into the retail bankruptcies over those seven quarters, there were just 33 filings by what most professionals would consider major retailers. Of those, five resulted in outright liquidation, meaning the companies closed all store operations, including online sales, and the brands were shuttered. Among the other 28, 18 reduced their store base, and 10 successfully used the brand and URL to convert to an online-only platform.

For lenders and professional services firms, these should be very encouraging statistics. It means that Chapter 11 doesn’t have to mean the end of an era; if managed and financed properly, it can be the beginning of a new era for a retailer, characterized by a leaner store base and a more focused e-commerce strategy.

As mentioned, 10 of the retailers that filed Chapter 11 liquidated their entire store base and converted to e-commerce-only businesses. These 10 filings resulted in the closures of more than 3,300 retail doors. While this is a significant loss for the retail landscape, which many may blame on the Amazon Effect, it was actually the proliferation of e-commerce that allowed these brands to live to fight another day. While online sales are undoubtedly driving some retailers to shutter stores, the successful implementation of an online strategy, when embraced and properly implemented, can also be beneficial to both distressed and healthy retailers.


Part of the misconception can be blamed on simple name recognition. When a retailer with a long history, a high store count, and deep roots in Americana files for bankruptcy, people take notice.


The 18 retailers that downsized their store base accounted for nearly 11,000 doors prebankruptcy, 4,400 of which were Payless locations. On average, these chains closed about one-third of their locations as part of a bankruptcy restructuring plan. With the protections of bankruptcy in place, these retailers were often able to shed underperforming stores and leave a leaner base of core high performers. This process can result in a more sustainable business better positioned for future success.

If retail sales continue to rise and bankruptcy filings are moderate and often result in some form of exit, why are there seemingly more and more reports of the industry’s demise? Part of the misconception can be blamed on simple name recognition. When a retailer with a long history, a high store count, and deep roots in Americana files for bankruptcy, people take notice. From Payless to Brookstone, RadioShack to Gymboree, people want to hear about retailers with whom they are familiar.

Yet, of the 10 largest public bankruptcies in 2017, only one was by a retailer. While oil and gas drillers and investment firms filed for bankruptcy with prepetition asset values that were double or triple that of Toys R Us, it was the toy retailer people grew up visiting that grabbed all the headlines. Ask an investor, bank, turnaround professional, or liquidator—the fact that the public cares about retail can be a major asset for a troubled retailer.

Slimming Down

A few recent success stories help frame what businesses and professionals are doing right when it comes to restructuring difficult retail situations. These are cases in which a major retailer files for Chapter 11, downsizes the store base, and continues to operate the business in a new form.

For example, A’GACI LLC, a young women’s lifestyle brand and fast fashion retailer, filed for Chapter 11 bankruptcy protection in early January 2018. The company, like many others, cited overexpansion and the growing prominence of e-commerce as the reasons for the filing. The company, established in 1971, found itself with an inflated store base of 76 locations, 21 of which had been added in the prior two years.

Under the protections of bankruptcy and with professional assistance, A’GACI ran successful store closing sales at about one-third of its locations. With key ownership and management in place and the support of a retail-focused lender, A’GACI exited bankruptcy as a revitalized 55-store chain, poised for success.

Similarly, National Stores Inc., which operated the Fallas, Factory 2-U, and other discount apparel and housewares store banners, filed for Chapter 11 bankruptcy in August 2018, blaming a negative environment for retailers, acquisition and expansion costs, storm-related losses, and a data breach. During a bankruptcy-mandated auction, the ownership group was able to secure funding to close a transaction for the purchase of 85 stores from the original National Stores chain. The purchase formed a new Fallas Stores and preserved more than 2,500 jobs in the many communities the company serves across seven states and Puerto Rico.

These two examples, and several others in recent years, serve as evidence that the Retail Apocalypse may be more fiction that fact. Retailers that can adapt and effectively restructure can continue on long after Chapter 11.

Michael Sullivan

Michael Sullivan

Second Avenue Capital Partners

Michael Sullivan is a managing director of Second Avenue Capital Partners, responsible for new business originations. He previously was a managing director at Gordon Brothers Group, where he was responsible for business development in the Northeast region for the firm’s Valuation & Advisory Services Division and before that held leadership roles in two other major U.S. valuation firms. Sullivan holds a bachelor’s degree in finance from the University of Maryland, Robert H. Smith School of Business.

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