I am aghast that 11 retailers are listed as possible candidates for bankruptcy proceedings in coming months. Sure, we all know that high debt is an enemy of retailing, since it limits a retailer’s ability to merchandise its wares and to fight for more business. Most of the debt can usually be managed, but companies with high debt are now under the magnifying glass of bankers, analysts, and investors.
There are several reasons for this intense scrutiny. It is likely to be a promotional holiday season. While most retailers have worked with their vendors to obtain merchandise that is of unusually high value at low prices, many shoppers are cautious these days. Sure, everybody will receive a gift for the holiday, but it will be smaller since shoppers are unsure of their own future.
Just as customers feel the economic pinch, the cost of doing business has risen as well. It will likely rise some more as the Federal Reserve tries to stem inflation and minimum wages are raised (as we recently saw happen in California). Marginal retailers, with high debt, will be forced to close some of their stores, reduce shopping hours, and/or reduce selling space in some of their major units to reduce operating costs. No doubt, they will do whatever they can to survive the difficult environment that they may be facing.
11 retailers were listed by Retail Dive as being vulnerable. They reminded us that David’s Bridal, Bed Bath & Beyond, and Party City have already been forced to file for court protection by declaring their need for legal support. The Credit Risk Monitor lists these 11 additional companies at elevated risk of bankruptcy. Here they are:
1. Farfetch – Luxury Apparel Long-term debt: $917 million
2. Joann – Craft Long-term debt: $976 million
3. Qurate Retail – Video Commerce Long-term debt: $5,268 million
4. Rent the Runway – Apparel Long-term debt: $735 million
5. Rite Aid – Drugstore Long-term debt $3,100 million
6. A.K.A. Brands – Apparel Long-term debt: 47 million
7. Big Lots – Home Long-term debt: $493 million
8. The Container Store Long-term debt: $163 million
9. Kirkland’s – Home Long-term debt: $46 million
10.Petco – Pet Retailer Long-term debt $1,628 million
11.Vince – Apparel manufacturer Long-term debt: $67 million
This list reflects a variety of business types. There is no question that, during the pandemic, lifestyles changed and shifted shopping behavior. Homebound routines reduced demand for such things as traditional work clothes while home stores’ merchandise was sought after. Many consumers wanted to spruce up their homes. Then came the need to be outdoors and home improvement was no longer a first priority. Those shifts, along with the lingering economic pressures both customers and retailers continue to feel, have left many brands facing threats for their survival.
Some companies will bank on name recognition as they try e-commerce to connect with customers. E-commerce has certain requirements, such as free shipping and returns in order to stay competitive, and such new operating costs must be factored into budgets. But, companies like Bed Bath & Beyond have brands that the customer trusts and that will support a shift to buy on the internet. Similarly, if Container Store really closes a few doors, people who want to organize their lives, or at least their home, will find many products on-line by the Container store.
In contrast, another well-known brand -Rite Aid – faces tougher problems. It has suffered because demographics have shifted and some locations may have suffered. Of course, the strong demand covered this up during the pandemic. But since then, rising costs to operate stores that now see less traffic is proving costly. Rite Aid has $3.1 billion of long-term debt.
Vince’s bankruptcy possibility is not a surprise, despite the quality of its clothes and their design. The prominent space it enjoyed in department stores spoke of management’s admiration of the product and its design. However, as department stores downsize, refocus, and/or close units to maintain their own profitability, that space is no longer available. The company has at fiscal year-end $108 million in long-term debt.
Farfetch has the right name; the merchandise is very expensive and has very limited appeal. Sure, there is someone who wants a Marin logo-print brushed baseball cap for $530 or a Moncler Ain padded down jacket for $1750. But while there are customers for both items, they are few in number and hard to find.
Whether it is JC Penney, Toys “R” Us, J. Crew, Neiman Marcus, or Gap, the history is that each thrived under private ownership, expanded when they were in public hands, and then got into the race to expand too quickly. When Stanley Marcus ran the chain with his personal imprint, Dallas customers flocked the store. When Charles Lazarus created Toys “R” Us, customers appreciated a one-stop children’s store. Today, each of these brands is now operating with a new business model in order to adjust to a new marketplace.
POSTSCRIPT: Whether it is a store that changed strategies several times (for example, Rent the Runway) or changed its merchandise mix, the appeal to the loyal shoppers ends up changing and new customers have to be found. Sometimes, the attempt to build a new customer base is challenging and fails. On the other hand, I remember some department stores that failed because they did not change. Sometimes the chairman of the company wanted to cling to old customers – who were actually getting too old to make a difference.
Retailing is a dynamic marketplace. It must cater to the steady stream of new customers – young people – while it also must appeal to the older generation in some way as well. If you have too much debt, companies like Vince, Container Store, Kirkland and A.K.A. Brands too corrective action. We will see how the year ends for all of retail.
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