17% Of Chain Retailers & Restaurants Are Financially Distressed
Some 17% retailers covered by S&P Global remain financially vulnerable, according to a report this week from the ratings agency. Big boxes and chain restaurants make up the most significant portion of the distressed companies. Together, the 17% account for $7.4 billion in debt.
A number of retailer with negative outlooks is below the historical average, according to S&P.
The year got off to a brutal start for the financially weak players in the industry. Already 10 large retailers have filed for Chapter 11 in 2019, just three less than in all of 2018. The list includes Gymboree and Payless, both of which made their second trip in as many years and ended up liquidating their store base this time around after attempts to reorganize in 2017.
By March, 12 retailers had between a 4% and 50% chance of filing for bankruptcy in the next 12 months, according to data from CreditRiskMonitor. They included Neiman Marcus, J. Crew, Francesca’s, J.C. Penney, Pier 1, Ascena Retail Group, Destination Maternity, Stein Mart and Camping World Holdings, among others.
Since 2017, a record-breaking year for bankruptcies, the world has gotten no kinder to retailers with heavy debt loads (often leftover from private equity buyouts) and that play in sectors vulnerable to online encroachment.
In a recent report, Moody’s analysts suggested the current “shake out” of weaker retailers could result in a healthier industry overall. The analysts also predicted that larger, diverse retailers with cash to burn and healthy balance sheets will keep making life harder for the struggling. They do that by competing on price and making investments into e-commerce that are harder for indebted or financially poorer retailers to follow. Along with competition and debt, operational flubs and fashion misses have also plagued weaker retailers.
The Trump administration’s tariffs are not helping things, either. A recent UBS analysis found that increased taxes on Chinese imports could, in just a year’s time, put $40 billion in sales and 12,000 stores at risk for retailers. UBS analysts also found that in the first quarter of 2019, the industry’s store count fell 5.3% year over year, the highest rate in at least a decade.
Private equity’s role in the travails of bankrupt and distressed retailers is hard to overlook. Data compiled by Retail Dive show waves of private equity acquisitions — which are typically financed through leveraged buyouts — in the mid-2000s and mid-2010s. Of the 10 major retail bankruptcies in 2019, 80% were currently or previously owned by private equity firms. In all, more than 22% of private equity acquisitions going back to 2002 have filed for bankruptcy at some point, according to Retail Dive’s analysis.