Among the casualties thus far: Gymboree, rue21, Payless ShoeSource, Gordman’s Stores, Gander Mountain, RadioShack, HHGregg, Wet Seal, and The Limited. That’s not counting the numerous small businesses that have filed for Chapter 11 bankruptcy protection.
Not all of these stores will go out of business, of course. Many of them will attempt to restructure their debts so they can go on operating. But part of that restructuring will inevitably result in store closings. How many store closings, it’s hard to know, but the groundwork is being laid for a record number of them.
In June of 2017, Fitch Ratings published its Loans of Concern list—that is, a list of retailers they consider to be at risk of default within the next 12 months. Included in this list are Sears, Claire’s Stores, Nine West Holdings, 99 Cent Stores LLC, J. Crew Group, True Religion Apparel, private mall chain Charlotte Russe, Charming Charlie LLC, NYDJ Apparels LLC, and Vince LLC.
Other retailers have experienced investment downgrades. S&P Global downgraded Neiman Marcus to CCC+ from B-, with the comment that its “capital structure is unsustainable over the long term. Trends such as weak mall traffic, a highly promotional retail apparel environment, and cautious consumer spending continue to weigh heavily on Nieman Marcus.” Other companies that received downgrades from S&P include Macy’s and Charlotte Russe.
Although some of the decline in retail sales can be attributed to online shopping, and Amazon in particular—Slice Intelligence reports that 43 cents of every online dollar is spent on Amazon—some experts argue that many of these problems can be placed at the feet of private equity.
More than half of the bankruptcy filings this year have come from retailers that were previously purchased by private equity firms. Typically these purchases come in the form of leveraged buyouts, in which a PE firm uses a combination of equity and debt to purchase a company, which puts that company in great debt.
“The [retailers] that aren’t surviving in a tough REIT apparel environment are the ones that were highly levered and had the imprint of private equity on it,” said Evan David Simon, CEO of mall operator Simon Property Group during an earnings call.
Many PE firms seek out undervalued retailers and look for costs to remove. That could include store rent, payroll, and debts to suppliers. As part of that process, says Deb Rieger-Paganis, a managing director in the turnaround and restructuring process at AlixPartners, they often fail to invest enough money in critical areas like the brand’s stores or digital operations.
“Because of the pressure to generate returns, they constructively do something that effectively burdens a company with so much debt, it can’t sustain that debt,” said former bankruptcy litigator Ron Sussman. “When it tanks, it’s only the PE guys and gals who make it out.”
The rise in interest rates is making it tougher for these retail stores to refinance their debts. Combine that with the struggle to bring in cash, and that paves the way for bankruptcy and restructuring.
Another part of the problem is that a change to the bankruptcy code in 2005 decreased the amount of time retailers have to get approval for sale or reorganization.
Prior to 2005, retailers were able to spend at least a year in bankruptcy. Now they only have 210 days to decide whether to keep a store’s lease. Add to that the fact that going-out-of-business sales can take up to 90 days, these stores often have just four months to make that decision.
It’s clearly not one factor alone that has caused this stunning rise in retail bankruptcies, but more of a perfect storm of PE loans coming due, bankruptcy law changes, and weakening markets in brick-and-mortar stores.