Retail Bankruptcies in 2017: Toys ‘R’ Us, rue21, and Others Sought Chapter 11 Protection as Online Shopping Surged

2017 Retail Bankruptcies
iStock/Kenishirotie

It’s been an abysmal year for traditional retailers. In fact, there have been more retail bankruptcies in 2017 than in any other year. In the first half of the year, more than 300 retailers filed for bankruptcy–a 31% increase over the first half of 2016.

With only one month left in 2017, U.S. retailers have already closed more than 6,700 stores; that’s 235% more than in 2016. Not only have major retailers shuttered thousands of stores, they have also laid off tens of thousands of employees.

Sales at traditional brick and mortar retailers continue to decline in the face of increased competition from online retailers like Amazon.com, Inc. (NASDAQ:AMZN). The so-called “Amazon Effect” has resulted in shoppers shifting their allegiance from brick-and-mortar stores to online options like never before. This has resulted in an eye-watering number of traditional retailers, including Toys ‘R’ Us Inc and rue21, Inc. filing for Chapter 11 bankruptcy in 2017. Just look at the list below.

Toys ‘R’ Us Bankruptcy: Toy Retailer Files for Chapter 11 Protection

September kicked off with the biggest toy retail store bankruptcy. Toys ‘R’ Us, the one-time mecca for kids, filed for Chapter 11 bankruptcy protection as the company faced fierce competition from Wal-Mart Stores Inc (NYSE:WMT) and Amazon.

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Brands like Toys ‘R’ Us have helped coin a new term in the age of the retail apocalypse: “Chapter 22,” for companies that have filed for bankruptcy protection twice.

In an effort to remain relevant, Toys ‘R’ Us amassed $5.0 billion in debt. It hasn’t helped. The fact it has $2.2 billion in debt maturing next year doesn’t help either. The private retailer was able to come up with $3.0 billion in bankruptcy financing, which it plans to use to restructure the company, update stores, and pay down some debt.

The company will keep its 1,600 Toys ‘R’ Us and Babies ‘R’ Us stores open during the restructuring, though the underperforming locations will inevitably be closed.

The big question, of course, is “how will Toys ‘R’ Us do during the lucrative holiday season?”

rue21 Bankruptcy: Clothing Retailer Exits Chapter 11, Closes 420 Stores

One-time teen clothing sensation rue21 filed for Chapter 11 bankruptcy protection in May. The move was done to strengthen the company’s balance sheet, achieve a more efficient cost structure, and “better align the size of its footprint with market realities.”

This, of course, means store closures. The company closed 420 underperforming stores or 35% of its 1,179-location fleet. The company warned that it would continue to evaluate additional store closures.

The retail chain listed its assets and liabilities in the range of $1.0 billion and $10.0 billion. The company also secured $125.0 million in financing and up to $50.0 million in new money. The company used the influx of cash to support day-to-day operations.

Fast-forward four months and rue21 emerged from bankruptcy.  The company closed about 420 stores and currently operates around 760 stores in 45 states, mostly located in malls and outlet or strip malls.

“rue21 can now move forward from a position of renewed strength, with a highly relevant brand, an enthusiastic and loyal customer base, hundreds of high performing stores, and a rapidly growing eCommerce business supported by strong vendor relationships and terms that are trending well above plan,” said Melanie Cox, chief executive officer of rue21.

Time will tell.

Gander Mountain Bankruptcy: Camping World Holding Acquires Outdoor Specialty Retailer

Successfully emerging from Chapter 11 bankruptcy is actually pretty rare in the current U.S. retail environment. In March, Gander Mountain Co filed for voluntary Chapter 11 bankruptcy protection.

Before it filed for bankruptcy, though, rumors were swirling that the nation’s largest outdoor retail chain was in trouble. As a privately held company, Gander Mountain does not generally comment on its business affairs, but in light of the rumors, the company made an exception.

“Like most retailers, we are subject to normal economic cycles, changes in our industry and shifts in consumer demand that require us to adapt our business accordingly,” the company noted in February. “Gander Mountain and its ownership group have undertaken a best-practices approach to review our strategic options specific to positioning the company for long-term success.”

One month later, it officially filed for bankruptcy. At the time, the St. Paul, Minnesota-based company said it was looking for a potential buyer. However, no one came forward, so the company decided to restructure, initially closing 32 underperforming stores or 20% of its 160 locations. That move led to more than 1,280 full- and part-time employees being laid off.

In May, Gander Mountain and Overton’s, its boating business, were acquired by Camping World Holdings out of bankruptcy auction for around $390.0 million. The company liquidated all 162 locations, though the new CEO said around 70 stores will remain open.

RadioShack Bankruptcy: Electronics Retailer Files for Chapter 11 Again

RadioShack Corp is another good example of a company filing for Chapter 22. In March, the electronics retailer filed for its second bankruptcy in two years. The company said it was going to close 200 of its 1,500 locations as soon as possible and consider what it will do with the rest.

The company first pulled the plug and filed for bankruptcy in March 2015, closing about 2,400 of its then approximately 4,000 stores.

The second filing came after RadioShack tried to reinvigorate its business by co-branding with Sprint Corp (NYSE:S) in an effort to compete with larger rivals. The newly christened co-branded stores had mini Sprint stores inside. RadioShack also cut its operating expenses by about a quarter. But it wasn’t enough.

General Wireless Inc, an affiliate of Standard General LP, the hedge fund that acquired the RadioShack brand in 2015, filed for a Chapter 11 reorganization in March, listing assets and liabilities in the range of $100 million to $500.0 million.

Sprint reached an agreement with RadioShack to convert several-hundred stores into Sprint-owned businesses.

At one time, RadioShack had more than 5,000 stores across the U.S., claiming 90% of the population was within five miles of a store. But that wasn’t enough though to stave off competition from online retailers like Amazon.

hhgregg Bankruptcy: Home Appliance Retailer to Shutter All Stores

If it could happen to RadioShack, it can happen to any electronics retailer. hhgregg, Inc. (OTC:HGGGQ) filed for chapter 11 bankruptcy in early March, just days after announcing the closing of nearly 90 stores

The Indianapolis-based electronics and appliance retailer signed an agreement with an anonymous buyer to purchase its assets. Selling it assets will allow hhgregg to exit chapter 11 “debt free with significant improvement in liquidity for the future stability of the business.”

Robert J. Riesbeck, hhgregg’s President and CEO commented, “We have conducted an extensive review of alternatives and believe pursuing a restructuring through Chapter 11 is the best path forward to ensure hhgregg’s long-term success.”

The company expected the Chapter 11 process to be quick and smooth and to emerge in approximately 60 days. However, it took a little longer. In October, it was announced that hhgregg emerged from bankruptcy, but will live on as an online-only brand. Unfortunately, the online consumer electronics market is pretty crowded, with Amazon, Walmart, and Best Buy Co Inc (NYSE:BBY).

Other Major Retail Bankruptcies in 2017

Dozens of major retailers have filed for bankruptcy in 2017. So far, 35 retailers have filed for bankruptcy protection, some have emerged – most have not.

Below are some of the U.S. retailers that have filed for bankruptcy protection in 2017.

  1. L Brands Inc (NYSE:LB)
  2. Wet Seal Inc
  3. Eastern Outfitters, LLC
  4. BCBG Max Azria Group Inc
  5. Vanity Shop of Grand Forks, Inc.
  6. hhgregg
  7. RadioShack
  8. Gordmans Stores, Inc.
  9. Gander Mountain
  10. Payless ShoeSource
  11. rue21
  12. The Gymboree Corp
  13. CornerStone Apparel, Inc., owner of Papaya Clothing
  14. True Religion Apparel, Inc
  15. Alfred Angelo, Inc.
  16. Perfumania Holdings Inc
  17. Vitamin World, Inc.
  18. Aerosoles Group
  19. Toys ‘R’ Us

What will happen in 2018? Unfortunately, there is no reason to think the retail apocalypse will lose momentum next year. Consumer spending accounts for more than 70% of U.S. gross domestic product.

The U.S. economy is chugging along, but wages are flat and inflation is rising. So too is household debt. It’s going to be difficult for the average American to keep U.S. retailers afloat indefinitely.

The retail crisis doesn’t just hurt the employees who lose their jobs; it also hurts the communities they work in, especially smaller and poorer areas. They rely on revenue and employment from these large retail stores to bolster their communities. If major retailers continue to file for bankruptcy or permanently shutter their doors, smaller towns will have greater difficulty providing services and balancing their budgets. This could snowball into another issue which is commonplace across the U.S.: municipal bankruptcies.

 

Sources

Toys “R” Us, Inc., Commences Court-Supervised Processes To Implement Financial Restructuring,” Toys ‘R’ Us Inc, September 19, 2017.

Toys ‘R’ Us, Once a Category Killer, Is Forced Into Bankruptcy,” The Wall Street Journal, September 19, 2017.

rue21 to Reduce Debt and Focus on Best Performing Stores Through Chapter 11 Reorganization With Creditor Support and New Capital,” rue21, Inc., May 15, 2017.

rue21 Announces Confirmation Of Plan Of Reorganization,” rue21, Inc., September 11, 2017.

Gander Mountain responds to reports of potential bankruptcy,” KWCH12, February 14, 2017.

Camping World wins Gander Mountain bankruptcy auction,” Chicago Tribune, May 1, 2017.

RadioShack files for bankruptcy, again, placing future in doubt,” CNN, March 9, 2017.

RadioShack declares bankruptcy,” CNN, February 5, 2015.

hhgregg Files for Chapter 11 Reorganization,” hhgregg, Inc., March 6, 2017.

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