Retail Bankruptcies in 2018 Expected to Grow Due to “Amazon Effect”
It looks like U.S. retail bankruptcies in 2018 could be even worse than in 2017. That’s saying something. The U.S. retail industry took a huge hit in 2017, with many big names either reducing their store count or, in some cases, filing for bankruptcy.
Store closures are up 229% year-over-year in 2017, and brands such as Toys “R” Us Inc, The Gymboree Corp, Rue21, Inc, Payless ShoeSource Inc., and RadioShack filed for bankruptcy. Many of these brands have cited Amazon.com, Inc. (NASDAQ:AMZN) as a big reason for their decline in sales.
Retail company bankruptcies are expected to continue with a vengeance in 2018. The number of U.S. retailers at risk of defaulting on their debt or filing for bankruptcy has surpassed levels last seen during the Great Recession. On top of that, once-powerhouse retailers like “Sears” and “Kmart” owner Sears Holdings Corp (NASDAQ:SHLD), J. Crew Group Inc, and dozens of others have some of the lowest credit ratings out there.
This suggests that 2018 could be much worse for retailers than 2017 was. . .but not for all of them. Financial company Morgan Stanley (NYSE:MS) thinks that, in 2018, Amazon could become the first company to be worth $1.0 trillion, and its share price could reach $2,000.
Retailers with Lowest Credit Ratings
Retail is the largest private sector employer in the United States, accounting for roughly one out of every four jobs. Supporting tens of millions of jobs, the increasing number of retail bankruptcies in America hits at the heart of the U.S. economy.
2017 has been the worst year for retail store closures and retail bankruptcies remain robust. Thanks to fierce competition from online retailers like Amazon and Wal-Mart Stores Inc (NYSE:WMT) and low cash levels, 2018 could be an even worse year for store closures and bankruptcies.
According to Moody’s Corporation (NYSE:MCO), brands like Sears, J. Crew, Claire’s Stores Inc., and almost two dozen other retailers have some of the lowest credit ratings.
Distressed lists are a barometer for how well a company is doing and should be seen as a warning sign for consumers and investors. For instance, in February, five of the retailers on Moody’s distressed list filed for bankruptcy protection in 2017: Charming Charlie LLC, Gymboree, Payless, Rue21, and True Religion Apparel Inc.
Again, 2018 is shaping up to be a worse year for retail bankruptcies than since before the recession. In 2008, 16% of the retail companies tracked by Moody’s were distressed. In December 2017, that number stood at a whopping 26.
Distressed retailers that Moody’s rated at Caa or below and consumers need to keep an eye on in 2018 are:
- 99 Cents Only Stores LLC
- BI-LO Holding Finance LLC (parent of BI-LO and Winn Dixie)
- The Fresh Market Inc
- GNC Holdings Inc (NYSE:GNC)
- Guitar Center Inc.
- SHO Holdings I Corporation (textiles, apparel, and luxury goods)
- Tops Holding II Corporation
- Fairway Group Holdings Corp.
- Neiman Marcus Group Inc
- Bon-Ton Stores Inc (OTC:BONT)
- Sears Holdings Corp
- Claire’s Stores Inc.
- Charlotte Russe, Inc.
- FullBeauty Brands Holdings Corp.
- Evergreen ACqCo 1 LP (parent of Savers thrift stores)
- Vince, LLC
- Indra Holdings Corp. (parent of Totes Isotoner)
- Bluestem Group Inc (OTC:BGRP) (parent of Fingerhut, Appleseed’s)
- Nine West Holdings, Inc.
- Calceus Acquisition Inc (parent of Cole Haan footwear)
- Payless ShoeSource Inc.
- David’s Bridal Inc
- Everest Holdings LLC (manages Eddie Bauer brands)
- J. Crew Group, Inc.
- TOMS Shoes, LLC
Sears Holdings & Bon-Ton: Major Retailers Expected to File Bankruptcy in 2018
Sears Holdings Corp and Bon-Ton Stores Inc (NASDAQ:BONT) are two major retailers analysts expect to file for bankruptcy in 2018.
Wall Street analysts have been predicting the demise of Sears Holdings for years now, but 2018 might be the year the walls come down. Sears Holdings announced close to 400 Sears and Kmart store closures in 2017, and in November, it said it will permanently close 63 more underperforming Kmart and Sears locations in January 2018.
The company is looking for ways to stop the bleeding. Sales have tumbled 45% since 2013, its debt load has soared to over $4.0 billion, and it’s losing over $1.0 billion annually. In its most recent quarter, same store sales at Sears tumbled 17% and fell 13% at Kmart.
To stay afloat, Sears’ CEO has been lending the company money. It has also been selling off brands, including “Craftsman” (to Stanley Black & Decker, Inc. [NYSE:SWK]). It also joined the bandwagon and began selling on Amazon (“DieHard” and “Kenmore” branded products).
Sears Holdings is expected to announce even more store closures in 2018. But will it be enough?
Bon-Ton is another major retailer that could file for bankruptcy in 2018. The company has $572.0 million in debt due next December and is saddled with total debt of $850.0 million. Its debt has been rated at distressed levels for ages and Standard & Poor’s lists it as one of the retailers most at risk of bankruptcy.
For the third quarter, ended October 28, 2017, the company announced that third-quarter revenue fell 7.6% year-over-year to $545.3 million, with comparable store sales down 6.6%. It blamed the poor results on unseasonably warm weather and a drop in mall traffic.
The retailer’s net loss increased 42% year-over-year to $44.9 million, or $2.19 per share, from a loss of $31.6 million, or $1.58 per share, in the same prior-year period. It lost more than $26.0 million from operations and had interest expenses of $18.9 million.
Regardless of how well its holiday sales go, there are concerns Bon-Ton will need to restructure its debt (file for bankruptcy) over the next 12 months.
A Look Back at the Retailers That Filed Bankruptcy in 2017
When it comes to store closures and bankruptcies, 2017 will go down in history (for now) as one of the worst years on record. In addition to dozens of bankruptcies, major retailers have shuttered thousands of stores and laid off tens of thousands of employees.
Toys “R” Us filed for bankruptcy in September, blaming increased competition from the likes of Wal-Mart and Amazon. Teen clothing brand Rue21 filed for Chapter 11 bankruptcy in May and in March, Gander Mountain Co. filed for bankruptcy
In March, RadioShack filed for Chapter 11 bankruptcy for the second time in two years, saying it would close 200 of its 1,500 locations. Earlier in the month, hhgregg, Inc. (OTC:HGGGQ) filed for Chapter 11 bankruptcy, just days after announcing it closed nearly 90 stores.
Dozens of other U.S. retailers declared bankruptcy in 2017. Some of the bigger names include:
- L Brands Inc (NYSE:LB)
- BCBG Max Azria Group Inc
- Vanity Shop of Grand Forks, Inc.
- Gordmans Stores, Inc. (NASDAQ:GMAN)
- CornerStone Apparel, Inc., (owner of Papaya Clothing)
- Alfred Angelo, Inc.
- Perfumania Holdings Inc
- Vitamin World, Inc.
- Aerosoles Group
What will happen in 2018? The U.S. economy seems to be getting stronger, but wage growth isn’t happening and U.S. household debt is at record levels. Retailers may be closing stores and declaring bankruptcy because of the “Amazon effect”, but sales are also down because Americans simply don’t have as much discretionary income to spend as they once did. It’s more important to pay for utilities, rent, and mortgage than a new pair of shoes. That’s bad news for a country that gets 70% of its gross domestic product from consumer spending.
“Weekly Store Openings and Closures Tracker #37: Charming Charlie to Close 100 Stores; Dollar General to Open 900 Stores,” Fung Global Retail & Technology, last accessed December 21, 2017.
“Morgan Stanley: Amazon could be a $1 trillion company within a year,” CNBC, November 13, 2017.
“26 retailers that could go bankrupt in 2018,” KSDK, December 20, 2017.
“Sears is teetering on the edge of bankruptcy and Kmart could be its first casualty,” Business Insider, December 16, 2017.
“Risk Insight: 2017 Retail Bankruptcies Set Record Pace – Which Companies Are Most At Risk?” S&P Global Market Intelligence, April 20, 2017.
“The Bon-Ton Stores, Inc. Reports Third Quarter Fiscal 2017 Results,” Bon-Ton Stores Inc, November 16, 2017.