More Retailers Filing for Chapter 11 Bankruptcy for their Second Time
We’re witnessing an alarming trend in the American retail industry. An increasing number of retailers are filing Chapter 11 bankruptcies for the second time, in what the industry is calling “Chapter 22” bankruptcies (as in 11 + 11).
At least four retail companies have been in this situation over the past year, including The Wet Seal, LLC, (which filed for its second bankruptcy in two years), RadioShack Corporation, (which also filed for its second bankruptcy in two years), American Apparel Inc (which filed for its second bankruptcy in 13 months), and Eastern Outfitters (which filed for its second bankruptcy in less than a year).
Chapter 11 bankruptcy protections are often sought by heavily debt-laden companies in order to improve their balance sheets. The idea is to negotiate with creditors to shed some of the debt, in a restructuring effort. The fact that many retailers are ending up back in bankruptcy protection goes to show that their restructuring initiatives are failing.
This is largely due to the fact that most of these companies continue to rack up debt even after successfully emerging from their first restructuring process. Declining profits have also hurt their ability to pay off their mounting debt.
The bitter reality is that the American retail industry is seemingly evolving at a supersonic speed. Digital retail is fast encroaching upon traditional retail conducted in physical stores. Big retail companies, which have taken on massive debt—primarily to lease large store spaces in order to expand their footprints—are no longer finding it viable to keep operating these underperforming stores.
The expenses required to keep operating these stores far outpace their sales, and are putting downward pressure on the companies’ earnings. This is forcing many retailers to close stores, lay off workers, and—in some cases—file Chapter 11 bankruptcies, sometimes more than once.
The number of big names in retail that have closed stores or have gone bankrupt this year is unprecedented. What’s more alarming, however, is that many of these retailers may be forced into second bankruptcies or, worse, liquidation.
At least three big retailers are again feeling pressure after already having gone through one bankruptcy. Macy’s Inc, Eddie Bauer LLC, and Kmart Corporation (owned by Sears Holdings Corp) are all struggling with shrinking profit margins and heavy debt loads, after having emerged from bankruptcies earlier on, thus sparking fears of more “Chapter 22” bankruptcies in the months to come.
“Filing ‘Chapter 22’ Becomes Enticing Option for Ailing Retailers,” Bloomberg, September 18, 2017.