'A scary number' of retail companies are facing bankruptcy amid the coronavirus pandemic
GNC has walked through the door of death after knocking on it for years. And more are likely to follow this year as the COVID-19 pandemic continues to destroy the American retail sector.
The 85-year-old vitamin seller filed for bankruptcy on Wednesday after years of struggling sales and a debt burden of more than $ 1 billion. GNC plans to close up to 1,200 stores in the United States. The company operates more than 5,800 stores.
Meanwhile, debt-laden mall resident J.C. Penney on Tuesday said he would close another 13 stores as part of his recent bankruptcy filing. The company informed the courts in May that it would close a total of 250 stores and shade fewer than 600 locations by the end of summer 2021.
Of course, 2020 will be one of the deadliest times for the former icons of the mall and various malls. The pandemic has closed stores for months and shaken sales for the sector. With consumers reluctant to return to stores after months of quarantine, retailers are faced with the reality that they need less business ... or shouldn't be in business at all.
"Some companies just won't survive," says McGrail, COO of one of the world's largest asset sales and valuation companies, the Tiger Capital Group. The McGrail team, which often includes business partners from an affected retailer, hangs up the signs that say "Everything must go" and works to get the best dollar for equipment and other inventory.
McGrail refuses to say which retailers called him to value assets, except that the names would not be a big shock.
This is the current life of McGrail and others in the areas of bankruptcy and retail restructuring. When talking to a large number of experts, one thing is absolutely clear: a storm of retail bankruptcies will rain thanks to the aftermath of the Corona virus on Wall Street.
Once impressive retailers like Neiman Marcus (filed for bankruptcy in May) either completely disappear or emerge from the bankruptcy with 75% smaller branch networks. Those retailers who somehow manage to avoid bankruptcy through a creative debt increase or other restructuring will find the way ahead of them bumpy at best.
"This is a scar number"
While the bankruptcy of GNC is a headline builder, for a number of reasons we haven't seen a sharp rise in bankruptcies, experts explain.
First, the preparation of a structured bankruptcy application usually takes two to three weeks. The retailers were only pushed into the mass-market closings driven by social distancing from mid to late March. Most hoped that they would open stores again in April, which put an end to bankruptcy planning. Second, even the worst-positioned well-known retailers still had enough cash to move around in April and May (especially for workers on leave) - so executives could consider all options except bankruptcy that made headlines.
Finally, one of the advantages of a retailer's bankruptcy filing is to raise money for creditors by holding sales to close the deal. This could not happen if the store was closed by the state.
Now all bets are closed this summer as the states allow shopping centers and retailers to reopen.
"I think many of these companies will [file for bankruptcy] and it is not a handful. There are several dozen. And that is a scary number. It is far more than we have seen together in recent years," says Stifel CEO Michael Kollender, who heads the consumer and retail investment group for the company, and Kollender and his colleague James Doak from Miller Buckfire (Stifel's restructuring department, where Doak is a co-director) have suffered from dozens of consumer and bankruptcies in recent years Retailers worked, including Aeropostale, Gymboree and Things Remembered.
"We'll see that some big chains disappear and don't come back. These are chains that struggled before the situation. COVID-19 will take them over the ledge, ”adds Kollender. Doak expects retailers to do numerous creative deals to stay afloat - for example, a mall owner takes a stake in an anchor tenant.
There is a precedent here as a consortium of mall owners, Simon Property Group and General Growth Partners, won the auction for Aeropostale's assets in 2016. Both had an interest in keeping Aeropostale open as it was an important traffic driver (and rentable tenant for years.
For Doak, the creativity of retail managers who are looking for a lifeline is emerging.
Rumor has it that the aforementioned bankrupt J.C. Penney is considering a sale to Sycamore Partners, a private equity firm that has long been buying distressed retailers. According to reports, J.C. Penney also sparked the interest of a consortium of landlords, Simon Property Group and Brookfield.
Macy essentially burdened his future with a $ 4.5 billion debt increase to survive the year.
It has just started
Most Yahoo Finance experts expect some chaos when retailers reopen their stores this summer. It is already unfolding the way it looks.
My J.C. Penney has just reopened after being closed for # COVID19 since March, and it feels like he's frozen all over with coats and brown boats.
85 degrees out. pic.twitter.com/xB6JmFY183
- Brian Sozzi (@BrianSozzi), June 20, 2020
Thousands of stores across the country are currently in their closed or reopened stores on poorly aged inventory (see photo above). The dust-collecting material has to be sold at fire retail prices - the problem is that everyone in retail will do exactly the same this summer, so retailers can get a terrible return on this inventory investment.
Investors should expect significant inventory depreciation in the second quarter and consequently, and chains may not be able to borrow as much from their asset base as possible. This is a terrible situation to be ahead of the period of high working capital, known as the Christmas business season.
"I don't think JC Penney has a long-term future. I'm not so sure if Macy's has a long-term future. I think the residents of these B and C malls - the specialty shops where the increasingly vacant are Gathering halls - may not have a future, and we're seeing an enormous number of closings announced and even successful chains like Zara, ”said former Sears Canada CEO Mark Cohen, professor at Columbia Business School, at Yahoo Finance's The First Trade. "I think the break will be exceptional and we are seeing the first signs of it."
In the meantime, the liquidations of stores and their rock-bottom prices for goods will put pressure on the efforts of stronger chains to get their businesses going. That will make relatively strong retailers far less strong. For retailers wishing to emerge from bankruptcy, it's likely that vendors are lukewarm about shipping their products while tightening payment terms. This double strike usually kills a wounded retailer forever.
Then there is the general uncertainty about how people will see the new normality of social distancing, how they will return to the mall. This fog of war is expected to continue well beyond the coming holiday seasons.
"We are in a retail tsunami," says Kollender.
Tsunamis are destructive. And this is how the corona virus will be for the country's retailers.
Brian Sozzi is the editor-in-chief and co-moderator of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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