Wave of Bankruptcies Sweeps Through Retail
As the coronavirus sent millions home social distances and closed businesses in the US and beyond, the clock started ticking - and for some it was ticking much faster.
Retailers are just not designed to be idle.
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They are machines that only work when they are in motion and without money coming into the front door. The cost of inventory shipped already, paying off debts, renting costs, and the rest will overwhelm all but the toughest balance sheets.
For many retailers, a few quick steps - roadside pick-up programs that sprung up overnight, suddenly from in-store websites, vacation days, and wage cuts - were enough to stay afloat as long as they could convince their supporters that there was a place for them gave after the pandemic.
But companies in crisis and already weakened by bad business decisions or debt - mostly the result of adventurous acquisitions or private equity buyouts - simply had no convincing lenders to make it to the other side.
All retailers who had bankruptcy watchdogs prior to COVID-19 fell quickly and were supported by hordes of others who were on the list of companies at risk but were more likely to move ahead or hobble further.
The rush for bankruptcy included private equity-backed Neiman Marcus Group, J. Crew Group and John Varvatos, all of whom filed for Chapter 11 protection, as well as Ascena Retail Group, Tailored Brands Inc., Centric Brands and Le Tote (combined with their Lord & Taylor unit), all of whom never fully recovered from their dealings.
They included J.C. Penney Co. Inc., Brooks Brothers, Retailwinds, Stage Stores, Lucky Brand and True Religion and many more.
"We are in the middle of a retail forest fire," said Greg Portell, global director of Kearney's consumer practice, in August. "And forest fires are incredibly devastating, but they are necessary to create new growth."
This is the hope both for the entire industry, which at least in the US has been fighting for decades and overloading and overworking the retail scene, as well as for the individual chains that had to go through bankruptcy, but hopefully a lot less debt and a new life came out .
However, bankruptcy is rarely easy, especially as it brings unsolved problems to light and before a judge.
There is a struggle before rebirth.
For Neiman Marcus, it was a bankruptcy showdown with creditors over a dispute that had lasted for years - whether it was appropriate for the company's backers to carve out the Mytheresa web business for themselves.
Creditors argued that Mytheresa's valuable asset had been moved from Neiman's debt structure to other affiliates to keep its value out of the reach of creditors. Neiman's one-time buyout sponsors, including Ares Management Corp., argued that moving Mytheresa was a business decision.
The dispute culminated in an agreement before the retailer's Chapter 11 plan was confirmed, but it also resulted in a dramatic series of side events. Dan Kamensky, who founded the now-closed Marble Ridge Hedge Fund, was arrested in September on charges of wrongly attempting to interfere in a transaction related to the settlement.
Trying to prevent Jefferies Financial Group Inc. from competing with his firm on a transaction that was involved in the retailer's restructuring, Kamensky said, “If you keep telling them what you just told me, it's me Go to jail, ok? Because they're going to say I abused my position as a trustee, which I probably did, right? Maybe I should go to jail. But I ask you not to put me in jail. "
But that's a footnote now.
Neiman's bankruptcy emerged from owners after five months in September, clearing more than $ 4 billion in debt.
The company's challenge will be to further optimize the branch base and the number of employees. Amid the pandemic, generate more pedestrian traffic in the surviving stores and convince shoppers it is safe to return to the stores. It must also sustain the online sales growth that is a large part of the investment, maintain high levels of service despite downsizing, and project a more modern image that attracts Gen Z and GenX. Neiman has announced seven store closings and may close more.
J. Crew also got out of bankruptcy after four months in September, greatly reduced its debt and brought in new property.
Beyond the balance sheet, a lot is the same in the company. It's still a story of two brands, J. Crew and Madewell.
J. Crew has to regain its cool factor and its special place in fashion - a niche between luxury and mainstream, a mix of moody, preppy, classic, colored, mixed patterns and prints and never too trendy. Before bankruptcy, there were frequent complaints about quality degradation. And store closings are likely to continue.
Madewell is more stable than its sister division and continues to grow. It has a different downtown appeal, a clear fashion voice, and a loyal following. It's casual, easy going, and rooted in jeans.
J. Crew's new owners, Anchorage Capital Group, appointed Libby Wadle as Chief Executive Officer in November, overseeing J. Crew and J. Crew Factory and continuing to lead Madewell.
At Penney, bankruptcy was a more complicated process, with multiple belligerent factions and the specter of liquidation hanging over the case.
Penney's had to overcome objections from a faction of secured lenders and shareholders before finally closing a sale of its retail stores to landlords this month.
The going concern sale transaction involved the sale of JC Penney's retail business to Simon Property Group and Brookfield Asset Management Inc., as well as the real estate business to a group of majority first mortgageeurs who had also provided the retailer with property financing during the bankruptcy.
A minority of first mortgage lenders argued that the deal prioritized returns for the majority of lenders at the expense of other creditors. However, when the Texas bankruptcy court tried to get an outcome that would get the retailer as a business, admitting that the sale transaction was the only way to get it, the parties huddled together and worked out a settlement before the sale was approved in November.
Shareholders in the case continued to deny the deal, saying it would deter them from recovering, but the retailer argued that without a sale, the case would plunge into liquidation that would only end the deal and crater recoveries for sellers and other creditors .
For decades, Penney's has suffered from frequent leadership changes, a flawed reinvention strategy, grappling with product categories that didn't resonate well enough with buyers, and an inability to generate enough revenue from selling goods to support the business and get back into the company to invest. Now the company is led by Jill Soltau who has skillfully built a talented new team of managers with strong experience.
While the US is particularly congested, the market didn't have the bankruptcy trend to itself.
The UK carried the brunt of bankruptcy filings in Europe, with a wide variety of home furnishings disappearing due to the general decline in physical retailing and the long months of lockdown that saw already fragile businesses shut down and have to leave or lay off.
One of the headline-grabbing mistakes was the already ailing department store chain Debenhams, which couldn't find a buyer and collapsed just a few hours after the Arcadia Group went bankrupt at the end of November. Arcadia, the parent company of Topshop and Topman, was in the middle of a restructuring plan after signing a deal with its creditors last year.
The second national lockdown in England turned out to be too much for business and is now being sold piece by piece by Deloitte, which hopes to find a buyer for Topshop, Topman and the other companies by the end of the year.
Among other bankruptcies in the UK this year were Laura Ashley, Cath Kidston, Lulu Guinness and Oasis / Warehouse, all of which closed but quickly found buyers for their intellectual property and / or assets.
Mall operator Intu also collapsed earlier this year while DVF Fashion, Diane von Furstenberg's UK subsidiary, ceased operations and closed its store on Bruton Street in Mayfair, London.
With the introduction of vaccines and the stabilization of the world in 2021 - and hopefully a return to normal - retail, slowed down by the painful bankruptcy process, can move on and try to move forward again.
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