The retail sector is about to see an avalanche of bankruptcy filings once the uncertainty associated with coronavirus clears. J. Crew is just the beginning.
This weekend, J. Crew became the first publicly traded retailer to fall victim to the novel coronavirus pandemic. The U.S. apparel-maker filed for Chapter 11 bankruptcy protection as its debt pile began to eclipse its operations amid Covid-19 shutdowns. The news underscored the severity of coronavirus’ economic impact on U.S. businesses, particularly in the already struggling retail sector.
Retail has been on a downward trajectory ever since Amazon (NASDAQ:AMZN) came on the scene and e-commerce unexpectedly upended the industry. But in an era of cheap debt, many retailers have managed to keep the lights on by borrowing rather than adapting.
But now the moment of reckoning is here as social distancing, an economic downturn, and nervous consumers all threaten to topple hundreds of U.S. stores.
Manny Chirico, the CEO of PVH Corp believes that the flimsy financials will limit retailers’ ability to cope with this sudden drop in traffic. He sees 20%-25% of the nation’s retailers going bankrupt over the next 2 years.
It seems J. Crew is just the first of many.
It’s impossible to predict with certainty which retailers will eventually file for Chapter 11, but there are a handful of major stores that don’t look capable of making it through the end of the year. Department stores are high on the list for potential defaults since they were already struggling with decreased foot traffic before the pandemic shut down their operations completely.
JC Penney (NYSE:JCP) could become the first department store to file for bankruptcy. Reports that the firm was considering Chapter 11 surfaced earlier this month when it missed an April 15 interest payment. Now the firm is halfway through a 30-day grace period during which it will either sink or swim.
JC Penney was struggling before the pandemic, so it’s no surprise that it may not make it through. Gap Inc. (NYSE:GPS) is in a similar situation that could also end in bankruptcy. In 2019, before anyone had heard of coronavirus and the American consumer was still strong, Gap closed 230 locations— something BDO Advisory Partners’ David Berliner says typically precedes a bankruptcy filing.
Since we began our biannual bankruptcy tracking, we have found that retailers closing stores are often a precursor for an eventual bankruptcy filing
The firm was downgraded by both Moody’s and S&P Global in recent days, and you can assume that GPS stock is circling the drain.
Inventory issues are another major problem facing U.S. retailers who’ve been unable to move their Spring and Summer merchandise. Not only will they find themselves constrained by storage space for the old goods, but they will also lack sufficient funds to stock up on new-season winter items.
That’s going to be especially painful for retailers like J. Jill (NYSE:JILL) and Stein Mart (NASDAQ:SMRT) that sell primarily in brick-and-mortar locations and don’t have the cash to cope with that kind of inventory constraint.
While J. Crew is likely one of many retailers to file for bankruptcy, some analysts say it could take time for the rest of the sector to follow suit. The outlook for shoppers is still highly uncertain without a coronavirus vaccine.
Filing for bankruptcy now doesn’t make sense according to Michael Sirota of Cole Schotz.
Filing for bankruptcy doesn’t create a sudden cure for the virus, it doesn’t create a cure to open stores — so why incur the expenses of Chapter 11 when you’re not going be able to do anything while business is closed?
Creditors like landlords and debt-holders can force a company into bankruptcy, but in the current environment that would prove fruitless. There’s no way to liquidate with everything shut down. Plus, landlords may be hesitant to kick their retail tenants out because they don’t have anyone else to occupy the space and pay rent.
That doesn’t mean bankruptcies will be avoided. Instead, they might be delayed. Once the economy starts to reopen, we could see a host of bankruptcies as retailers work to restructure their businesses and creditors seek to collect on failing businesses.