J.Crew and Neiman Marcus: The tidal wave of retail bankruptcies begins.
The brick-and-mortar retail industry was already in poor health before the Coronavirus paralyzed the global economy, but the virus has exacerbated the sector’s sickness. In the age of digital commerce, too many iconic retailers failed to adapt to changing market conditions, making bankruptcy an almost certainty. It took a highly infectious respiratory illness for J.Crew and Neiman Marcus to finally concede defeat and declare bankruptcy. With a lot of comparable overpriced department stores hemorrhaging red ink, which is next to file for Chapter 11?
J.Crew Group recently confirmed that it has filed for bankruptcy protection in a Virginia federal court. According to the retailer, it will access $400 million in debtor-in-possession financing from lenders to restructure the company. Under the provisions of the agreement, $1.65 billion in corporate debt will be eliminated in exchange for relinquishing ownership to lenders. Approximately $2 billion of its total debt will be canceled and substituted for about 82% of equity in the retailer.
The maker of preppy clothing will attempt to strengthen the brand by investing in its e-commerce platform. Anchorage Capital Group, Blackstone Group Inc’s GSO Capital Partners, and Davidson Kempner Capital Management, which now own most of J.Crew’s debt holdings and are in line to control the firm, believe this strategy “will position the company for future success.”
In recent years, the business has struggled because its fashions have largely gone out of style, and its debt obligations have weighed on the organization’s operations. The COVID-19 pandemic made problems worse since their stores were deemed non-essential and were forced to close.
But there is one thing you can depend on: The company is still selling $80 khakis online!
Like J.Crew, Neiman has failed to attract customers to its locations. It did receive a lifeline from creditors last year to help turn things around and cut its $4.3 billion in liabilities. But the public health crisis shuttered its stores, too, making it impossible to tackle its obligations.
The Retailpocalypse In 2020
The retailpocalypse has been going on for a few years now. In the good old days of 2019, more than 9,000 stores shut down or were going to be closed, a 59% bump from the previous year. Twenty-three companies declared insolvency, and the two most prominent Chapter 11 cases were Forever 21 and Barneys New York. It might be too easy to blame their misfortunes on consumers. But until covidepression wreaked havoc on economies everywhere, American shoppers had been increasing their spending habits nearly every month since the Great Recession – just not at bricks-and-mortar stores.
The slaughter is anticipated to continue in 2020 as the Coronavirus will amplify the downward trend in retail.
CreditRiskMonitor maintains risk scores that crunch the numbers related to financial metrics, credit ratings, and stock volatility. According to its assessment, 11 large-scale retailers had a score of one, which means the probability of bankruptcy within 12 months is between 10% and 50%. The companies included JCPenney, Rite Aid, GameStop, GNC, and Party City.
Could the next big victim of the coronapocalypse be JCPenney? Despite its $3.7 billion debt total, the brand has enough liquidity to keep its doors open for several more months. Its biggest roadblock will be refinancing its debt without some serious concessions, particularly the reduction in the total number of physical locations. JCPenney has suffered the same problems as the other brands listed: a poor e-digital platform, too many brick-and-mortar stores, and enormous debt levels.
Brand Reinvention Or Autopsy?
Neil Saunders, managing director at GlobalData Retail, recently wrote in a research note that some of these retailers need to undergo a “brand reinvention.” Perhaps an autopsy would be more suitable.
Many issues crippling these companies are self-inflicted. J.Crew failed to understand consumer trends. Neiman has been overleveraged for too long. JCPenney, Sears, and others have fallen from grace with disorganized aisles, broken merchandise, and an abundance of sales. The retail industry is suffering from an over-store problem, and the only way the sector can correct itself is by trimming the fat. Once that is out of the way, it is up to these brick-and-mortar fronts to improve their understanding of shopping habits, consumer trends, and behavioral patterns.
Until then, more defaults, bankruptcies, and closures will be the new norm in the post-Coronavirus economy.
This article originally appeared at Liberty Nation and was republished with permission.
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