Retail Bankruptcy Outlook for Second Half of 2011

This blog discusses the retail bankruptcy outlook for the second half of 2011 and the associated economic forces behind our outlook. Some of the major drivers that will impact retail bankruptcies include consumer confidence, continued unemployment, and rising commodity prices.

Consumer Confidence:

According to the Conference Board, the consumer confidence index declined 5.2 points in May. The proportion of consumers expecting business conditions to improve over the next six months declined, and those anticipating worsening conditions increased. Consumers appear to be more cautious when spending for clothing and other items, as rising gas and food prices take up a bigger chunk of their disposable income, raising some concern about a possible slowdown in sales over the summer and into the critical back-to-school period. 

Rising Inflation and Commodity Costs:

The U.S. inflation rate raced to 3.2% for the 12 months ending April 2011, a two and a half year high, as gasoline and food prices spiked. The rapid increase in inflation has left wages trailing. Many Americans are now worried about the squeeze on their personal finances and are cutting spending to cope with rising prices. Average hourly earnings, when adjusted for inflation, have dropped 1.2% for the trailing 12 months ending April 2011. In addition, due to rising prices of commodities from cotton to copper, retailers are being forced to pass along some of these higher costs, which is likely to dampen retail sales.

Continued Unemployment:

As discussed in our October 2010 blog, the unemployment rate is a very strong indicator of retail sales. Currently, unemployment levels remain high at 9.1%, and job creation remains low. According to the ADP payroll report released on June 1, only 38,000 jobs in the nonfarm private-business sector were created in May (78% less than forecast). The poor employment numbers will potentially restrain consumers from making impulse purchases thereby constraining retail sales. In fact, major retail chains reported a modest 4.9% gain in sales last month compared with a year earlier, below analysts’ predictions of a 5.4% rise, according to Thomson Reuters’ tally of 24 retailers released on June 2.

Outlook:

Over the past year, many retailers have restructured their operations and balance sheets and are generally healthier than they were a year ago. As a result, we think that the number of retail bankruptcy filings in the second half of this year will likely be similar to last year. While inflation and raw material price increases will negatively affect retailers’ profitability margins, this likely will not result in a large number of bankruptcies. However, if margin pressures are too high and costs increase beyond recent estimates for the second half of the year, we believe retailers in the apparel, furniture and restaurant sectors will be at the highest risk. For example, in the restaurant sector, we have already seen the fast food chain Sbarro file for bankruptcy, along with several other restaurant franchisees. In addition, with the slow housing market recovery, furniture retailers have suffered a great deal, and this trend looks like it will continue.

Do you think the number of retail bankruptcy filings in the 2nd half of 2011 will increase over last year?

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