Retail Bankruptcy Outlook for Q4 2010

JPMorgan’s September 14th Hardlines Retail Report, which analyzes sales data back to 1976, states that there is a 90% correlation between growth in August and September retail sales and sales levels in October, November and December of that same year.  We saw a moderate increase in August sales for this back-to-school season, and a 1.1% improvement in consumer confidence from August to September.  This evidence suggests that 2010 holiday sales will improve over 2009. This is further corroborated by our Retail Compass Survey of CFOs and an article from the National Retail Federation, predicting marginal increases in holiday sales for the 4th quarter over 2009.

What impact will the high unemployment rate have on retail sales?

The unemployment rate is a very strong indicator of retail sales.  It currently stands at 9.6% nationally however, 27 states had increasing unemployment rates during the month of August and there is little expectation that there will be much improvement for the remainder of the year.  As a result, many Americans remain frugal and cautious when it comes to their discretionary spending.  In response, some retailers have shifted focus toward low-end customers by stocking a larger mix of inexpensive products and gearing advertising toward price and value.

Will a slightly positive holiday sales season keep retailers from bankruptcy?

During this period of economic stagnation, the number of retail bankruptcy filings in the 4th quarter of 2010 will likely be similar to the pace over the past 12 months, at least for retailers that have adequate liquidity.  Over the past 2 years, most retailers have already negotiated rent reductions, reduced inventory levels and cut excess costs to the extent possible.  If retailers are somewhat constrained with cash during the holiday season, lenders and creditors may loosen the reigns a bit, at least in the short-term, to allow the retailers some leeway to make it through the end of the year.  According to a Reuters article from the beginning of the year, retailers are increasingly viewing a bankruptcy filing as the beginning of the end and are afraid of becoming the next Circuit City or Linens N’ Things.  For these reasons, we think that relatively few retailers will file for bankruptcy before the end of the holiday season.  That being said, the recent bankruptcy filing of Blockbuster shows that retailers under pressure from lender and creditor constituents may still be forced into bankruptcy.