Update on Retail Bankruptcies in 2014

The first half of 2014 has seen a number of regional apparel and other retail bankruptcy filings, starting with the January filing of Dots. While initially planning to reorganize, the 27-year old retailer was forced to liquidate its 400 locations after a viable sale of the chain failed to materialize. Ecko and Brookstone filed in April and ended up conducting 363 asset sales, while Coldwater Creek moved quickly to liquidate its 365 stores. More recently, Love Culture filed for bankruptcy, the victim of unprofitable leases and severe cash drain due in part to investments it made in its online business.

bankruptcy table

After reviewing these 2014 filings, we noted two main challenges facing regional retailers:
  1. E-Commerce: According to the U.S. Commerce Department, e-commerce sales hit $75 billion in the second quarter this year, a record high share of retail sales. Although consumers are increasingly shopping online, some regional retailers have been slow to build their online presence. In particular, these retailers have failed to keep up with the latest trends in social media and develop an attractive and efficient online and mobile presence. However, replicating the e-commerce strategies of larger, national retailers requires large upfront costs that can strain the resources of regional players. In addition to the developmental costs, e-commerce also presents logistical issues. Fulfillment of online sales requires retailers to update their distribution system in order to handle the increased volume of goods to be shipped directly to customers. Consumers also increasingly expect services such as same day delivery and the ability to order online and pick up their order at a nearby store. We believe the ability to engage and speak to consumers through a sophisticated online interface will be an increasingly important factor for retailers going forward.
  2. Long-Term Leases: Many regional retailers have attempted to expand by opening new stores, and in order to do so, locked themselves into long-term leases. However, as foot-traffic decreases and consumers increasingly shop online, this expansion has hampered the profitability of many retailers, resulting in too many marginal or unprofitable stores that are difficult or costly to close outside of bankruptcy. Partly in response to the increase in internet orders, retailers of all sizes have announced store closings or reductions in the size of their stores, and we expect this trend to continue. All of the above factors point towards a reduced need for large store-networks and decreased square footage at existing stores.

Forecast for Remainder of 2014

U.S. retail sales have been less than stellar during the first half of 2014. Despite the improvement in the Spring after the unusually brutal winter, sales have cooled so far this Summer, setting a challenging environment for the second half of 2014.

The August-October timeframe typically requires retailers to burn cash as they build inventory in preparation for the critical holiday season. With retail sales flat, large national retailers are likely to increase discounting in order to support revenue, which may put further pressure on regional retailers. Furthermore, any sign of distress often pushes vendors/suppliers to restrict payment terms and credit limits, and evidence of significant cash burn often leads suppliers to demand cash in advance. The resulting liquidity crunch can lead a distressed retailer towards insolvency in a short time-frame. As a result, weaker regional players are likely to be under duress in the coming months, and we can expect to see more retail bankruptcies before the end of the year.

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