Retail in the Red: BDO Bi-Annual Bankruptcy Update

August 2021

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Retail in the Red…BLACK

The first half of 2021 revealed the retail sector is rebounding as the economy reopens. Sales for the first five months of the year rose 17.6% compared to the same period in 2020. While there were many retail bankruptcy filings in the first half of 2019 and 2020, there was a marked slowdown in retail bankruptcies in the first half of 2021, with only nine retail bankruptcies filed through June. At the same time, the retailers that filed for bankruptcy in 2021 had fewer stores compared to 2020 or 2019, minimizing the number of overall store closures. The decline in filings and store closings can be attributed to a combination of factors, including government stimulus money, easy access to credit, low interest rates and the reopening of the economy.

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Retailers filing for bankruptcy this year are closing fewer stores and are increasingly able to reorganize, as opposed to selling or liquidating the business.

The chart below demonstrates store closings have been on a sharp decline for the past 3 years. While the first half of 2021 saw just 537 bankruptcies, 2020 saw 3,374 and 2019 saw 4,418. The number of liquidations also decreased to about half of what it was in 2019.

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As the economy recovers, the retail sector is making a comeback. For the first time in years, store openings are predicted to surpass store closings this year, according to Coresight Research.

In terms of retail segment performance, dollar stores and off-price retail continue to expand rapidly as consumers seek value. The following chart shows three different dollar store chains (Dollar General, Dollar Tree and Family Dollar) accounted for 1,848—or about 50%—of all newly announced stores.

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Mall Sales Have Returned…For Now

While mall sales have bounced back to pre-pandemic levels, the mall format continues to struggle. New stores are increasingly opening outside of malls as retailers reinvent themselves. Many brands opening off-mall locations are drawn by lower rent, convenience, visibility and the ability to provide curbside pickup. This is creating something of a feedback loop: As malls see declining foot traffic, stores that were traditionally mall staples—such as Sephora and Bath & Body Works—are reevaluating their footprints. Both beauty brands have announced recent off-mall expansion plans. Even Tesla, which has 170 showrooms in upscale malls, is planning to let many of their mall leases expire and move toward locations conducive to test driving and delivery centers.

In the first quarter of this year, the vacancy rate at enclosed malls reached an all-time high of 11.4%, according to Moody’s Analytics REIS. Coresight Research forecasts about a quarter of U.S. malls could close over the next three to five years.
 

Newer Store Concepts May Become the “New Mall”

Two trending store strategies are the store-within-a store and pop-up concepts. The store-within-a-store allows the host store to expand its offering and the mini-store within to reach new customers, while both benefit from increased foot traffic. Target has announced adding Apple and Ulta Beauty shops, Kohl’s is adding Sephora shops, and Nordstrom is adding the at-home fitness start-up, Tonal.

Pop-up stores are another way for brands to reach new customers through a brick-and-mortar location, but without a long-term rent commitment or large capital investment. These stores are temporary rented spaces used to showcase new and exclusive products and give customers an elevated experience. E-commerce and direct-to-consumer brands like to use the pop-up model because it can expose them to new customers and help them test a brick-and-mortar expansion.

According to research firm Forrester, stores will still account for three-fourths of retail sales in 2024, despite e-commerce growth. Therefore, it’s important for retailers to update their store strategies to account for changing preferences and market dynamics. One common approach is to implement more store technology to improve the customer experience. According to BDO’s 2021 Retail Digital Transformation Survey, 68% of retailers have implemented in-store analytics, 64% are using mobile point-of-sale, while 35% have wayfinding capabilities using in‑store apps.
 

Demand and Consumer Cash are Fueling the Continued Recovery of 2021

As of June, retail sales grew for nine consecutive months and year-over-year each month since June 2020. Department store and apparel sales—subsectors hit hard by the pandemic—both rose year-over-year in June. The NRF expects retail sales this year to grow between 10.5% and 13.5% compared to 2020 and the GDP to increase approximately 7%. This would be the highest growth since 1984. In contrast, the market contracted 3.5% in 2020, the worst performance since World War II.

In addition to COVID-19 vaccinations and low interest rates, COVID stimulus payments and the expanded child tax credit contributed to increased retail sales. As part of the American Rescue Plan, the child tax credit is expected to bolster sales in the second half of 2021, as the IRS estimates 90% of U.S. children will qualify for the increased amounts paid monthly from July to September.
 

Retailers Face Inflation, Shipping and Labor Obstacles

While sales are rebounding, there are factors pointing to a potentially slower recovery, if they become uncontrolled. Concerns for retailers include labor shortages, the uptick in COVID-19 cases and emerging variants and increased inflation—due primarily to supply shortages and the pent-up demand from consumers.

A dramatic increase in consumer purchasing from the early months of the pandemic to now has put excessive pressure on shipping routes and backlogged ports trying to keep up. The Suez Canal closure in March put an already overwhelmed system into further turmoil.

Another challenge for retailers is finding employees to service this explosion in consumer activity. As stores quickly open back up to full capacity, many retailers are struggling to find employees. Short-term issues such as finding childcare during the pandemic and longer-term issues related to skills gaps have made the labor market particularly tight.

Now retailers are incentivizing workers with pay raises and benefits, but if they’re unable to find enough workers by the holiday season, they could be looking at reduced store hours, overworked employees and a deteriorated customer experience. For holiday sales to reach their full potential, it is crucial for retailers to secure a sufficient workforce before the holiday season.

Consumers are eager for a shopping spree and retailers are banking on this to drive sales, but if inflation remains high, it might curb consumer spending. In July, the Consumer Price index rose to an annual rate of 5.4% from a year earlier. This was the same increase as the period ending in June, which rose at the fastest pace in 13 years. The Federal Reserve Bank believes prices will moderate as supply shortages are resolved, but it is unclear when the shortages will dissipate and whether the inflation is transient. A Salesforce forecast projects retailers in the U.S. will spend more in the second half of 2021 than in the same period in 2020 for logistics-related costs ($163 billion), wages ($48 billion) and suppliers ($12 billion). These cost increases will likely force retailers to raise prices, which may curtail consumer spending and the expected increased sales.