In 2017 a record 8,000 store closures took place when the annual average is typically just 2,000. This has caused a surge in demand for case management services, where consultants help companies prepare for bankruptcy and maximize stakeholder value throughout the process.The explosion of online retailers, the Amazon effect, and improvements in delivery infrastructure means brick and mortar retailers have to fight harder than ever to stay afloat.
However, not all retailers are going out of business due to the shift towards online sales; some have simply fallen victim to bad business practices and acquired too much debt. Finally, we will take a brief look at how the flood of store closures is impacting the real estate market and landlords.
Major bankruptcies in 2018
In 2018 a few notable retailers have filed for bankruptcy protection and are worth taking a look at:
Sears finally filed for Chapter 11 bankruptcy protection in October and will be closing 142 stores in addition to the 46 previously announced before the end of the year. The company listed $6.9 billion in assets and $11.3 billion in liabilities.
Mattress Firm filed in October and plans to close 700 of its 3,272 stores. The company’s debts are over $3.2 billion.
Nine West Holdings filed for bankruptcy in April and listed debts of over $1 billion. The company has plans to sell its Nine West and Bandolino shoe and handbag businesses.
Claire’s, the children’s accessory retailer, plans to close 92 stores – the majority of which are located in enclosed malls. The company claims that the reduced foot traffic in malls is responsible for the decline in sales.
The Bon-Ton Stores is one of the bigger brands filing for bankruptcy. Bon-Ton is the parent company for Carson’s, Elder-Beerman, Herberger’s, and Younkers. The liquidation of all stores commenced in April, 2018.
Toys ‘R Us, one of the most popular toy-based companies in the U.S., failed to restructure its debt and was forced to liquidate.
Tops Markets operates 174 supermarkets nationwide and filed for bankruptcy protection in February. So far only 10 store closures have been announced.
It is expected that more than 3,800 stores will close in 2018 — not as high as last year, but still nearly double the historical annual average. The most notable names among this year’s closures are Gap (200 stores within the next three years), Toys ‘R Us (all 800 stores) and Walgreens (600 stores). Many more stores are on the verge of closure announcements.
Companies on the watch list for bankruptcy
Various well-known brands are on the brink of filing for bankruptcy. The following companies are in danger of filing in 2019:
– Sun Pacific Holding Corp.
– Vince Holding Corp.
– Bebe Stores Inc.
– J. Crew
– Neiman Marcus
– J.C. Penney
– 99 Cents Only Stores
Debt vs consumer shift to online sales
There is no doubt that a large portion of mall-based retailers are in trouble as a result of the explosion of online sales. However, online shopping is not the sole culprit for the demise of all retailers. Many can blame their woes on being saddled with an immense amount of debt. Some of the retailers struggling due to debt include:
J. Crew incurred $3 billion in debt in 2011 as part of a leveraged buyout to take the company private. The company now has $1.7 billion in debt.
Neiman Marcus has an even bigger debt pile of around $4.8 billion, leaving the retailer severely over levered.
J.C. Penney is carrying debts of around $4.2 billion. Earlier this year, the company refinanced over $300 million of debt that was set to mature in 2019 and 2020.
Impact on real estate and landlords
Store closures have a domino effect on real estate and its landlords. Many sophisticated retailers negotiate to include co-tenancy clauses in its leases with landlords. A co-tenancy clause is a requirement that either certain named key tenants (often anchor tenants or department stores) or a percentage of the gross leasable area remains occupied. If that requirement is violated, the tenant with a co-tenancy clause has the right to reduce rent; usually to a nominal percentage of its gross sales. For example, when a department store closes, it will likely trigger a co-tenancy violation for a number of other stores within the mall.
The more stores that close, especially those with larger footprints, the more the landlord will be impacted. Not only does the landlord lose the revenue from that specific tenant(s) who closed, but now several other tenants have the ability to reduce their rent payments as well. This can send a mall into a tailspin.
The record-breaking number of store closures and bankruptcy filings by some of the biggest brands in the world is alarming. Making use of innovations such as big data, online avenues, fast and free delivery, a personalized shopping experience, and CPG services is key to surviving in the current retail environment. Keep an eye out in the coming years for more big companies to fall under the bankruptcy axe as the retail environment continues to shift.