It was a tumultuous week for fashion retail and department stores. J.Crew and Neiman Marcus filed for bankruptcy, and we could soon see more big names formalizing what has been an almost foregone financial conclusion as a result of store closings and COVID-19 chaos. Next week could be a tipping point between the “great resettling” and the “great bankruptcy,” with short-term as well as long-term consequences for the retail landscape.
“As the number of retail bankruptcies start to pile up from companies whose final destruction was caused by the coronavirus pandemic, we are about to see a massive round of close-out, going-out-of-business, liquidation sales,” says Forbes. “It’s likely to be the largest such wave in modern retail history.”
The list of distressed retailers that could seek formal bankruptcy protection next week include Macy’s, JCPenney, Sur La Table, The Gap and Lord & Taylor. Even before the effects of the COVID crisis, those companies have struggled to meet their numbers. Their potential Chapter 11 filings will depend on the whims of their financing partners and the possible advantages of bankruptcy.
According to the Financial Times, the pandemic is not the only problem facing department stores and fashion retail. “Both were already suffering from bloated debt levels that left them little able to respond to the sweeping changes in American retail over the past two decades, including the rise of eCommerce and the migration of young people from the suburbs to cities after the financial crisis,” the report notes.
“In this environment, it’s just impossible when you have such massive fixed costs,” said David Shiffman, the co-head of investment bank PJ Solomon’s consumer retail group. “These businesses are enormous and consume huge amounts of capital. That has been ongoing for years.”
“Every fashion retailer really should be examining the benefits of reorganization. With COVID-19, there is a window of opportunity right now,” noted Anthony Lupo, a partner at law firm Arent Fox, in the Forbes report. “That window is closing soon, so if you don’t restructure now when people are more than willing to renegotiate, you’re going to be forced to go to them later.”
Next week could also see a shift toward mergers and acquisitions (M&A). Suitors for Neiman include Saks Fifth Avenue parent Hudson’s Bay Co. According to The Wall Street Journal, Saks has tried to merge with Neiman several times over the past decade. Analysts say that a combined company could bring cost savings and wield more clout with suppliers.
Even with new M&As, department stores face business model issues that go beyond the pandemic.
“The department store model was built on providing for those who want to shop and be entertained. They would come in, and they would dine. They would get their hair done. They would socialize. They were designed for you to get lost on purpose,” said NPD Retail Group’s Marshal Cohen in a report. “Over the past decade, that got lost. There was a homogenous, sea-of-sameness mindset in all the department stores. Even the most luxurious ones were carrying similar products and similar brands. They went the safe route. They went down the margin route rather than the exclusive route.”