Corporate defaults are on the rise, and that means retailers already in distress could become even more pressured this year.
A U.S. Distressed and Default Monitor report for March 2024 from Fitch Ratings noted that corporate defaults are on the rise due to leverage and looming debt maturities. While BDO restructuring expert David Berliner believes that 2024 won’t be a big year for fashion retail bankruptcies, he thinks retailers that are already struggling could find themselves running out of options as going-concern companies.
That was the case for JoAnn Fabrics, which filed for Chapter 11 bankruptcy court protection last month. Also in struggle mode for the last few years was 99 Cents Store Only, which earlier this month said it would shut down and liquidate. The 99 Cents parent Number Holdings Inc. subsequently filed a Chapter 11 petition to effect an orderly wind down of operations. Court documents said shrink contributed to a drop in sales, but also that its financial troubles go back to a leveraged buyout in 2012.
Separately, women’s athletic apparel brand Outdoor Voices has already shut down its 16 stores and shed employees as it prepares to file for an Assignment for the Benefit of Creditors, a process that allows for the liquidation of a company outside of the oversight of a federal bankruptcy court. And apparel retailer Express Inc. on Monday became the latest to file for Chapter 11 protection. The struggling specialty chain had been in talks with advisors about restructuring options, including Chapter 11 debtor-in-possession financing.
Retail firms on S&P Global Ratings’ list of retailers with ratings from “CCC+” to “CC” include Belk Inc., Fossil Group, and Qurate Retail Inc. This credit issuer ratings range raise the cautionary flag from likelihood of default to a virtual certainty of default. The upper range at “CCC+” indicates vulnerability and dependency on favorable business conditions to meet financial commitments, although there could be a default 12 months out. The lower range at “CC” reflects a determination that nonpayment of a debt obligation, or default, is a virtual certainty.
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Sourcing Journal profiled the retailers often mentioned by credit experts and retail consultants as the ones to watch this year, with the possibility that a few could end up in bankruptcy court over the next 12 to 18 months.
Asos
The fashion e-tailer on Wednesday posted an 18-percent drop for first half sales that ended March 3, after issuing warnings in March, and also said last November that growth wouldn’t return until 2025.
And while Asos has been changing up its merchandise mix, it still posted a wider pre-tax loss of 120 million pounds ($149.5 million), versus a loss of 87.4 million pounds ($110.3 million) in the same year-ago period. The retailer is still in the process of clearing out old stock and said that “over 60 percent of sales” from product now are excluded from promotions.
It is bringing in new offerings via a Test & React program that can bring designs to market in two to three weeks. But that still lags behind some of its fast-fashion competitors, such as Shein, which can cut that timeframe down to 10 days. In addition to Shein, other fast-fashion players competing in the space include Boohoo and Temu, which has been ramping up expansion pace.
Fashion sources said Shein also has Asos in its sight lines for a different reason. The Chinese competitor is believed to be interested in snapping up the British e-tailer—whose assets include HIIT, Topshop, Topman, and Miss Selfridge, among others—should it falter on its turnaround plans.
Digital Brands Group
Digital Brands Group (DBG) was cited last year in S&P Global Market Intelligence’s list of most vulnerable retailers. A year later, there’s still much to be concerned about.
Last Monday, the curated collection of luxury lifestyle digital-first brands said it managed to narrow its fourth quarter net loss to $3.7 million, on a 17.6-percent decline in net revenues to $2.8 million. The net loss a year ago was $15.8 million, on revenue of $3.4 million. On an adjusted basis, the net loss was $600,000 versus a loss of $19.2 million a year ago.
The company finally completed its acquisition of fashion brand Sundry in 2023, a year after it was disclosed, and DBG CEO Hil Davis said last week that the fourth quarter was the “end of Sundry’s bottom, which our first quarter results will reflect.” Davis said that 2024 is the year DBG expects to see an “inflection point” in its business. The company is slated to disclose first-quarter earnings in May.
Francesca’s
Some vendors haven’t been paid for months, and that’s always a bad sign.
In other signs of liquidity problems, the women’s specialty chain earlier this year trimmed its staff and former employees told Sourcing Journal that product shipments have been running “lean.”
The chain filed for bankruptcy in December 2020, and was sold three months later to TerraMar Capital’s affiliate Francesca’s Acquisition LLC for $18 million. It also chased the “tween” market with its Franki by Francesca’s line.
But one retail executive said the retailer probably should not have acquired the Miley Cyrus and Suki Waterhouse approved startup Richer Poorer last year, which sells sweats, tees, tanks, intimates, dresses and loungewear. While it provided an avenue to expand its customer base, this individual said payroll and integration costs likely hurt the bottom line.
Fossil Group Inc.
Last month, the accessories firm posted a net loss of $157 million in 2023 versus a net loss of $44.2 million in 2022. And it projected 2024 global net sales in the range of $1.2 billion, representing a 14.3-percent decline from net sales of $1.4 billion in 2023. Even worse, 2023’s net sales represented a 16-percent drop from 2022 levels.
The company—under attack by activists—also saw its long-time CEO Kosta Kartsotis step down as chief executive. Jeffrey N. Boyer, the chief operating officer who was named as interim CEO, said the company is conducting a “strategic review of our current business model and capital structure with the goal of maximizing shareholder value.” The review is expected to consider additional structural cost reductions, as well as debt and equity financing options that could include the sale of various assets to strengthen its balance sheet.
Boyer said the company made progress on its March 2023 Transform and Grow Plan last year, which resulted in the exit from the smartwatch category, the closure of underperforming stores and a decrease in inventory levels. Those actions helped Fossil capture $125 million of annualized cost savings. But its quarterly loss was $28.2 million versus $9.4 million a year earlier, and cash flow from operating activities was just $49 million versus $104 million a year ago.
JCPenney
The department store chain is pulling out the stops to get more consumers back into the stores to shop. But will it be enough to revive sagging sales?
JCPenney (JCP) last August embarked on a $1 billion “refresh” plan to improve the in-store shopping experience through better store fixtures, category adjacencies and faster checkouts. That $1 billion also included investments in the retailer’s supply chain. The new refreshed concept was revealed at the opening earlier this month of the mass merchant’s Willowbrook Mall store in Wayne, N.J., the chain’s first store opening in eight years.
But for struggling retailers, liquidity constraints raise questions over how many stores will get the upgrade and on what timeline. While some credit contacts are keeping tabs on JCP, other retail executives seem less concerned. That’s because JCP’s 2020 bankruptcy resulted in its key landlords—Simon Property Group Inc. and Brookfield Asset Management—acquiring the operating assets for $800 million, comprised of $300 million in cash and the assumption of $800 million in debt. With the mass merchant the key anchor at many Simon and Brookfield malls, one retail executive said there’s too much at stake if JCP were to close stores because that could end up rejiggering neighboring store tenancies.
Neiman Marcus
According to Ragini Bhalla, Creditsafe’s spokesperson and head of brand, Neiman’s revenue declined in the third quarter of 2023, driven largely by steep discounts. Revenue for the quarter fell 9 percent to $1 billion from year-ago levels, while the luxury retailer said comparable store sales were down 5 percent for the period.
Moreover, Creditsafe’s data indicated that since December 2023, the retailer only paid about 62 percent to 60 percent of its bills on time, and the number of late payments past 30 days rose from 18.1 percent in November 2023 to 23.1 percent in December 2023. Late payments between 31 to 60 days over the same period rose from 0.6 percent to nearly 4 percent. In January 2024, the number of late payments rose to 33.6 percent in January and reached 31.6 percent in February.
Neiman entered into a Fourth Amendment to its Credit Agreement in October 2023, a $900 million asset-based lending facility led by Bank of America, that extends the maturity date from Sept. 25, 2024 to Oct. 27, 2028. Currently, Creditsafe has Neiman Marcus at a “moderate risk” of failure, Bhalia said. That level of risk suggests that payment performance could become “seriously delinquent” within the next 12 months. The company filed for Chapter 11 bankruptcy protection in May 2020 and exited court oversight in September 2020.
Qurate Retail Group
The struggling Qurate ended 2023 with a wider fourth-quarter net loss of $273 million, versus a net loss of $51 million a year ago. Total revenues fell 11 percent to $3.14 billion, and it posted an operating loss of $103 million against operating income of $42 million in the year-ago period. For the year, the HSN and QVC owner was able to narrow the net loss to $145 million, on a revenue decline of 5 percent to nearly $7 billion. The year ago net loss was $2.59 billion on revenue of $7.36 billion. Last year was essentially a transitional year as the company continued to execute on the Athens Project, its three-year turnaround plan disclosed in June 2022.
The Athens Project resulted in Qurate shedding headcount, including two long-time hosts that resulted in many loyal customers electing to shop elsewhere. The cuts were necessitated by changing consumer spending patterns post-Covid and a disastrous fire at a QVC warehouse in Rocky Mount, N.C. in December 2021.
Rent the Runway
What Rent the Runway (RTR) needs is more time to effect its restructuring plan, though it hopes that it won’t run out of liquidity in the process.
The restructuring saw chief operating officer Anushka Salinas stepping down from her role in January, as well as a corporate headcount reduction of 10 percent, or 37 positions. The company said in a statement in January that it is “now focused on investing more into the areas of the business that reignite the growth funnel” as it seeks to capture more market share in the rental subscription model.
With other retailers like Urban Outfitters’ Nuuly and John Lewis Fashion Rental jumping into the rental market, RTR has faced growing competition. During the fourth quarter earnings call, CEO Jennifer Hyman spoke about use of technology and artificial intelligence to personalize engagement with customers as well as help drive conversion and loyalty.
The company narrowed its quarterly net loss to $24.8 million, on a 0.5-percent rise in revenue to $75.8 million. The company’s aim is to be “free cash flow break even” in fiscal 2024, according to CFO Sid Thacker.
Stein Mart
Stein Mart has been on shaky ground even before the pandemic. It filed for bankruptcy court protection in 2020 and exited Chapter 11 proceedings in 2021. But it’s been paying vendors over 90 days of the due date, and that’s typically a sign of liquidity problems.
Executives at brands who sell to the discount retailer have long spoken about its history of late payments, and some factors have told clients that they’re on their own if they choose to continue shipments.
The department store retailer filed for Chapter 11 protection in August 2020, and was acquired for $6 million by Retail Ecommerce Ventures (REV), a venture capital firm that has acquired a number of bankrupt banners that include Pier 1 Imports, RadioShack, Modell’s Sporting Goods, Linens ‘n Things and Dress Barn. Rumblings in 2023 indicated that REV could be facing financial struggles of its own.
Stitch Fix
The company has been losing subscription box subscribers, and it consolidated its warehouses down to three as it looks for ways to cut costs. The online personal styling service is known for its use of recommendation algorithms and data science to personalize curated orders, but it’s still losing both money and subscribers. For the second quarter ended Jan. 27, the company said active clients from continuing operations were 2.8 million, a decrease of 184,000, or 6 percent, quarter-over-quarter. The decrease was 572,000, or 17 percent, year-over-year.
Last year saw the departure of chief technology officer Sachin Dhawan and the closure of a Dallas warehouse facility and a Salt Lake City distribution center. The company’s Bethlehem, Penn. warehouse shuttered operations earlier this year. In another cost-cutting move, the company shifted its full-time stylists to part-time work.
Last month, the company said it narrowed its second quarter net loss to $35.5 million from a net loss of $62.1 million a year ago. But revenues for the quarter fell 17.5 percent to $330.4 million. CEO Matt Baer said during a conference call that the company still has work to do to “improve the trajectory of our business.” The company forecasted net revenue from continuing operations for Fiscal Year 2024 to fall between 17 percent to 19 percent to the range of $1.29 billion to $1.32 billion.
The Children’s Place
A regulatory filing with the Securities and Exchange Commission in February raised significant doubts about the retailer’s liquidity and ability to continue as a going concern. The retailer also said it was “considering strategic alternatives.”
One month later, Mithaq Capital SPC took charge of the children’s specialty chain after providing a $78.6 million interest-free, unsecured and subordinated term loan to increase its liquidity base. That, plus a $130 million term loan from Gordon Brothers, is expected to be enough to get the retailer through its all-important back-to-school selling season.
But while the new majority investor is bankrolling the business, it will still be up to CEO Jane Elfers and her team to keep close tabs on operations to ensure that the merchandising assortment and pricing meet customers needs. The answer to that won’t be known for another few quarters. Even if Elfers and her team do everything right, the quick shifting consumer spending patterns could change on a dime and leave the retailer with an inability to make timely adjustments to its merchandising mix.
The RealReal
The luxury consignment retailer is another name often mentioned as a possible bankruptcy candidate. Over the years, the company has been plagued by perpetual losses, a high rate of returns and growing customer acquisition costs, as well as the departure in 2022 of its founder and former CEO Julie Wainwright.
The company was also sued in 2020 by investors alleging securities law violations connected with its June 2019 initial public offering. Another lawsuit that’s still ongoing is a 2018 claim by Chanel that the luxury reseller sold at least seven counterfeit Chanel bags.
New CEO John Koryl said in February during a fourth quarter earnings conference call that the firm made a strategic shift to refocus its business “on profitable supply.” He pointed to a new initiative called Drop-ship Consignment—previously known as Virtual Consignment—that he said could “unlock” incremental supply from its trusted partners.
Koryl also said the company is beginning to see benefits from investments in automation and AI. More importantly, debt exchange transactions connected to convertible senior notes due in 2025 and 2028 have reduced the company’s total indebtedness by at least $17 million. But while it posted a narrower net loss for the year of $168 million versus a year-ago net loss of $196 million, that loss remains significant and Koryl and his team will need to do more to make sure the company continues to make positive progress.
According to Creditsafe’s Bhalla, The RealReal has paid most of its bills on time in the last year. While that’s good news, she said the “sheer volume of their net losses and negative equity leads us to question the company’s liquidity and ability to keep the business running long-term.”
Creditsafe has the company on its “high risk” list, meaning that a “bankruptcy could be in the cards over the next 12 months,” she said.
Belk Inc.
This department store retailer has been on the watch list of many credit analysts for years. That’s mostly because they say executives at the privately-held company aren’t as open about disclosing financial information as public firms, leaving analysts to extrapolate viewpoints from outdated data.
The first Belk store was founded as a bargain retailer by William Henry Belk in Monroe, N.C., in May 1988. Three years later, his brother, Dr. John M. Belk, joined the business and the two opened additional stores across the Carolinas. The retailer is currently operating under the third generation of Belk family leadership. The company website said Belk is America’s largest privately owned mainline department store company.