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As banks fail, retail bankruptcies rise

May 1, 2023
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Illustration: Sarah Grillo/Axios

As the era of free money ends, an increasing number of retailers have been pushed into bankruptcy — serving as prospective targets for bargain-hunting acquirers.

Why it matters: After a relatively dry past couple of years, firms that specialize in retail restructurings and distressed situations are seeing a spike in business.

Driving the news: The failures of Silicon Valley Bank, Signature Bank and Silvergate have had minimal impact on retail thus far — but First Republic's fall could shake consumer confidence and accelerate distressed situations.

Details: Headed into this year, inflation, rising interest rates and limited access to financing were posing going-concern hazards for the sector.

  • Those pre-existing conditions may be exacerbated if the Fed keeps hiking rates, bank failures continue or the government defaults on its debt, putting a chill on consumer spending.
  • Plus, home values — one demarcation of consumer wealth — are beginning to deteriorate, says Deborah Weinswig, CEO of Coresight Research.

Catch up fast: Bed Bath & Beyond is the latest casualty, following Chapter 11 filings by Serta Simmons and David's Bridal.

  • As of April 13, S&P noted nine bankruptcies, which included the household name Party City, among others.
  • That number compares starkly against just two bankruptcies filed by this same point a year ago.

Between the lines: Bankruptcies by the likes of BBBY and David's Bridal are emblematic of larger problems, says James Gellert, CEO of financial analytic firm RapidRatings.

  • Those issues include higher costs, tied to supply chain, materials, labor and interest in addition to restrictive capital, he tells Axios.
  • Inventory-related issues and consumer purchasing behavior also play a role, according to a lawyer who specializes in restructurings.
  • Trade creditors are more leery of supplying struggling retailers with goods without payment upfront, a scar left by the Toys R Us bankruptcy, he says.

State of play: Retailers rated by the rating agencies either as Caa1 or CCC+ or below are at the highest risk of default or even bankruptcy.

  • That group includes pharmacy chain Rite Aid, crafts retailer Jo-Ann Stores, auto retailer Carvana, discounter 99 Cents Only Stores and department store banner Belk.
  • Also on the rating agencies' watch list are eyewear retailer MyEyeDr., catalog business Augusta Sportswear, home goods retailer At Home, and boating and fishing chain West Marine.
  • Rounding out the list are auto body chain Service King, fabric maker Elevate Textiles, medical apparel maker Careismatic, and video-driven shopping provider Qurate.

Meanwhile: Retailers on Fitch's top market concern loans or bonds lists include some of the above names, along with pet supply e-commerce site Petmate, photo products retailer Shutterfly and licensed sports apparel maker Outerstuff.

  • The most vulnerable retail segments are pharmacy, personal care, department stores, home improvement, apparel and home furnishing, per S&P.

What's next: The biggest impact will be felt on the middle market, particularly regional retailers, Gellert says.

  • "The smaller the company, and the more private, the fewer options they have to maneuver," he says.

Be smart: A silver lining, at least for dealmakers, is an uptick in buying opportunities.

  • The sector will see an increase in M&A activity from well-funded strategics and PE, Gellert says.
  • Capital needs to be opportunistic this year, he adds.
  • For example, Authentic Brands Group picked up Boardriders, the rebranded Quiksilver, which was on distressed watch lists earlier this year.

The intrigue: Desirable retail real estate is in short supply but bankruptcies have made storefronts more readily available.

  • Wisconsin-based specialty retailer Johnson Fitness & Wellness picked up 17 locations to expand into Texas, for example.

The bottom line: "It's going to be a tough year," Gellert says.

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