As banks fail, retail bankruptcies rise
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.
- 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 MyFitnessStore.com locations to expand into Texas, for example.
The bottom line: "It's going to be a tough year," Gellert says.