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Defaults and bankruptcies in the retail sector are leveling off after a surge in 2023 and early 2024, rating agency analysts tell Axios.

Why it matters: Not as many retailers are under pressure to have a banner holiday season.

Reality check: Retailers may not find coal in their stockings Christmas morning, but they won't get much of what is on their wish list either.

Holiday spending is likely to be up around 1% to 2%, says Holly Etlin, a managing director at AlixPartners, though the National Retail Federation projects sales will increase between 2.5% and 3.5%.

A season that is five days shorter and choosy consumers seeking value will impact the number, says Declan Gargan, a retail director at S&P Global Ratings.

Yes, but: Though the consumer sector is showing some signs of distress, overall it has remained resilient, says Bea Chiem, a retail director at S&P.

Catch up quick: The surge in bankruptcies last year and earlier this year was caused by a steep decline in consumer spending in areas like home-related goods, including furniture and flooring, which boomed during the pandemic, analysts say.

Home goods alone have experienced 11 consecutive quarters of sales declines, Gargan notes.

Category killers, such as crafts retailer Joann, continue to be under siege from omnichannel retailers such as Walmart, says David Silverman, a senior director at Fitch.

Makers of consumer packaged goods will also have an elevated default rate, Chiem emphasizes, with the sector having about 18% of issuers rated CCC or lower.

The latest: Discount-oriented chains like dollar stores, which over-expanded their store footprints, along with drug stores, are facing increasing pressure, analysts say.

Wages haven't kept up as well for lower-income or working-class consumers, while their credit card debt is increasing — which will, in turn, hurt retailers they frequent, like Big Lots and 99 Cents Only Stores.

Drug stores, meanwhile, are giving up margin to stay included in pharmaceutical networks, while losing sales of consumer products to rivals offering lower prices, Silverman says.

The big picture: "Bankruptcies and distressed never follow a straight line," says James Gellert, executive chairman of RapidRatings.

"We may be seeing a slight leveling off. The fundamental problems that have caused the bankruptcies over this last year still exist."

While inflation has eased and interest rates are lower, retail supply chains remain stressed, with ongoing credit challenges for many players, he says.

Middle-market companies are primarily financed with floating-rate debt, which tends to be more expensive, he adds.

By the numbers: Moody's expects the default rate to decline over the next 12 months including the holiday season, says Raya Sokolyanska, a senior analyst at Moody's.

The default rate was elevated in mid-2023 and again in early 2024 at about 9%, though it is currently above 8%, she says.

That compares to a peak of more than 20% during the height of the pandemic, Sokolyanska says.

What we're watching: Retail's trajectory will be heavily impacted by the election, says Gellert.

"With a Trump victory, the specter of tariffs is gigantic," he says, adding that increases the cost base for retailers.

The extent of promotions is a key bellwether. If retailers offer increasingly steeper discounts as the holiday season progresses — that's a bad sign, Etlin says.

Post-holiday is still a more common time for retailers to file for bankruptcy or to default, Sokolyanska says.

Zoom out: There could be long-term fallout from retailers' near-term reliance on unregulated private credit to refinance and stave off bankruptcy, Etlin says.

The bottom line: "The election is the wild card. We'll find out this week," Chiem says.

Retail bankruptcies are leveling off, but election is a wild card

The decline is occurring after a surge in 2023, but the outcome of the election and the holiday season could change that.

Illustration of a dollar sign badly wrapped in wrapping paper.

distressed situation

Defaults and <a class="gtmContentClick" data-vars-link-text="bankruptcies" data-vars-click-url="https://www.axios.com/pro/retail-deals/2024/09/16/retail-bankruptcies-mergers-acquisitions" data-vars-content-id="52c7a53d-2277-47f7-8ca4-d2b956bc2370" data-vars-headline="Retail bankruptcies are leveling off, but election is a wild card" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/pro/retail-deals/2024/09/16/retail-bankruptcies-mergers-acquisitions" target="_self">bankruptcies</a> in the retail sector are leveling off after a surge in 2023 and early 2024, rating agency analysts tell Axios.Why it matters: Not as many retailers are under pressure to have a banner holiday season.

Retail bankruptcies are leveling off, but election is a wild card

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