September 21, 2022
Happy hump day, Retail readers.
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1 big thing: Retail to see more bankruptcies in H2
Retail will likely see more bankruptcies in this second half of the year, according to a new BDO report.
Why it matters: Though at a historic low, the specter of bankruptcy looms if retailers don't reduce risks on their balance sheets, David Berliner, a partner at BDO’s business restructuring and turnaround services practice, tells Kimberly.
- “If consumers pull back before the holidays and really cut their spending, retailers that have expanded or brought in too much inventory are really going to feel it,” he says.
What’s happening: BDO recommends retailers deploy real-time analytics to inform price-setting, as well as scenario-plan for supply chain disruptions.
- This allows retailers to streamline their SKUs, for instance, letting them carry less inventory and cutting the need for discounts on excess goods.
- “It is expensive to buy inventory in advance and hold it for many months before you sell it, especially in a rising interest rate, inflationary environment,” Berliner says.
- “It's got to be eating into everybody's profitability unless you can continue to raise prices to match it,” he says.
Yes, and: BDO's report cautions retailers against expanding too quickly and locking into leases.
- “Retailers that get into trouble are those that have over-expanded and they were chasing what they saw as positive trends,” Berliner says.
- Expansion includes the costs of inventory, staff payroll and lease liabilities, he says. (Though bankruptcy lets retailers out of those leases for a relatively small penalty, he adds.)
- “Retailers want to grow, but they want to grow profitably, and you might be better off being a little smaller and more profitable than being bigger and not making as much money,” Berliner says.
The bottom line: "The winners and losers are going to start to materialize this holiday season,” Berliner says.
- “I would think that if you see filings at the very end of the year or the beginning of '23, it's because those retailers had a very bad holiday season,” he says, adding that he expects an uptick if consumer demand is weaker than expected.