All Access

Retail Deals

Standard

Retail Deals Alerts

Alert

Retail Deals Thought Bubble

Thought Bubble

mustard

BFD Expert Voices - Retail Deals

BFD Expert Voices

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, Richard writes.

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.

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.

1 big thing: As banks fail, retail bankruptcies rise

Illustration of a hundred dollar bill as a flag at half mast 

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

What's happening: 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, boating and fishing chain West Marine, 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. 

2. State of play: At risk of default 

Illustration of a rolling steel door partially covering a hundred dollar bill.   

Subway's bankers lined up some $5 billion in financing to support a $10 billion-plus LBO, Reuters reports citing sources.

Why it's the BFD: The biggest hurdle to a deal of this size in this market is restrictive financing, Richard writes.

Details: The mix of bonds and loans provided by investment bank JPMorgan, which is advising Subway on the sale process, could be 6.75x TTM EBITDA of about $750 million.

Yes, but: The debt package would likely serve as a bridge to cheaper financing such as whole business securitization, per Reuters.

Between the lines: So far, bids for Subway have been between $8.5 billion and $10 billion, so the aim of the proposed financing is to get bids closer to the asking price.

Bain Capital, TPG, Advent International, TDR Capital, Goldman Sachs' LBO unit and Roark Capital are among PE firms circling.

Reality check: There's reason for buyers to be wary of taking on too much debt, even if it is being offered on a silver platter.

Buyouts that were conducted for retailers At Home and Michaels in 2021, while the economy was stabilizing immediately following the pandemic, are already showing cracks.

At Home is on default watch lists, while Michaels was recently downgraded by Moody's to B3, the cusp of a distressed Caa1 rating.

Subway said it would not make further public comment regarding the process outside of the initial news release until the transaction has been completed. JPMorgan declined to comment.

3. The BFD: Subway bankers line up financing

💸 Those now-expired Bed Bath & Beyond coupons are not completely worthless, thanks to several major competing retailers, Axios' Kelly Tyko writes.

 The Container Store and Big Lots are temporarily offering a discount for bringing in the bankrupt home goods chain’s iconic blue coupons.

Bed Bath & Beyond Inc. filed for Chapter 11 bankruptcy protection Sunday. Its buybuy Baby stores are also closing.

Tuesday was the last day Bed Bath & Beyond accepted its popular coupons as store closing sales were slated to start Wednesday.

4. Retail therapy

Illustration of a silhouette of head with a brain made out of price stickers.

• Interactive Strength, an Austin-based fitness startup that does business as Forme, priced its U.S. IPO at $8 per share, the top of its range, Bloomberg reports.  https://axios.link/3LIVYKB

• Alimentation Couche-Tard (TSE: ATD), the Canadian owner of Circle K, agreed to buy 112 fuel and convenience stores in the Southeastern U.S. from Mapco. https://axios.link/427GgxU

• Midea Group, a Chinese home appliance maker, is weighing a takeover bid for Electrolux (SWX: ELUX), a Swiss luxury home appliance maker with a $4.3b market cap, per Bloomberg. https://axios.link/3oU5662

5. Retail transactions

• Estée Lauder Companies named Guillaume Jesel president and CEO of the Tom Ford brand and Peter Hawkings as creative director. Additionally, Ermenegildo Zegna N.V., the licensor of all Tom Ford men’s and women’s fashion, appointed an unnamed CEO of Tom Ford Fashion. 

6. It's Personnel

Welcome back, Retail readers. Happy Monday.

📺 What we're watching: Richard began streaming "Secrets of the Elephants" on Disney +, the first episode highlighting the complex language of the world's largest land animals.

🙏 Big thanks to newsletter editor Claire Rychlewski and copy editor Mickey Meece for today's edits.

May 01, 2023

1 big thing: As banks fail, retail bankruptcies rise