Massive Credit Risk, as Retail Tries to Regain Equilibrium
The shift to ecommerce has left massive brick-and-mortar financial distress in its wake. And retail results from the first quarter of 2017 don't offer much hope of a quick recovery any time soon.
Consider these recent business headlines:
- This week Ralph Lauren announced the closing of their Polo Flagship store on 5th Avenue in NYC, and a restructuring charge of $370 million.
- Payless Shoesource announced the closing of 400 stores, and filed for Chapter 11.
- The S&P has taken more than 20 negative rating actions for retailers so far this year. And according to Moody’s, retail distress has approached recession era levels.
- In February, three retailers — Gordman’s, hhgregg, and Radio Shack — filed for Chapter 11. And according to this high risk report, unprofitable retailer Bon-Ton Stores is on the verge.
- All told, chains including Staples, Macy’s, JCPenney, and many others have announced closures of more than 3,500 brick-and-mortar stores throughout the country.
Many retailers will survive this retail storm — but only if their underlying financials are strong. Others will become just another renowned brand for the history books.
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Retailers are facing a number of pressures
Large fleets of brick-and-mortar stores are expensive to operate, and retail margins are thin. As shoppers move online, retailers are grappling with how to evolve accordingly.
For instance, explaining charges related to store closings, layoffs, and the development of new retail concepts, Jane Nielsen, CFO at Ralph Lauren, states: “We are looking carefully at the way consumers are shopping online and believe that shifting to the [new digital] platform will allow us to [operate] more efficiently in all of our markets around the world.”
Some of the most financially resilient retailers are aggressively closing stores, testing new store formats and investing in the online channel. Others -- especially the most highly leveraged companies -- will end up filing for bankruptcy.
Risk just continues to grow
Because of these factors, the FRISK® Stress Index shows a tremendous uptick in retail bankruptcy risk. For instance, industry financial risk for apparel retailers (SIC 56) shows that retail risk is 364% greater than before the Great Recession hit:
More sectors than retail are at risk
When retailers fail, there can be many ripples downstream.
Suppliers may fail. Downstream REITS and real estate developers get riskier, as vacancies increase and rents dry up. Bond investors take a hit, as junk-rated debt issuers default. And unsecured trade creditors can be left with big losses following a bankruptcy filing.
Because of the chain reaction when retailers fail, it is increasingly important to monitor public company performance and financial stress.
Credit risk monitoring strategies to mitigate your risk
When retail chains and suppliers are publicly traded entities, the standard credit monitoring tools for private companies simply don’t work to assess their level of risk. In those cases, the FRISK® score assesses whether a company will file for bankruptcy within 12 months with extreme accuracy. See our accuracy scorecard here.
But what of distressed retailers like Payless Shoesource, Claire’s Stores, and others that are controlled by private equity or hedge funds, and have either filed or are at increased risk of filing for bankruptcy? Many of these privately-held companies are extremely leveraged, and higher risk, too.
We get asked that question all the time. In addition to advanced strategies we can offer, we’ll share some timely advice from leading bankruptcy attorney and expert Bruce Nathan, of Lowenstein Sandler. In these situations, telltale events such as a change of leadership, changes in the Board of Directors (either resignation of existing board members or the addition of new ones with a bankruptcy background), formation of an ad hoc insolvency committee, or retention of external bankruptcy professionals, to name just a few -- all provide a timely warning that more bad news is coming.
Bottom line: closely watch the FRISK® score as well as your news alerts, for a heads up on increasing retailer financial distress in your portfolio.
Find out how the financial stresses in retail might affect your risk exposure: Contact us for a free personalized portfolio assessment.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.