Strong Start to December, But Retail Business Bankruptcy Ahead?
The 5 weeks between Thanksgiving and Christmas typically lifts the spirits - and finances - of even the most beleaguered retail brands.
This year appears to be no different. Black Friday and Cyber Monday provided consumers with more reasons to spend, and boy did they.
Still, retail competition has been fierce. eCommerce continues to challenge numerous brick-and-mortar stalwarts, and despite two more shopping days this year than last, deeper discounts and more couch shopping continues to pressure the sector.
What do we see when we look more closely at recent results?
Early Holiday 2016 retail results ... but don’t be fooled by a festive topline
The holiday season is a tricky time of year for retailers, despite high spirits as the season begins.
First, the good news:
- According to an Adobe survey, online spending over the Thanksgiving/Black Friday weekend reached a new peak of $5.27 billion, up 17.7 percent over 2015.
- A look at the Consumer Sentiment Index for November confirms that Joe Public has been in a buoyant mood these past few weeks. The index, which measures consumer perceptions of current economic conditions, measured 93.8 for the month, up from 87.2 in October – a six-month high.
- Chains like Kohl’s and Target enjoyed record online holiday sales, pushing their respective share prices north.
But while early results may paint a positive picture, as every good credit professional knows, they don’t tell the full story.
In the inevitable dash for holiday sales, the period is fraught with risk: fierce competition pressures gross margins, online deals attract buyers but fulfillment costs cut into profits, and a desire for lean inventories means that the line between accurate forecasting and successful merchandising is is razon thin.
Even winning retailers face unexpected seasonal markdowns and lower margins – and without sufficient financial health to weather the storm, it can end badly, as this partial list of bankrupt retailers from 2016 clearly illustrates:
What's more, debt-laden retailers, many from ill-timed LBO’s, face an extra cash crunch. Combined with dropping mall foot traffic, it shapes up to be the perfect storm for financial distress in 2017.
Risk-laden retailers to watch in 2017
The obvious question becomes: who’s next?
In Creditors Could Push the Brakes on Retailers, we observed a list of financially troubled retailers teetering on the edge. Consider this chart of troubled brands as a high risk of bankruptcy fair warning:
An Update on Sears Holdings and Claire’s Stores
The fate of Sears Holdings and Claire’s bears extra scrutiny, so here’s an update:
Sears Holdings is one of the riskiest retailers on our radar. Barring another Christmas miracle, we don’t expect the storied retailer to make it through 2017. All year, the retailer has grappled with an unsustainable cash burn rate, and recent Q3 results (announced December 1st ) were grim. ‘Transformational Initiatives’ look like too little, too late, and despite financial maneuvering, little has fundamentally changed, in our view. With lower comp store sales, lower gross margins, growing operating losses, and a FRISK® score of ‘1’, the risk of bankruptcy remains at an all time high.
NOTE: Sears has a call to review Q3 quarterly results on this Thursday, December 8. If Sears is one of your counterparties, you may want to tune into the call.
Like Sears, Claire’s Stores has a FRISK® score of ‘1’, which signals the highest likelihood of business failure in the next 12 months. Mall traffic and gross margins continue to decline, and it continues to struggle with debt totaling $2.53 billion. FTI Consulting is advising Claire's as it aims to hold off default, pay creditors and manage its large fleet of stores.
How to Target Bankruptcy Risk in 2017
Careful due diligence and real-time credit risk monitoring is a must, in order to see past the top line retail figures and understand what’s really going on.
With this in mind, gain a better understanding of what advanced warning really looks like. Learn to see the pattern of warning signs as retail bankruptcy unfolds:
Read a post-bankruptcy analysis and case study
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 more than 56,000 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 $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.