Retailer first-quarter earnings in the U.S., in part due to the impact of the coronavirus, were terrible. Companies endured significant year-over-year revenue declines, as only so much merchandise could be distributed through online channels; inventories, as consequence, ballooned. Apparel retailers have required significant adjustments to handle their financial leverage and operating lease commitments. Brooks Brothers Group, Inc. and Tailored Brands Inc., in particular, fell prey to slowing demand for professional business attire, a trend which was accelerated by the coronavirus pandemic.
CreditRiskMonitor® is a leading web-based financial risk analysis and news service designed for credit, supply chain, and other risk professionals. The core of the service is comprised of two proprietary bankruptcy models, the FRISK® score and PAYCE® score, which accurately predict public company bankruptcy using a "1" (highest risk)-to-"10" (lowest risk) scale. Our commercial credit reports contain these predictive analytics, trend analysis, vital news, and regulatory filings, all of which help risk professionals navigate through even the most turbulent times.
Brooks Brothers Bankruptcy
In a June article, the retail list CreditRiskMonitor compiled showed that all companies – whether public or private, large or small – have the capacity of filing for bankruptcy. Iconic Brooks Brothers, which operated for more than 200 years, can now be added to the list of retail casualties. The gradual shift towards casual dress and less expensive alternatives was manageable, yet the abrupt consumer demand collapse from the pandemic forced the company into bankruptcy court on July 8, 2020.
While credit professionals may have been aware of these overarching challenges, payment history failed to provide any meaningful indication of bankruptcy risk until the month before filing. The DBT (Days Beyond Terms) Index actually showed prompt payment of invoices on a dollar-weighted basis to its manufacturing and service vendors. Conversely, the PAYCE® score, which covers more than 80,000 private companies across North America, demonstrated consistently high risk over the last 12 months.
Not only would the company have been classified as high risk, but vendors who were privy to such information could have taken action to eliminate exposure. Such business decisions might include the request for a letter of credit, cash on delivery, purchase of insurance, or adjustment of credit terms. In addition, these risk management steps can circumvent millions of dollar exposure and financial losses. According to the bankruptcy petition, Brooks Brothers carried between $500 million and $1 billion in outstanding liabilities.
Another Domino to Fall
Tailored Brands, Inc. is only hanging on by a thread. Despite the strong payment behavior (as denoted by its DBT Index of “9” for most of the last year), its FRISK® score has now fallen to a "1", the highest bankruptcy risk category:
Throughout the spring and summer of 2020, one of the most notable factors contributing to the FRISK® score’s severe bankruptcy risk reading has been subscriber crowdsourcing activity. Senior risk officers employed by more than 35% of the Fortune 1000 are leveraged in this specific data component. Whenever this group of professionals becomes concerned about a particular company their research actions will reflect unique patterns within the commercial credit report that is aggregated into the FRISK® model computation.
In the case of Tailored Brands, financial counterparties are worried about the financial wherewithal of the company. On July 6 those concerns proved on the mark, as Tailored Brands announced it had missed an interest payment of $6.1 million on its bonds. This sets the stage for bankruptcy without substantial relief. Effectively, subscriber crowdsourcing highlighted the company’s poor debt servicing capacity several months in advance of the default. Crowdsourcing is highlighting similar concerns across the retail landscape and in other industries, as well. This real-time warning provided via the daily updates to the FRISK® score allows risk professionals to stay ahead of bankruptcy.
According to Bloomberg’s tracker, “retail companies are going bankrupt at the fastest pace on record”, with the total count for the industry in year-to-date 2020 surpassing the previous recent high reached in 2008, during the Great Recession. In CreditRiskMonitor’s view, retail bankruptcy filings will continue at an elevated level throughout the course of 2020 and into 2021, as consumer spending remains weak and retailer liquidity continues to dwindle. Whether your company is involved with apparel manufacturing, product transportation, property leases, or any third-party service, now is the most crucial time to be monitoring retail financial risk. If you would like to receive a comprehensive risk assessment, contact us today to see how our resources and tools will help your company.