Bankruptcy does not necessarily mean the end of a business. It can be a way to get out of debt, reorganize and come out of it stronger.
But during the coronavirus pandemic, bankruptcy filings are increasingly catastrophic for retailers. In turn, it threatens thousands of additional workers in an economy that has already suffered tens of millions of lost jobs.
The woes of retailers could also have an impact on this year’s election campaign, as jobs will increasingly become a priority for politicians seeking to attract the working class.
The bad news for retailers and their employees keeps piling up. Pier 1 Home Goods Channel This Week announced plans wind up his business after failing to find a buyer. Modell’s announced his intention to close his business to March. Grocer Earth Fare, which filed for bankruptcy in February, only found a buyer for part of it.
Compare their fortunes with retailers like Macy’s and Mattress Firm, which have used court protection to break out of bad leases and downsize at their most profitable stores. Some, like Gymboree and Payless ShoeSource, came out of bankruptcy to fall back. But at least they had a chance to come back.
Those shots are likely to be fewer in the wake of the coronavirus outbreak, according to retail and restructuring experts. Retail was already facing broader challenges, with shoppers increasingly abandoning malls for e-commerce. Now retail finance is gone as banks tighten their purse strings. It is also not clear that the buyers will be there. A second wave of coronavirus could be on its way later this year as states relax social distancing guidelines and reopen their economies under the leadership of the Trump administration.
“With unemployment on track to 20% and social distancing is an unpleasant reality, it’s hard for me to envision a world where a bankrupt business trying to get out of Chapter 11 proceedings will be able to present financial projections that lenders trust, ”said Eric Danner, partner in the Restructuring & Dispute Resolution Practice division of CohnReznick Advisory.
So far this year, the number of liquidation plans by bankrupt retailers has not exceeded previous years. According to data provider Debtwire, five of the 15 retailers that have filed for bankruptcy so far have announced plans to shut down their businesses, although some of those retailers could still turn into liquidation. Last year, 16 of the 25 retailers that filed for bankruptcy were liquidated. The previous year, 11 of 23 bankrupt retailers closed their doors.
But it wasn’t until May.
Modell’s sporting goods store in New York.
Michael Brochstein | SOPA Pictures | LightRocket via Getty Images
The full impact of the pandemic on retail is only just beginning to be felt. Neiman Marcus, J. Crew, Stage Stores, JC Penney and Centric Brands have filed for bankruptcy. Many more are expected to come as the fallout from the coronavirus strains the economy, restructuring advisers say.
Stage Stores, which has 700 department stores mostly in mid-sized markets and rural communities, has warned it may need to liquidate if it can’t find a buyer. He said in a hearing Thursday that he was in talks with 21 parties, eight of whom are interested in purchasing a large subset of his store’s current footprint, some distribution centers and, in some cases, his seat.
More bankruptcies and liquidations would put additional pressure on many of the remaining retailers rather than allowing them to benefit from reduced competition. As malls lose their flagship stores, shoppers have even less reason to go.
“When those stores go, volume almost disappears from the market – and it’s not easily replicated in other channels,” said Michael Dart, partner at AT Kearney and author of “Retail’s Seismic Shift”.
This means even more job losses in an industry which is one of the country’s main job drivers. Retail industry lost 2.1 million jobs in April alone, according to the US Bureau of Labor Statistics.
For JC Penney, the ability to come out of bankruptcy could affect up to 85,000 employees. The retailer filed for bankruptcy on May 15 after years of declining sales and a turnaround attempt by CEO Jill Soltau, the pandemic has been swept aside.
Soltau, who joined the company in 2018, had sought to turn the retailer around by refocusing on the in-store experience and apparel. Those efforts had worked before the pandemic pulled the rug from under the retailer, bankruptcy lawyers said in bankruptcy court in a hearing on Saturday. The retailer had made progress with lenders on $ 4.9 billion in debt, CFO Bill Wafford said in a court statement.
But then the pandemic took sales of bricks and mortar, where JC Penney does the majority of his business, to nearly $ 0.
An empty parking lot is seen outside a closed JC Penney Co. store in Mt. Juliet, Tennessee on Thursday, April 16, 2020.
Luke Sharrett | Bloomberg | Getty Images
In the event of bankruptcy, the retailer hopes to accelerate its sought-after recovery. He assesses the split of its real estate into a real estate investment trust and said it is closing nearly 30% of its stores.
To support its bankrupt business, JC Penney has $ 500 million in liquidity when it went bankrupt and $ 450 million in new funding from its creditors, mostly hedge funds. But only half of these loan funds are guaranteed. He would get the second half if he sticks to a list of steps and sticks to strict alliances. About a quarter of the $ 450 million in funding is intended to pay restructuring advisers, people familiar with the situation said.
This leaves limited liquidity to fuel JC Penney’s ambition. According to experts, this limited cash reserve could hinder its ability to come out of bankruptcy.
“Penney needs every penny he can get to remodel stores and persuade salespeople to keep shipping to them,” Erik Gordon, professor at the Ross School of Business at the University of Michigan. “This is not a reorganization where just reducing debt will put things in order.”
The terms of the financing agreement angered a creditor in a bankruptcy hearing on Saturday. A creditor’s advisor also criticized the retailer for paying millions in retention bonuses to its executives and an interest payment of $ 17 million to the same lenders funding the $ 450 million loan – both shortly before filing.
It is common for companies facing bankruptcy to pay large retention bonuses and advisory fees to ensure that the company has the best representation when it goes through bankruptcy.
A representative for JC Penney declined to comment.
Judge David Jones, who must approve all spending, used the hearing to remind executives, advisers and creditors exactly what was at stake. The company’s thousands of jobs, the judge noted, depend on the company’s ability to reemerge.
“There are 85,000 people who are the 85,000 most important people to me right now,” Jones said.