Tiger Group Expert: Retail’s Downward Slide to Continue in 2018
NEW YORK, Feb. 28, 2018 /PRNewswire/ — Retailer bankruptcy filings in 2017 approached numbers not seen since the Great Recession—a trend that will continue for the rest of this year and likely into 2019 as well, writes Michael McGrail, Chief Operating Officer of Tiger Group, in a column for ABL Advisor, an online publication serving the asset-based lending community.
While some analysts predict either a slowdown in bankruptcies and store closures or even an outright reversal of fortunes for retailers this year, McGrail cites strong headwinds facing U.S. department stores, mall-based specialty retailers and smaller furniture chains, among others. “The safest bet, as we see it, is that today’s generally positive economic trends will not be enough to save many of the decades-old chains that are nearing the end of their lifecycles,” observes McGrail, a veteran of the ABL sector.
All told, at least 21 major retailers filed for bankruptcy protection last year. Working alone or with partners, Tiger Group ran liquidation sales for Gander Mountain, Gordmans, RadioShack, MC Sports, Vanity, Sears Canada and hhgregg, to name a few. As McGrail notes in the column, the firm also entered into multiple private deals involving undisclosed retailers, virtually all of which were household names. Meanwhile, the list of high-profile bankruptcies in 2017 also includes the likes of Limited, Wet Seal, Eastern Outfitters, BCBG Max Azria, Rue21, True Religion, Perfumania, Vitamin World and Aerosoles.
In the Feb. 21 column (“Retail Bankruptcies–Will the Shakeout Persist?”), McGrail writes that most of the bigger transactions in 2017 involved companies that were massively overleveraged—a situation facing many other retail chains in today’s market. “When you are unable to cover your interest and bond payments,” he writes, “your demise will be dictated by financing. Of course, if the Federal Reserve raises interest rates to more ‘normal’ levels this year, a possibility that at the time of this writing had begun to roil the stock market, the move would further increase the likelihood of overleveraged chains needing to restructure.”
He also points to the weakened state of many retail operators today. Traditional chains face stiff competition from the likes of Amazon.com and Walmart.com, but they are also paying the price for aggressive expansion strategies executed in years past, McGrail says.
“While the bulk of retailer expansion occurred prior to 2008, a few retailers have selectively opened new stores as the economy gradually recovered,” he writes. “However, expansion stores in new markets typically need time to achieve local recognition and community goodwill before turning a profit. Given the ongoing contraction of sales in U.S. brick-and-mortar retailing, the generally lower profits at such expansion stores are now a liability for those chains that chose to grow.”
Meanwhile, changes in consumer spending patterns are visible on a number of fronts. McGrail notes that national retailers used to sign leases running anywhere from 10 to 20 years. Today, some of these chains are asking for short-term leases with five-year renewal options, he relates.
The shift in spending can also be seen in the lower recovery values on liquidations in certain retail segments. “In furniture, hanging a going-out-of-business sign no longer results in the same level of traffic and sales it once did,” McGrail writes. “The same is true of GOBs for mall-based retail stores due to less foot traffic. Smartphone-addicted tweens, once the prime sales target, now barely acknowledge the existence of malls. As a result, U.S. mall traffic decreased 5.5% year-over-year in 2017 alone. Additionally, per-store inventory levels are relatively small in mall-based chains, which puts significant constraints on the advertising spend during a liquidation. Historically, what worked was to simply rely on the existing traffic at the mall to propel the GOB. As this traffic wanes, recoveries for mall-based stores decrease in kind.”
In U.S. retailing, there are certainly some positive stories, he says. Many chains have made significant progress in adapting to the new normal by shedding underperforming stores, ramping up omni-channel capabilities, adding food, shrinking store prototypes, signing store-in-store deals and the like. Bearing this in mind, one could argue that we’re experiencing a normal evolution and that the term “retail apocalypse” is a hyperbolic cliché, McGrail writes. “Nonetheless,” he concludes, “the unfortunate reality is that brick-and-mortar stores are clearly in the midst of an ongoing shakeout. Irrespective of economic conditions, the ABL sector can count on a continued, dramatic transformation of the retail industry.”
The full column is available at http://www.abladvisor.com/articles/13494/retail-bankruptcies-will-the-shakeout-persist.