As the coronavirus pandemic keeps America’s retail stores closed, Michael McGrail is gearing up for what is shaping up to be a busy summer of running going out of business sales at some very prominent chains.
“Some companies are just not going to survive this,” says McGrail, who is the COO of one of the world’s largest asset disposition and valuation firms, Tiger Capital Group. It will be McGrail’s team — which often includes store associates of a stricken retailer — that hangs the “Everything must go” signs and works to fetch top dollar on fixtures and other inventory.
McGrail declines to say which retailers have been calling him up for asset appraisals, except to note the names wouldn’t be any big shock.
Such is the current life for McGrail and others in the retail bankruptcy and restructuring fields. In talking to a host of experts, one thing is abundantly clear: A thunderstorm of bankruptcies in retail are about to rain down on Wall Street thanks to the aftershock of the coronavirus.
Once formidable retailers will either vanish entirely or emerge from bankruptcy with 75% smaller store networks. Those retailers that somehow manage to avoid bankruptcy by way of a creative debt raise or other restructuring will find the road ahead bumpy at best.
It’s going to be ugly
We haven’t seen a strong uptick in bankruptcies (only four so far this year, per BDO data) this month for several reasons, experts explain.
First, preparing for a structured entry into bankruptcy typically takes two to three weeks. Retailers were only thrust into mass social distancing driven store closures in mid- to late-March. Most held out hope they would reopen stores in April, which pushed off bankruptcy planning. Secondarily, even the worst positioned big name retailers still have enough cash on hand to move through April and May (especially with workers furloughed) — that allows executives to consider all options besides a headline-grabbing bankruptcy.
And lastly, one of the benefits of a retailer filing for bankruptcy is to raise cash for creditors by holding store closing sales. That can’t happen with state mandated store closings.
“You can’t do that now. You can’t do that with everyone homebound and you can’t make it to the store. So there is no benefit to bankruptcy,” says David Berliner, lead of BDO’s restructuring and turnaround services practice.
But with rent, interest, and other expenses continuing to accrue and no idea on when stores will be allowed to reopen, retailers are coming to the conclusion they must get ready to file for bankruptcy to alleviate costs in the hopes of surviving. The avalanche of filings are likely to begin hitting around the time of store re-openings in late May and early June, experts believe.
That threat alone will probably keep the sector’s stock prices under pressure until it becomes more apparent which retailers will live and and who will die.
“I think many of these companies will file [for bankruptcy], and it’s not a handful. It’s several dozen. And that’s a scary number. It’s far more than we have seen over the last several years combined,” says Stifel managing director Michael Kollender, who leads the consumer and retail investment banking group for the firm. Kollender and his colleague James Doak at Miller Buckfire (Stifel’s restructuring arm, where Doak is co-head) have worked on dozens of consumer and retail bankruptcies in recent years, including Aeropostale, Gymboree and Things Remembered.
“We will see some major chains go away and not come back. These are chains that were struggling before the situation. COVID-19 will put them over the ledge,” Kollender adds. Doak thinks there will be numerous creative deals struck by retailers in a bid to stay afloat — for instance a mall owner takes a stake in an anchor tenant.
There is precedent here as it was a consortium of mall owners, Simon Property Group and General Growth Partners, that won the auction for Aeropostale’s assets in 2016. Both had an interest in keeping Aeropostale open as it had been an important traffic-driving (and rent-paying) tenant for years.
To Doak’s point, the creativity by retail executives looking for a lifeline are starting to emerge.
J.C. Penney, which decided to skip an interest payment on April and is exploring a possible bankruptcy filing among other life-saving options, has received a $300 million financing offer, according to Bloomberg. A J.C. Penney spokesperson declined to comment on the report.