Will the Retail Apocalypse Return?
After years of large retailers and malls struggling prior to the COVID-19 pandemic and the most vulnerable retailers filing for bankruptcy relief in its immediate wake in early 2020, the US economy rebounded strongly with the aid of government assistance and low interest rates. As a result of sustained economic growth and consumer spending, chapter 11 bankruptcy filings, particularly those in the retail sector, reached historic lows towards the end of 2020 and through 2021. However, certain economic changes could trigger an uptick in distress across the retail sector.
Since the economy rebounded following the initial months of the pandemic, consumer demand has risen while pandemic-related shutdowns have caused global supply chain issues. The costs for food, vehicles, electricity and housing, among others, have increased exponentially, causing inflation to rise at the fastest pace in 40 years.[1] The US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for all items rose 7% for the 12 months ending December 31, 2021 (the largest 12-month increase since June 30, 1982), and has continued to rise into 2022.[2] Jobs data from the Bureau of Labor Statistics also found that while average hourly earnings rose, inflation eroded pay at the same time that consumers have taken on more debt than in any year since before the 2008 financial crisis.[3]
As a result of mounting consumer debt and the expiration of government stimulus credits, consumers may be forced to cut back on discretionary spending in order to meet their debt obligations. In addition, as inflation continues to erode pay, consumers may pivot to discount options, forcing retailers to make difficult decisions in this new environment, including reverting to various forms of discounting measures in order to fight for market share.
Moreover, despite the creation of a record number of jobs in 2021, retailers have struggled to find employees for their stores or warehouses. While these staffing shortages have caused distribution, inventory, and operational problems for retailers of all sizes, smaller retailers have struggled disproportionately with their ability to combat labor issues, supply chain disruptions, manufacturer preferences, and inflation when compared to larger retailers.[4]
Despite the low number of retail bankruptcy filings in the second half of 2021 and the first quarter of 2022, a number of struggling drug stores, apparel retailers, and department stores have announced efforts to right-size and close stores. In fact, last month, Rite Aid announced the results of its fiscal fourth quarter earnings and reported that it plans to generate $170 million in cost savings during the next fiscal year through, among other things, the closing of 145 unprofitable stores.[5] Rite Aid also received a FRISK Score of 1 from CreditRiskMonitor, the lowest score available indicating the highest risk for bankruptcy.[6] At the end of 2021, CVS also announced its plans to close 300 stores per year between 2022 and 2024 as part of a shift to e-commerce.[7] In the apparel space, American Eagle announced its plans to close 225 stores.[8] Other notable retailers to watch include Party City and The RealReal (each having carried a FRISK Score of 2),[9] chapter 22 candidates (those retailers that recently emerged from a chapter 11 bankruptcy and could refile), and certain movie theater and fitness center chains.
While bankruptcy filings continue to remain low, the combination of continuing inflation, rising interest rates, supply-chain disruptions, labor issues, consumer debt and spending, and the expiration of government assistance, may create another wave of distress and bankruptcy. Retailers, landlords, manufacturers, vendors, and lenders should remain nimble and consider alternatives to be prepared for the changing economic climate and its impact on consumer spending habits and retail operations across the sector.
ArentFox Schiff LLP’s national Bankruptcy & Financial Restructuring practice has counseled parties in each of these roles through out-of-court restructurings and retail bankruptcy cases across the country.
