Retail Zombies Haunt Industry
The lengthy list of retailers teetering on the edge of bankruptcy but not being allowed to die is holding the rest of the industry back
By Miriam Gottfried
Investors are normally a ruthless bunch but some are keeping alive a range of battered retailers, which is making things worse for the already struggling industry.
More retailers are teetering on the edge of bankruptcy than at any point since the recession.
Moody’s rates the debt of 19 retailers, or 13.5% of the retailers it covers, as “speculative, of poor standing and subject to very high credit risk” or worse. That is up from only 5.6% of the ratings agency’s retail portfolio at the end of 2011 and compares with 16% in 2009 in the middle of the financial crisis.
As dismal as things are among stores fighting e-commerce competition and endless price pressure, not that many have gone bankrupt. American Apparel, Limited Stores, Wet Seal and Sports Authority so far have been more the exception rather than the rule.
The roster of the living dead is mostly made up of household names, including publicly held companies Sears Holdings, Fairway Group Holdings and Bon-Ton Stores and private-equity-owned David’s Bridal, TOMS Shoes, True Religion Apparel, Nine West Holdings, Payless ShoeSource, Gymboree, Claire’s Stores and J. Crew parent Chinos Intermediate Holdings.
The future doesn’t look any brighter. A Republican proposal to tax imports by making them nondeductible expenses and exempt exports could further burden these companies.
To buy themselves time, some of the companies have done distressed-debt exchanges, in which bondholders agree to take a haircut, and other more creative arrangements. In September, Claire’s said it swapped $574 million of debt for new term loans that mature in 2021. And in December, J. Crew moved $250 million worth of intellectual property to a Cayman Islands subsidiary with the aim of borrowing against the assets and using the proceeds to buy back some of its debt. Gymboree, which has a $769 million secured term loan due February 2018, could end up looking for a similar out.
But investors may just be prolonging the inevitable. “What is the end game?” asks Moody’s retail analyst Charles O’Shea.
The problem is investors don’t want to believe the end is near. Instead bondholders are clinging to the idea that at least part of the dire situation is a temporary—the result of bad weather, a dip in tourism or fluctuations in oil and gas prices—as opposed to a secular decline. By allowing the most troubled retailers to live on, investors are contributing to the glut of bricks-and-mortar stores that has been weighing on retail margins, leading to store closures even at healthier retailers such as Macy’s.
A rise in bankruptcies wouldn’t be painless for the survivors. There would be inventory liquidations and even more vacancies at malls. Still, stronger retailers’ best hope for survival may be putting the zombie retailers to rest.