2020 was a pivotal year for retail bankruptcies

2020 will go down in history for many dubious distinctions, including retail bankruptcies. There have been more than three dozen bankruptcy filings by national and regional chains as stores have been closed due to Covid-19, decimating sales of non-essential traditional businesses.

The number of consumer-facing businesses that have restructured in court is even greater when you include fitness centers, such as 24 Hour Fitness and restaurant chains like Chuck E. Cheese, which have both been authorized to come out of bankruptcy.

In total, retail deposits resulted in a record default rate of nearly 20%, meaning that one-fifth of all high-yield loans held by retailers amounting to $ 10.6 billion were in default over the past 12 months, according to the rating agency Fitch.

In fact, the figure of $ 10.6 billion is almost double the previous record of $ 5.7 billion reached in 2017, according to Eric Rosenthal, senior director of leveraged finance at the company.

Among the cases were some of the biggest retail bankruptcies in recent years, including those of a luxury supplier Neiman Marcus and department store banner JCPenney.

“Most of the flaws that we expected to see over the next two years, with or without a pandemic, have occurred,” said David Silverman, retail analyst at Fitch, noting that there was no surprises.

Not all of the retailers who have applied for bankruptcy protection have done so because of the short term debt maturity.

Custom brands, the parent of Men’s Wearhouse, is an example of a trader who “strategically” used Chapter 11.

“We believe some retailers used the bankruptcy process in 2020 to both ‘clean up’ their capital structures and improve their store portfolios by closing stores at a faster pace than their rental terms would allow. otherwise, ”said Silverman.

The good news for non-essential retailers who struggled in 2020 is that 2021 looks relatively more promising with vaccine distribution.

In addition, a certain level of collective immunity could be reached in early fall, said Dr Anthony Fauci in a Facebook interview with California Governor Gavin Newsom on Wednesday. This would lead to a return to normal, likely boosting sales of clothing, accessories and beauty products, as well as restaurants, travel and entertainment in the second half of the year, Silverman said.

Based on its outlook for 2021, rating agency Moody’s said department stores, budget stores and specialty stores are likely to experience the biggest rebounds in operating profit in 2021, although it will take several. years for clothing to return to pre-pandemic levels.

Expectations from rating agency S&P point in the same direction, saying it believes consumers will reinvest their money in experiences in the second half of the year after continuing their current spending habits in the first six months of 2021.

More immediately, retail will get a little boost from a $ 900 billion stimulus package signed on Sunday night.

On the other hand, and perhaps ironically, the New Year could prove to be more difficult for essential retailers (including Target and Home Depot are examples) that worked well during the pandemic, according to Silverman. Indeed, their sales will likely be below the heady levels of 2020, with consumers reallocating dollars to travel, meals and entertainment in the second half of the year to a new standard, he said.

“We actually think retailers in general might have a more difficult year in 2021,” said Silverman.

Moody’s has selected the grocery store in particular as likely to experience lower operating income in 2021.

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