These retailers could be at risk in 2018
Credit ratings indicate possible financial pitfalls
As holiday revelers put the finishing touches on their gift lists, some of the stores where they’ve been shopping may face a rough new year.
The number of U.S. retail and apparel companies at potential risk of defaulting on their debts or seeking bankruptcy court protection continues to grow, according to an analysis by rating agency Moody’s for USA TODAY. The list surpasses levels reached during the past recession and may signal worsening financial struggles in 2018.
Facing competition from online retail giants Amazon and Walmart, along with low levels of cash, companies such as Sears and Kmart owner Sears Holdings, preppy apparel retail-
er J. Crew Group, teen accessories seller Claire’s Stores and nearly two dozen other retailers had some of the lowest credit ratings issued by Moody’s as of mid-December.
“You could throw a dart at that board and basically hit somebody who’s defaulting” on company debt or filing for bankruptcy court protection, said Charles O’Shea, senior retail analyst for Moody’s Investors Service.
That “board” includes well-known companies that serve a variety of shoppers, tastes and preferences: luxury retailer Neiman Marcus, nutritional supplement seller General Nutrition Center, better known as GNC, and footwear companies such as Nine West, TOMS shoes and Calceus Holdings, the parent company of Cole Haan.
Rating companies’ distressed lists historically have served as a potential early warning for consumers and investors. Five U.S. companies named on a Moody’s distressed retailer list in February filed for bankruptcy court protection in 2017: Gymboree, Rue21, True Re- ligion Apparel, Charming Charlie and Payless ShoeSource.
All but Charming Charlie, which filed Dec. 11, emerged from bankruptcy after closing stores and shedding debt. More than 30 U.S. retailers filed for bankruptcy protection during the first 11 months of 2017, according to research by Trepp, an information and analytics provider to the structured finance, commercial real estate and banking markets.
Moody’s data show 26 U.S. retail and apparel companies, or 18.6% of the companies it rates in that sector, have credit ratings of CAA or lower. That means their credit is deemed speculative and considered high-risk. In contrast, 19 retailers made Moody’s distressed list during the height of the Great Recession nearly a decade ago, representing 16% of the rating giant’s retail and apparel portfolio at that time.
Moody’s competitor S&P Global Ratings issued similarly downbeat news in a report in late November that rated the retail and restaurants sector as the most distressed in the USA.
“The unusual thing is this is happening in a macro-environment that’s pretty good for retailers. Consumers are spending,” O’Shea said. “It was a very different environment during the Great Recession.” Retail defaults could accelerate in 2018 if companies face refinancing difficulties, he said.
Heavy borrowing, followed by looming refinancing and repayment deadlines, can make it more difficult for traditional retailers with physical stores to execute the pivot to e-commerce to compete with online rivals increasingly favored by U.S. consumers.
Toys R Us filed for bankruptcy protection in September, saying it needed help dealing with $5 billion in long-term debt that cost the retailer roughly $400 million to service each year. The heavy debt load made it difficult to maintain the upkeep and condition of its stores, provide faster shipping options and offer a subscriptionbased delivery service, Toys R Us Chairman and CEO David Brandon said in a bankruptcy court declaration.
Charming Charlie, a Houstonbased women’s fashion accessories seller, had difficulty dealing with the U.S. consumer shift away from traditional stores. Robert Adamek, the company’s chief financial officer, said the sweeping change was made worse by merchandising miscalculations, an overly broad vendor base and other issues that created a funding crisis.