Re­tail land­scape to shift more

Ad­di­tional bank­rupt­cies are ex­pected

Baltimore Sun Sunday - - MARYLAND - By Kather­ine Do­herty, Lau­ren Cole­man-Lochner and El­iza Ron­alds-Han­non

The U.S. re­tail apoca­lypse is far from over.

While the col­lapse of sto­ried mer­chants like Sears and Toys “R” Us has left stores shut­tered across Amer­ica, re­tail­ers still make up about a fifth of the uni­verse of dis­tressed bor­row­ers. Con­sumer con­fi­dence is slump­ing.

Last Fri­day, the head of the big­gest mall owner in the U.S. cau­tioned that more re­tailer bank­rupt­cies are com­ing. Economists are in­creas­ingly wor­ried about a re­ces­sion in the next year. And even rel­a­tively strong store chains such as Macy’s and Kohl’s have warned that their re­sults over the hol­i­day shop­ping sea­son were lack­lus­ter.

All this adds up to what Barry Bo­brow and Lynn Whit­more at Wells Fargo Cap­i­tal Fi­nance see as a pro­longed restruc­tur­ing for the in­dus­try.

“We’re head­ing more and more into a dis­tressed mar­ket,” said Bo­brow, man­ag­ing di­rec­tor at Wells Fargo Cap­i­tal Fi­nance. Whit­more, man­ag­ing di­rec­tor of re­tail fi­nance, says re­tail­ers are la­bor­ing un­der debt lev­els that “just eclipses any­thing we saw in the re­ces­sion.”

There are rea­sons to be hope­ful about the re­tail out­look im­prov­ing. Stores have im­proved their on­line sales, which could help op­er­at­ing in­come grow 5 per­cent to 6 per­cent this year, ac­cord­ing to Moody’s In­vestors Ser­vice. The rat­ings firm raised its out­look on the in­dus­try to pos­i­tive from sta­ble in Oc­to­ber, the first shift since July 2015.

Only about 4.9 per­cent of re­tail mort­gages were over­due in Jan­uary, down from more than 6 per­cent at the start of 2018, ac­cord­ing to com­mer­cial mort­gage bond data provider Trepp. And many of the big­gest trou­bled re­tail­ers have al­ready failed, said Sharon Bonelli of Fitch Group.

Even so, there are still plenty of strug­gling mer­chants, and more will run into trou­ble if eco­nomic growth slows. David Si­mon, chief ex­ec­u­tive of­fi­cer of Si­mon Prop­erty Group, the largest mall owner in the U.S., said on a con­fer­ence call with in­vestors on Fri­day that there are store chains that his com­pany is “ner­vous” about, and that more bank­rupt­cies are com­ing for re­tail­ers with high debt loads.

Here are com­pa­nies that have been flagged by an­a­lysts at Moody’s, S&P and Fitch as some of the most at risk of restruc­tur­ing their debt or in some cases even fil­ing for bank­ruptcy.

Neiman Mar­cus

The lux­ury re­tailer is sad­dled with nearly $5 bil­lion of debt af­ter its 2005 lever­aged buy­out and its 2013 sale to an­other set of pri­vate eq­uity own­ers. The re­tailer has a $2.8 bil­lion loan due next year, and has too much debt rel­a­tive to its earn­ings, Moody’s an­a­lyst Christina Boni said in an in­ter­view. “If we had a magic wand and could get rid of their bal­ance sheet is­sues, Neiman could move for­ward, fo­cused on its core op­er­a­tions,” she said.

The re­tailer’s 8 per­cent notes due Oc­to­ber 2021 trade at less than 50 cents on the dol­lar. Its first round of talks with its lenders ended last year in stale­mate. The com­pany is try­ing to talk to cred­i­tors again to cut its bor­row­ings. A rep­re­sen­ta­tive for the Dal­las­based re­tailer said the com­pany is con­fi­dent it can come to a “mu­tu­ally ben­e­fi­cial so­lu­tion” with stake­hold­ers.

Neiman Mar­cus is in full com­pli­ance with debt agree­ments and has am­ple time to re­fi­nance its debt, the rep­re­sen­ta­tive said.

Pet Smart and Petco

Two of the largest pet sup­ply stores con­tinue to face com­pet­i­tive pres­sures from mega-re­tail­ers such as Ama­zon.com and Wal­mart. Both PetS­mart and Petco have strug­gled to im­prove their on­line sales to help keep com­peti­tors at bay.

PetS­mart ac­quired Chewy.com in 2017, tak­ing on $2 bil­lion of ad­di­tional bor­row­ings in the process. Un­for­tu­nately, PetS­mart’s earn­ings are de­clin­ing, mak­ing it harder to carry its debt, Moody’s an­a­lyst Mickey Chadha said.

A rep­re­sen­ta­tive for PetS­mart said, “The pet cat­e­gory con­tin­ues to grow. While we con­tinue to ex­pe­ri­ence cus­tomer chan­nel shift to on­line at PetS­mart, we feel we are well po­si­tioned to cap­ture and ben­e­fit from the growth in on­line through Chewy, and we are gain­ing mar­ket share on an ag­gre­gate ba­sis.”

Petco has less debt, Chadha said, but it re­mains to be seen whether its own on­line plat­form can stay com­pet­i­tive, and both chains are at risk of los­ing ex­clu­sive prod­ucts that draw shop­pers.

A rep­re­sen­ta­tive for Petco said the com­pany re­built mo­men­tum last year and re­turned to growth. The com­pany fo­cused on im­prov­ing nu­tri­tion in their pet food, ex­panded its groom­ing, train­ing and vet­eri­nary ser­vices busi­nesses, and achieved “dou­ble-digit growth” in e-com­merce, the rep­re­sen­ta­tive said.

J.C. Pen­ney

J.C. Pen­ney has been through it all: board­room bat­tles, law­suits, man­age­ment turnover, ac­tivist bat­tles — and that was just in 2013. In the five years since, it has had three CEOs. The cur­rent head, Jill Soltau, took over in Oc­to­ber and said the re­tailer is on track to gen­er­ate free cash flow in the lat­est fis­cal year and re­duce its bloated in­ven­tory.

To do so, it may have to shut­ter many more out­lets. The global re­tail think tank Core­sight Re­search pre­dicted one fifth of U.S. depart­ment stores — about 1,150 — will close by 2023 no mat­ter what they do.

“The U.S. has far too many depart­ment stores,” said Deborah Wein­swig, Core­sight’s CEO. “In par­tic­u­lar, it has far too many mid­mar­ket depart­ment stores that are com­pet­ing in a sim­i­lar, and highly chal­lenged, space.”

A spokes­woman for J.C. Pen­ney said that credit rat­ing firms have main­tained their high­est liq­uid­ity rat­ing for the re­tailer, and it has only $160 mil­lion of its more than $4 bil­lion of debt com­ing due in the next four years.

Iconix Brand Group

Over the past four years, the owner of brands such as London Fog and Mos­simo has en­dured a U.S. Se­cu­ri­ties and Ex­change Com­mis­sion ac­count­ing in­ves­ti­ga­tion, which isn’t over, and the de­par­ture of its founder as sales steadily slid. Now, Iconix has around $700 mil­lion of debt, in­clud­ing more than $100 mil­lion of busted con­vert­ible notes due 2023, which trade at about 44 cents on the dol­lar.

It’s even fight­ing with Jay-Z over his Ro­cawear brand, which it ac­quired in 2007.

MARKELL DELOATCH/AP 2015

J.C. Pen­ney is a re­tailed that’s been iden­ti­fied by a global think tank as a re­tailer strug­gling to stay afloat.

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