GONE TO RACK & RUIN
Good: Retail sales up Bad: Retailers hurting
Scratch the surface of recent retail sales gains, and you’ll find thousands of shuttered stores and billions in distressed debt underneath.
It seems like a contradiction: Retail sales rose a healthy 5.6 percent in January over the yearago period, but the industry is convulsing with store closures, bankruptcies and liquidations by major chains — topped off by levels of distressed debt not seen since the Great Recession.
What’s going on? Overall, topline results mask brick-and-mortar stores’ desperate battle against Amazon, which has radically reshaped American shopping habits with its Prime membership club, which offers rapid shipping of millions of products for a flat annual fee.
To compete, traditional chains are slashing prices while struggling to become omnichannel sellers with products in-store, online or whatever mixture consumers prefer. This battle has been heating up for years, but traditional retail is on the ropes now after online sellers scored a huge holiday-season victory.
“E-commerce acceleration is behind this dichotomy,” said Garrick Brown, vice president of retail research, Americas, at Cushman & Wakefield, adding, “Consumers came through for the holidays, but they really came through for [Amazon Chief Executive] Jeff Bezos.”
More shuttered stores and distress lie ahead. Cushman’s Brown forecasts as many as 5,000 store closures by major chains this year — a 25 percent spike from 2016.
Last month, ratings agency Moody’s Investors Service sounded alarm bells with a report stating that nearly 14 percent of the 19 retail and apparel companies it tracks have debts rated junk or Caa/Ca — the biggest percentage of debt so deeply into junk terrain since 2009. Pressure is rising, with nearly one-third of the $3.7 billion in public debt outstanding held by these chains coming due by the end of 2018.
“It’s going to be a very … challenging year for retail,” said Charles O’Shea, lead author of the Moody’s report.
There are bright spots within the sector — including off-price retailers such as Burlington Stores, which last week reported a 27 percent fourth-quarter earnings increase, while low interest rates will benefit retailers seeking to refinance rapidly maturing debt.
As retail limps into 2017, however, many stores are still recovering from a holiday season marked by deep price cuts that began as early as Nov. 1. These discounts, and omnichannel ef- forts, didn’t grow the pie, however — they just shifted the timing or channel of revenue. A chart from NPD Group shows zigzagging lines throughout the nine-week season, with an overall sales decline of 1 percent.
“They wanted an earlier holiday and they got it, but earlier doesn’t mean bigger,” said Marshal Cohen, chief industry analyst, retail, at the NPD Group.
Consumers will continue em- bracing online shopping with its rapid shipping and ultralow prices. The trends shoppers love, however, are squeezing the black ink right out of retail.
“You can always sell a product if you price it a certain way, but the question is, are you making enough money to make it worthwhile? Increasingly, the answer is clearly no,” said Joshua Shapiro, chief US economist at MFR, a financial consulting firm.