There are going to be lots of retail bankruptcies in the coming weeks and months.
Timing is key and having a plan is paramount, experts say, because a crash landing in bankruptcy is suicide.
As 630,000 retail businesses have been closed since mid-March, customers and employees are wondering who’s going to make it to the other side of the Great Resetting, as some are beginning to call this recovery.
Dallas-based Neiman Marcus and Plano-based J.C. Penney have landed on most analysts’ watch lists as their burdensome debt has been amplified by the pandemic.
Gordon Brothers, a go-to retail industry liquidator, has estimated that as many as 25,000 stores and 100,000 restaurants could end up closing permanently this year as companies scrutinize store leases and locations and ditch the borderline ones.
That forecast looms over the fact that stores and malls will begin to open on Friday in Texas and have started opening in a handful of other states.
“It may be a while before we see a rash of (bankruptcy) filings, a window of 60 to 120 days,” said J. Robert Bob Medlin, senior managing director at FTI Consulting. Medlin has been in the business of financial restructurings for 40 years, and FTI helps companies manage change and risk.
“Uncertainty is keeping many out of bankruptcy court,” Medlin said, “because there’s not a lot of visibility.”
Fort Worth-based Pier 1 Imports’ bankruptcy was basically mothballed when all its stores were closed because of the pandemic. It filed in mid-February and started going-out-of-business sales at half of its 900 stores. That was all halted, and without some revenue coming in, it’s burning through funds. In bankruptcy, when you run out of cash there is no more.
Of course, Pier 1’s management didn’t know what was ahead when it filed, and other companies feel the same way now.
In the past five weeks, retailers have done everything they can to stay out of bankruptcy.
They’re preserving cash by deferring rent, freezing costs, cutting salaries, furloughing employees and terminating contractors. They’ve drawn down their lines of credit to create a bigger cash cushion. They can sell assets.
“All those are things companies can do to adjust to downturns, but there’s never been one like what we’re seeing now,” Medlin said.
A first step in filing for bankruptcy is to obtain funds to use while the company is under the court’s protection. Debtor-in-possession financing starts with a 13-week forecast of cash needs.
“It’s Retail 101 to understand short-term cash flow, how much money is needed to operate,” and that’s not easy to do today, Medlin said. “Then companies have to show lenders a plan for how they’re going to survive.”
Many retailers didn’t pay April rent, but now lenders, landlords and retailers are all in the same boat. said Mark Dufton, CEO of real estate at Gordon Brothers.
“There is starting to be a heightened sense of cooperation to get through April, May and June,” Dufton said. “I don’t think anyone in the industry wants years of courtroom wrangling.”
The focus now is to get through the COVID period and take a hard look at their portfolios of stores going forward, he said during a webinar Tuesday hosted by Coresight Research founder Deborah Weinswig.
Retailers are also looking at property that could be sold to raise cash, especially if they’re trying to stay out of bankruptcy, Medlin said.
Banks are now working with retailers on their loan terms, offering 90-day moratoriums on debt, waiving fees and allowing them to draw on credit lines, he said.
That will help retailers buy themselves two to three months to see what the world will look like.
Clocks start to tick in bankruptcy. A huge one for retailers is a maximum of 210 days — an initial 120 days and an often-granted 90-day extension period — that they get to accept or reject store leases, Medlin said.
One of the principal reasons for retailers to reorganize in bankruptcy is to shed unprofitable leases. Right now stores are combing through their leases to know which stores they would ask a court to close.
That’s taking more time in a world that’s going to look different.
The other big reasons retailers have historically filed for bankruptcy is to shed unsustainable debt, usually from leveraged buyouts, a widespread issue in U.S. retailing today.
As negotiations have continued with lenders, and Neiman Marcus and Penney have both said they’ve missed debt payments, speculation has centered on whether the companies are planning court-led reorganizations. Both have said they are preparing for various scenarios but no decisions have been made.
Medlin said there are some companies on today’s lists of likely bankruptcy filings that he remembers being on lists as far back as the 1990s. But companies can eventually run out of options. To secure financing or attract a new owner, they have to prove they have a plan to emerge as an ongoing business with a role in the market.
The COVID-19 pandemic shutdown will force more of them into bankruptcy than before, Medlin said.
And as if a pandemic weren’t enough, there are always people who benefit from having retailers look desperate — the potential buyers.
Those include strategic buyers and hedge funds or private equity, Medlin said. “There are people who run funds that invest in distressed situations where they think there’s long-term value and that they can buy at distressed prices.”
A company never wants to go into bankruptcy with a crash landing, without a plan, Medlin said.
There’s a reason people say, “It’s easier to go into bankruptcy than it is to come out.”
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