GNC has walked through the gate of death after touching it for years. And others are likely to follow suit this year as the COVID-19 pandemic continues to devastate the U.S. retail sector.
The 85-year-old vitamin vendor filed for bankruptcy Wednesday after years of struggling with declining sales and a $ 1 billion debt burden north. GNC plans to close up to 1,200 stores in the United States. The company operates more than 5,800 stores.
Meanwhile, a debt-ridden shopping mall resident JC Penney said Tuesday that he will close another 13 stores as part of his recent bankruptcy filing. The company told the courts in May that it would close a total of 250 stores by the end of the summer of 2021, leaving it shaded under 600 locations.
Without a doubt, 2020 is shaping up to be one of the deadliest for the former icons of the mall and various shopping malls. The pandemic has kept stores closed for months and has sent sales to the sector at full speed. Since consumers only slowly return to stores after months of quarantining, retailers face the reality that they need to open fewer stores … or should no longer be in business.
“Some companies just aren’t going to survive this,” says McGrail, who is the chief operating officer of one of the world’s largest asset valuation and disposal firms, Tiger Capital Group. McGrail’s team, which often includes associates at an affected retailer’s store, hangs “Everything Must Go” signs and works to get the best price on accessories and other inventories.
McGrail declines to say which retailers have been calling him for asset evaluations, except to note that the names would not come as much of a shock.
Such is the current life of McGrail and others in the fields of bankruptcy and retail restructuring. When speaking to a large number of experts, one thing is very clear: a storm of bankruptcies in retail is about to rain on Wall Street thanks to the replica of the coronavirus.
Once formidable retailers like Neiman Marcus (who filed for bankruptcy in May) will either disappear entirely or emerge from bankruptcy with 75% smaller store networks. Those retailers who somehow manage to avoid bankruptcy through a creative increase in debt or other restructuring will find their way bumpy at best.
‘That’s a scar number’
While GNC bankruptcy is a headline maker, the fact is that we have yet to see a sharp increase in bankruptcies for various reasons, experts explain.
First, preparing for a structured bankruptcy filing generally takes two to three weeks. Retailers were only caught up in store closings fueled by massive social distancing in mid-to-late March. Most hoped that the stores would reopen in April, prompting bankruptcy planning. Second, even the worst-positioned big-name retailers still had enough cash on hand to move between April and May (especially with suspended workers), allowing executives to consider all options other than headline bankruptcy.
And finally, one of the benefits of a retailer filing for bankruptcy is raising cash for creditors by maintaining store closing sales. That couldn’t happen with state-mandated store closings.
All bets are now canceled this summer as states allow shopping malls and retailers to reopen.
“I think a lot of these companies will file [for bankruptcy], and it’s not a handful. They are several dozen. And that’s a scary number. It’s much more than we’ve seen in recent years combined, “says Stifel managing director Michael Kollender, who heads the firm’s retail and consumer investment banking group for the company. Kollender and colleague James Doak at Miller Buckfire (Stifel’s restructuring arm, where Doak is co-director) have worked on dozens of consumer and retail bankruptcies in recent years, including Aeropostale, Gymboree, and Things Remembered.
“We will see that some important chains disappear and do not return. These are chains that were fighting before the situation. COVID-19 will put them on the shelf, “adds Kollender. Doak believes that retailers will come up with numerous creative deals in an attempt to stay afloat – for example, a mall owner participates in a tenant.
Here’s a precedent, as it was a consortium of mall owners, Simon Property Group and General Growth Partners, who won the auction of Aeropostale’s assets in 2016. Both were interested in keeping Aeropostale open as it had been a major driving traffic (and tenant) for years.
By Doak’s point, the creativity of retail executives seeking a lifeline is beginning to emerge.
The aforementioned bankrupt JC Penney is rumored to be considering a sale to the privately held store Sycamore Partners, which has a long history of buying from distressed retailers. JC Penney has also reportedly captured the interest of a consortium of owners Simon Property Group and Brookfield.
Macy’s essentially mortgaged its future with a recent $ 4.5 billion increase in debt in a bid to survive the year.
Most of the experts Yahoo Finance talked about expects some chaos as retailers reopen their stores this summer. It is already developing by the looks of things.
My JC Penney has just reopened after being closed since March due to # COVID19 and it looks like it is frozen in time with brown coats and boats everywhere.
85 degrees outside. pic.twitter.com/xB6JmFY183
– Brian Sozzi (@BrianSozzi) June 20, 2020
Right now, thousands of stores across the country are in poorly aged inventory within their closed or reopened stores (see photo above). The things to collect the dust will have to be sold at retail prices – the problem is that all retailers will do the exact same thing this summer, letting retailers get a horrible return on that inventory investment.
Investors should expect significant inventory reductions for the second quarter, and as a result, chains may not be able to borrow as much as possible against their asset bases. That’s a terrible position to get ahead of the high working capital period known as the holiday shopping season.
“I don’t think JC Penney has a long-term future. I’m not so sure if Macy’s has a long-term future. I think that the occupants of those B and C shopping centers, the specialty stores that bring together the increasingly empty rooms, may have no future. We are seeing a large number of store closings being advertised and even successful chains like Zara, “said former Sears Canada CEO Columbia Business School professor Mark Cohen at The First Trade at Yahoo Finance.” So I think the breakage will be extraordinary and we are seeing the first signs of it. “
Meanwhile, the liquidations of the stores and their minimum prices for merchandise will press the efforts of the strongest chains to launch their businesses. That will make relatively strong retailers much less strong. For those retailers looking to get out of bankruptcy, sellers are likely to be lukewarm in sending products to them while adjusting payment terms. That double hit usually kills an injured retailer forever.
Then there is the general uncertainty about how people will see the return to the mall in the new normal of social distancing. That fog of war is set to linger well beyond the upcoming holiday season.
“We are in a retail tsunami,” says Kollender.
Tsunamis are destructive. And so will the coronavirus be for the nation’s retailers.