Right now, retail stores are closing at a pace that we haven’t seen since the 2008-2009 financial crisis. Some are calling it a ‘retail apocalypse’ as a number of major headwinds approach, including increasing pressure from Amazon and the sad fact that most brick-and-mortar retailers simply built way too many stores and borrowed too much money to do so.
Though many are likely aware of the above, what isn't so well known is how much debt is coming due starting next year. That's really the heart of the issue, which is why America’s ‘Retail Apocalypse’ Is Just Getting Started, Bloomberg’s Matt Townsend explained to Financial Sense Newshour on today's podcast.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
Debt Is the Main Challenge Retailers Face
Though online retailers are definitely a threat and many traditional retail businesses are overstored, what’s really going to drive the shakeout of legacy retailers is debt.
“What really drives a company out of business is, if they have a lot of debt and their business is deteriorating, that will force them into bankruptcy and potentially liquidation,” Townsend said.
And the fact is, a lot of this debt is starting to come due next year, Townsend stated, and many retailers may not to be able to pay it off or refinance it.
The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary. (source)
A (Sale) Sign of the Times
The problem is widespread, and likely to grow, possibly to crisis levels.
“Any retailer that you can think of — that maybe you grew up with — is, for the most part, in some form of distress or struggling,” Townsend said.
For example, Toys “R” Us filed for bankruptcy in September. Its plan is to reorganize and emerge from bankruptcy, so it isn’t going out of business, but the potential is there.
“There are not a lot of bright spots out there,” Townsend said. “A lot of the apparel chains, whether it’s Abercrombie & Fitch, American Eagle or Gap … are in some form of worsening results.”
Debt Is the Trigger That Will Upend Retail
There were many retail bankruptcies in 2008 and 2009, and then not many until 2016, where the number spiked, really taking off into this year.
“This year is basically on pace to be the worst year for retail bankruptcies, basically ever,” Townsend said.
Though there are many reasons for this, it really comes back to debt. Many of these retailers took on too much debt in the good years, and are now stuck with the bill.
That’s exactly what happened at Toys “R” Us, Townsend stated. The company was taken private in around 2005, and it was carrying a lot of debt. Then the financial crisis hit, online sales became a bigger deal, and it was stuck with all this debt that it decided it couldn’t repay or restructure. Eventually, it had to file for bankruptcy.
“This year there was only $100 million of high yield debt coming due among big retailers,” Townsend said. “Next year, it balloons to $2 billion” — a 20-fold increase.
Ripple Effects Likely
Eventually, these bills are coming due, Townsend stated. There’s the potential for credit markets to get tighter from here.
“This ‘retail apocalypse’ … really hasn’t even started yet, which is a scary thought,” he said. “If you look at what’s happening in retail and all the things going wrong, it’s potentially only going to get worse because of all these different factors.”
If there is a serious issue with debt default, it isn’t just retailers who will be affected, but holders of commercial real estate loans as well, Townsend noted, many of which are held by regional or small banks.
The other consideration is retail jobs. Retail is the largest employer of low-income workers in the country, with 8 million people making around $20,000 a year in low-skilled occupations. These people are at a high risk for defaulting on credit cards and other debt.
“If retail jobs start suffering and stores start closing, the engine for some of these states as far as job growth could be significantly damaged,” Townsend said. “I’m not saying it’s going to create a recession, but there are significant risks here for the economy.”
Article by Financial Sense