Retail’s ‘Chapter 22’ Risks During the Pandemic

Apparel retailers that have filed for Chapter 11 during the pandemic have sought to execute the process quickly. But that doesn’t necessarily insulate them from the risks of sliding back. 

Earlier this month, U.S. Bankruptcy Judge Marvin Isgur underscored that point as he oversaw a dispute over Tailored Brands’ need for additional financing after it exited bankruptcy in December. “It very quickly developed that the Tailored Brands Christmas season was nowhere near what it was forecast to be,” he said, referring to the kind of the forecasts, or financial projections, that usually underpin companies’ Chapter 11 plans to exit the process. 

As the COVID-19 pandemic extends, those forecasts can be less reliable, especially as the retail industry faces lower demand at physical stores as well as disruptions across the supply chain, bankruptcy experts said. 

“When a company files its plan of reorganization and the court is reviewing that plan, it’s supposed to be that the company has made the case that whatever its plan is, that it’s not going to be a fanciful scheme, but that they’re going to realistically have a chance of success,” said Steven Todd Brown, professor at the University at Buffalo School of Law. 

“That’s fair, but the problem is that you can only work with assumptions about what the market is going to be like,” he said. “What if the market doesn’t bounce back as quickly as they were predicting?

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“And it’s always tricky in a down market because your financial fortunes are always somewhat intertwined with your suppliers and service providers,” he added. “If you have too many disruptions in that mix, that can severely impact your ability to make a profit or even just to break even.”

In the past year, retail was among the top industries to face high numbers of bankruptcy filings, with retail bankruptcies in 2020 accounting for $41 billion in assets, according to the research group Bankruptcy Data’s recent 2020 report on bankruptcy filings. The group projects that apparel retailers face ongoing risks as bankruptcy watchers expect the next wave of filings in 2021. 

“Some companies…have seen the viability of their business models evaporate as the pandemic has changed consumer patterns (i.e., nobody is buying suits right now),” the group said in its report. “Executives are unsure if demand for their products will ever return, especially if the pandemic is prolonged. Many stores are beginning to reopen, but the massive increase in e-commerce transactions may be permanent.” 

A report by Moody’s this week reinforced that grim prognosis, with the credit rating agency noting that apparel companies and department stores accounted for more than half the number of defaulting firms in the industry last year.

“Notably, within apparel, vertically integrated retailers have been more challenged because of their reliance on large store footprints, while apparel brands have benefited from international growth and the ability to pivot to winning channels,” the Moody’s report said. 

“Even after stores reopened, many consumers shunned malls, contributing to cash burn at department stores and apparel retailers,” the report said. “Eight of the 15 defaulters in 2020 were in the apparel and department store sector, including Neiman Marcus, J.C. Penney, J. Crew, Ascena, Men’s Wearhouse and J.Jill.” 

A number of the retailers that underwent bankruptcy last year, including Neiman Marcus, Tailored Brands, J.C. Penney, Brooks Brothers and others, also exited the proceedings relatively quickly, within less than a year. Last Month, Neiman Marcus refinanced some $1.1 billion in debt, WWD reported.

A quick bankruptcy exit can help curtail costs and bring a speedy resolution to disputes with creditors, but it doesn’t necessarily guarantee that the process will help retool operations sufficiently to weather the post-bankruptcy environment, experts said. 

“In terms of the pandemic and its impact, certainly, with the number of retail companies that particularly do not have a large or high percentage of their sales in the form of online services, they have a heightened likelihood that they will have to file again,” said Edward Altman, professor of finance at the NYU Stern School of Business. “Second, the question is, in their restructuring, were they able to reduce not only their debt, but also effectively restructure their operations?”  

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