Things are much better in the industry than in recent years. Retail will always be a tough business, though.
Last year, with its store closures and traffic declines, was a financial disaster for scores of companies large and small. It was, however, an excellent year for bankruptcy lawyers and restructuring consultants, who have had considerably less work this year in the retail world.
So far, 2021 has brought a dramatic decline in Chapter 11s, defaults and distress, thanks in large part to government stimulus, cheap money and the comeback of shopping.
No one knows if or how long the lull in bankruptcies will last. Retail is not without its struggles right now. Logjams all along the supply chain are causing costs to skyrocket and inventory to fall. The industry is still competitive and as fast-changing as it ever was.
Since 2017, Retail Dive has published watch lists of companies in the industry most at risk of bankruptcy. This year, given the broad-based boom and large-scale balance sheet restructuring in the industry, things look quite different.
For one thing, regulars on the watch list — such as J. Crew, Neiman Marcus, J.C. Penney, Ascena and GNC — filed for bankruptcy in 2020. That allowed them to restructure their debt loads and businesses, making them healthier. In many cases it also reduced public financial reporting after the companies reorganized under private owners, making them less visible to firms that measure default and bankruptcy risk.
Since 2018, Retail Dive has published its watch lists using FRISK scores from CreditRiskMonitor, which specifically measure the probability of a company with publicly traded stock or bonds filing for bankruptcy within 12 months. The scores factor in various financial metrics, trading volatility and analytics from the firm’s own platform that is often used by company credit managers.
In spring 2020, those retail companies with the lowest FRISK scores, indicating the highest risk of bankruptcy, numbered 27. By that fall, after a wave of bankruptcies following the worst months of the COVID-19 crisis, the list stood at 17.
As of Oct. 1, retailers with the lowest FRISK scores had fallen to three.
Party City and Rite Aid each have FRISK scores of 1, indicating a 9.99% to 50% chance of filing for bankruptcy within the next 12 months.
Online apparel seller Digital Brands has a FRISK score of 2, which comes with a 4% to 9.99% chance of bankruptcy by CreditRiskMonitor’s calculations.
And that’s it.
Because it focuses on publicly traded companies, the FRISK score doesn’t cover the entire world of retail, and its metrics don’t capture every aspect of a company’s performance or financial profile.
Another risk measure is S&P Global Market Intelligence’s list of most vulnerable retailers, which again covers publicly traded companies. As of Sept. 17, that list included Express, Casper, J. Jill, Tuesday Morning, Digital Brands Group and Vince, all of which had between a 9% and just over 20% chance of defaulting over the next year, according to S&P.
Debt ratings provide another window into who is vulnerable to default (which can mean a lot of things) and bankruptcy. Those companies that carry C-level ratings with Moody’s include 99 Cents Only, Belk, Talbots, the reorganized Neiman Marcus and Tailored Brands-owned Men’s Wearhouse.
Retailers with “C” grades from Moody’s
|99 Cents Only||Caa1||Positive|
|Premier Brands Group||Caa1||Negative|
|NMG Holdings (Neiman Marcus)||Caa1||Stable|
|Jill Acquisition (J. Jill)||Caa2||Stable|
Source: Moody’s Investor Services
Yet another measure of risk is credit protection prices. Vendor finance specialist Cherokee Acquisition runs a marketplace for claims puts. The fee rates for a claims put, a form of credit protection on a vendor’s accounts receivables, would be triggered by a retailer’s bankruptcy filing. Prices for the financing rise with the expected risk of a filing.
Highest rates of all are for Tailored Brands, which as of Sept. 17 were a monthly rate of 3% on covered invoices to the retailer.
Claims Put Market prices
|Company||Put claim quote|
Source: Cherokee Acquisition/Claims Put Market. Fees as of Sept. 17
Many of the companies listed so far here also appeared on a list Retail Dive published in September based on financial health scores from RapidRatings, which measures default risk and company health based on dozens of financial metrics.
On that list of retail companies with weak financial health scores were: J. Jill, Express, Tuesday Morning, Party City, Rite Aid, The RealReal, Farfetch and Chico’s.
Taken together, the above represent 20 companies that various analysts and investors still deem vulnerable to bankruptcy and other forms of default — and even that list is not comprehensive of all risk ratings or vulnerable players in the industry.
Here is a closer look at some of the companies at risk:
Off-pricer Tuesday Morning went through a bankruptcy in 2020, a year that brought deep pain for the retailer that was without an e-commerce channel and already struggling to grow its sales and profits. Just a couple months after exiting bankruptcy, with a smaller footprint, Tuesday Morning was listed on S&P Global Market Intelligence’s list of most vulnerable publicly traded retailers.
This year, Tuesday Morning has tapped former executives from off-price peer Burlington as well as from Michaels as it tries to engineer a turnaround. In its most recent quarter, Tuesday Morning reported comparable sales that had returned to 2019 levels and a smaller operating loss, but also smaller margins because of supply costs.