Dec 21, 2016
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Fitch Ratings predicts the next US retailers to declare bankruptcy

Dec 21, 2016

Seven chains, including J. Crew, Claire’s, Sears, and Nine West, have been identified as being at a high risk of defaulting this year, according to a Fitch Ratings study of retail bankruptcy released earlier this fall and updated this week. The shift in the way millennials shop and the migration to online shopping are cited as the source of the retailers' problems.


J.Crew, on the retailer endangered species list, according to a report by Fitch Ratings. - Cherry Creek Shopping Centre

The report was based on a study of 30 recent retail bankruptcies, totaling a $10.5 billion worth of debt. True Religion Apparel Inc., 99 Cents Only Stores LLC, Nebraska Book Co., Rue 21 Inc were also named in the 114-page report.

The study found that many of these retailers have lost the ‘reason to exist’, having no favor or even brand recognition with customers.

One of the reported causes of the string of bankruptcies is the advent of millennials. Young people are not as interested in spending time in malls, and thus, spending less money at mall-based retailers. According to analyst Sharon Bonelli, co-author of the study, her research found that millennials prefer to spend whatever disposable income they have on technology (iPhones, tablets, laptops), or experiences, like coffee shops and restaurants.

The majority of the 30 endangered chains studied in the article sold branded goods, rather than brand-unique products. However, consumers are meanwhile looking to other locations, such as online retailers like Amazon, to purchase branded goods.

Two of the biggest names pointed out in the report, J. Crew and Claire's, have been making steps to shift their brand names to a more profitable image.

One option for J. Crew is to, through a loophole in the clause, move the brand name to an unrestricted entity in the Cayman Islands. This would allow the retailer to borrow assets to help pull J. Crew out of the $2 billion debt it currently sits in. But the J. Crew lenders have been in talks with lawyers, ready to push back against this option and the damage it would do to creditors.

Claire's already took this route earlier this year, securing a $130 million loan agreement from using an unrestricted subsidiary. This didn't stop Fitch Ratings from declaring Claire's in the top seven retailers at a high bankruptcy risk on December 12th, again citing poor mall traffic as a cause.

Also noted by the study, retailers are three times more likely to liquidate than other businesses as it is much tougher to facilitate a turn-around. 50 percent of the retail bankruptcies studied did not survive, in comparison to a 17% bankruptcy failure rate in other industries.


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