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January retail market: 6 companies go bankrupt; strong holiday sales expected

The pace of U.S. retail bankruptcies accelerated in late December 2018 and the first half of January as six companies sought court relief during the period, according to an analysis by S&P Global Market Intelligence.

The filings come against a generally strong backdrop for the U.S. retail industry during the same period as retailers also recorded a third straight month of job growth and consumers saw little to no price increases over the previous month.

Meanwhile, broad gains in U.S. employment and wage growth that boosted household spending power likely drove strong U.S. retail sales during the month, economists tracking the retail market said.

Bankruptcy

One company filed for bankruptcy in late December and five in early January. There were two companies that filed in the period covering late November and early December. Meanwhile, there were zero filings in the previous-year period spanning late December and early January. Filings for the most recent month outpaced monthly totals for every month of 2018 except the late July and early August period, according to S&P Global Market Intelligence data.

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JN Winddown LLC, which makes and sells do-it-yourself nail wraps online, filed for Chapter 7 bankruptcy protection Dec. 27, 2018, listing $72.6 million in liabilities, according to court filings.

Five more companies followed in January, kicking off 2019 with a spate of retail bankruptcy filings.

Hair care and cosmetics retailer Beauty Brands LLC filed on Jan. 6 and regional bedding chain Innovative Mattress Solutions LLC filed on Jan. 11, each seeking Chapter 11 protection with liabilities between $10 million and $50 million. Creditors on Jan. 15 filed an involuntary Chapter 7 bankruptcy petition against internet food retailer and caterer La Mirada Restaurant Group Inc., claiming nonpayment of a $1.34 million judgment against the company.

Specialty Retail Shops Holding Corp., which operates discount retail chain Shopko, filed for Chapter 11 bankruptcy Jan. 16, listing between $500 million and $1 billion in liabilities. The same day, children's apparel company Gymboree Group Inc. filed for Chapter 11 bankruptcy alongside 10 of its affiliated companies with total liabilities between $50 million and $100 million.

While higher than the previous period, the monthly bankruptcy total trailed the seven filings reported in October, which included larger, more well-known brands including Sears Holdings Corp. and Mattress Firm Inc.

Overall, the 33 bankruptcy filings in 2018 trailed the previous year's total of 40, though 2017 saw more filings than any of the preceding five years.

"Obviously, there still are troubles. There have not been as many bankruptcies, but there have been quite a number of store closing announcements," said Scott Hoyt, senior director of Moody's Analytics.

Retail sales

Consumers likely entered the holiday buying season with more money to spend because of boosted employment, wage growth and tax savings from the Tax Cut and Jobs Act, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business.

"This was going to be better than the previous years, for sure, given the job growth as well as the tax cut as well as the better income than the previous years," Dhawan said in an interview.

Early reports pinned holiday sales at record levels compared to previous years. Mastercard SpendingPulse reported a 5.1% year-over-year increase to more than $850 billion in retail sales between Nov. 1 and Dec. 24. Adobe Analytics, meanwhile, reported $110.6 billion spent online between Nov. 1 and Dec. 19, a $16.7 billion increase over the previous year.

The Census Bureau, meanwhile, has delayed the release of its monthly sales report because of the ongoing partial shutdown of the U.S. federal government. The report is a key indicator of the health of the retail market.

But some retailers, particularly department stores, struggled during the holidays. Retail stocks broadly dropped on Jan. 10 after Macy's Inc. slashed its full-year earnings guidance despite holiday sales increases, and Kohl's Corp. posted holiday sales growth of 1.2%, well below the previous year's 6.9% holiday sales growth.

Nordstrom Inc., meanwhile, said Jan. 15 that a 0.3% increase year over year in comparable full-price sales during the nine-week holiday period ending Jan. 5 was below the company's expectations. Nordstrom boosted overall comparable sales by 1.3% during the period.

Online sales, in particular, continue to challenge department store performance, Moody's Hoyt said.

"Online is a big winner, that makes it tough for brick-and-mortar. And then even within brick-and-mortar, you're going to have the retailers that are more successful and those are less successful." Hoyt said in an interview

However, Hoyt said he expected the period to be "one of, if not the best year in probably at least a handful."

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Consumer apparel prices remained flat month over month and year over year, according to data released Jan. 11 by the U.S. Bureau of Labor Statistics, or BLS.

Prices for jewelry and watches jumped 0.4% over the previous month and women's and girls' apparel prices climbed 0.2%. A 0.6% month-over-month drop in men's and boys' apparel offset the other increases.

"Retail pricing power has been very weak, it does appear to be a little better this holiday season than the last two or three, but it was still poor by longer run historic standards. That's also going to weigh on the performance of retailers and contribute to issues on profitability and their ability to maintain their store base," Hoyt said.

Prices for all goods fell 0.1% in December after remaining flat the previous month. Overall, prices rose 1.9% year over year, according to the BLS data.

Employment

Retailers continued to hire for a third straight month, adding 23,800 jobs in December for 15.95 million total on a seasonally adjusted basis, according to figures from the BLS released Jan. 4.

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General merchandisers led the gains with 15,000 jobs added in December, a 0.47% increase to 3.2 million total. Motor vehicle and parts dealers followed the gains with 7,300 added jobs during the month.

Retailers of sporting goods, hobby, books and music shed 9,400 jobs during the month, down 1.74% to 531,700 total. Jobs at nonstore retailers also dropped by 1,100, or 0.18%, to 598,200 total for the month.

More broadly, U.S. employers added more jobs than expected during the month on top of hourly wage growth surpassing forecasts.

Vulnerability

A new entrant on the list of public U.S. department store and apparel companies most vulnerable to default pushed several other mainstays further down from their mid-December placements despite little to no change in those companies' one-year probabilities of default.

The January analysis identified 15 such retailers with default probability scores ranging from 9.9% to 1.7% and corresponding implied credit scores of "ccc+" to "bb-."

New to January's list is women's apparel chain Francesca's Holdings Corp., which took the No. 9 spot with a 4.3% one-year probability of default.

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That pushed other retailers down the list, though their fundamentals remained mostly unchanged. The new listing also knocked off Burlington Stores Inc. but the company's 1.7% probability of default remained unchanged over the previous month.

Other changes included apparel and luxury goods retailer Vince Holding Corp. dropping three spots to No. 8 as its one-year probability of default declined to 5.0% in January from 6.4% in December. DGSE Cos. Inc. climbed to No. 6 on the list as a result, though its probability-of-default score remained at 5.4%.

Discount retailer Stein Mart Inc. also saw its probability of default drop 0.1% to 5.2%.

Destination Maternity Corp., which sells maternity clothing, remained in the top spot on the list with no change to its 9.9% one-year probability of default from December.

Christopher & Banks Corp. held on to the No. 2 spot with an unchanged 9.4% probability of default. Destination XL Group Inc. remained at No. 3 for a second month with a probability of default of 8.6%, constant from the previous month.