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October retail market: More bankruptcies, employment declines


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October retail market: More bankruptcies, employment declines

Multiple bankruptcies and declining employment in the retail industry beset the sector in the past month as companies prepared to enter the busy holiday season, according to a new analysis by S&P Global Market Intelligence.

Five U.S. retailers announced that they have applied for bankruptcy protection in the past month. That brings the tally to 38 in 2017, compared to 47 bankruptcies in all of 2016.

Privately held Toys R Us filed for Chapter 11 bankruptcy Sept. 18. The filing marked one of the largest retail filings dating back to 1990 in terms of assets and liabilities among S&P Capital IQ-covered discretionary retailing companies, excluding automotive retailing companies, according to the Capital IQ database. As of April 29, Toys R Us had $6.57 billion in total assets and $7.89 billion in total liabilities.

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Most recently, speciality retailer Point.360 filed for bankruptcy protection Oct. 10, and Dr. Miracle's Inc., an internet and direct marketing company, filed for bankruptcy protection Oct. 4.

The retail industry lost jobs in September, even as some stores ramped up hiring for holiday shopping. Total retail employment was down 2,900 month over month in September, coming in at 15.8 million, according to a monthly report released Oct. 6 from the U.S. Bureau of Labor Statistics. Within the broader retail sector, food and beverage stores lost 6,900 jobs, or 0.2% to total 3.1 million jobs in September, the biggest loss of any retail category. Miscellaneous store retailers gained the most jobs, adding 3,500, or 0.4%, to reach about 834,400 jobs.

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Jobs in general merchandise stores, a category that includes department stores and other general merchandisers, including Wal-Mart Stores Inc. and Target Corp., declined by 2,500, or by 0.1% to 3.13 million, although retailers are entering the holiday shopping season, which usually marks the busiest time for retailers all year. Inc. said it is hiring 120,000 for the holiday season, but most of these employees are planned for fulfillment centers and customer service sites. Target said it is hiring about 100,000 workers, while Wal-Mart said it will plan more hours for its current workers rather than hiring thousands more.

Retail sales ticked up a seasonally adjusted 1.6% in September, according to the monthly report released by the U.S. Commerce Department on Oct. 13. Overall, sales increased to $483.9 billion month over month, driven largely by strength in the gas and motor vehicle sales categories. Sales at gas stations jumped 5.8% in September to $39.41 billion, and sales at motor vehicle and parts dealers increased 3.6% to $100.06 billion.

Sales at electronics and appliance stores performed the worst, with a decrease of 1.1% to $7.43 billion in September.

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The Consumer Price Index, or CPI, rose 0.5% in September, similarly driven by a spike in gasoline. Gas prices increased 13.1% in September, accounting for roughly three-fourths of the seasonally adjusted gains, according to the monthly report issued by the Bureau of Labor Statistics on Oct. 13.

Meanwhile, the core CPI, which excludes food and energy prices, increased 0.1% in September. Services, not including energy, continued to rise modestly, at 0.2%. Other categories in the core CPI, including vehicles, apparel and medical care commodities all declined.

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The list of most vulnerable U.S. department stores and apparel companies remained largely unchanged through the end of September and beginning of October, according to an analysis calculating the one-year probability of default among S&P Capital IQ publicly traded U.S. apparel and retail companies and department stores. The probability of default among these companies ranged from 44.38% to 5.69% with a corresponding implied credit score of "cc" to "b."

The position of Sears Holdings Corp. remained unchanged, although high, on the list, despite the woes of the company's former subsidiary Sears Canada Inc. Sears posted a one-year probability of default rate of 25%, even with last month's number.

Sears Canada announced Oct. 10 that it plans to liquidate all of its stores following a failed attempt to save itself with outside investments. Edward Lampert, Sears Holdings' CEO, directly owns 22.6 million, or 22.24% of Sears Canada shares, while his investment fund, ESL Investments, owns 23.5 million, or 23.07%, of outstanding shares, according to S&P Capital IQ. The Ontario Superior Court of Justice heard Sears Canada's motion to liquidate on Oct. 13, and the court granted approval to liquidate its remaining stores, according to documents filed with the Ontario court. Sears Canada must complete its liquidation by Jan. 21

Mall-based retailers continued to fare poorly on the vulnerability list as traffic shifts online, with dELiA*s Inc.'s one-year probability of default standing at 16.19%, and Bebe Stores Inc. coming in at 10.17%.

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S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, refer to the PD Model Fundamentals - Public Corporates white paper.