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October retail market: Sears files for bankruptcy; US retail sales edge up

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October retail market: Sears files for bankruptcy; US retail sales edge up

Retail bankruptcies rose in late September and early October, ending a brief lull in filings, according to a new analysis by S&P Global Market Intelligence.

In one of the most anticipated filings of 2018, department store operator Sears Holdings Corp. declared bankruptcy Oct. 15, bringing the total number of bankruptcies to five in that period.

As the number of bankruptcies rose significantly, retail employment in September fell, continuing a trend that has taken hold as the industry continues to consolidate.

One bright spot continues to be retail sales, which have risen over the past few months and again posted an uptick in September, according to the U.S Census Bureau's report released Oct. 15.

Bankruptcy

Five retailers declared bankruptcy in the late September to early October period, up from zero bankruptcies in the prior period analyzed by S&P Global Market Intelligence. The filings bring the number of retail bankruptcies in 2018 to 27.

S&P Global Market Intelligence's bankruptcy count includes companies with a primary industry classification of retailing, household and personal products, or consumer durables and apparel, and a secondary classification of retailing.

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Sears filed for bankruptcy protection early Oct. 15. According to the Chapter 11 filing, the retailer reported estimated assets in the range of $1 billion to $10 billion and estimated liabilities of between $10 billion and $50 billion. The company also said its controlling shareholder, Edward Lampert, has stepped down as CEO but will remain chairman of the company.

Sears secured a debtor-in-possession financing commitment of $300 million from its senior secured asset-based revolving lenders and is negotiating an additional $300 million in subordinated debtor-in-possession financing with Lampert's hedge fund, ESL Investments Inc., to help it stock its shelves for the holiday shopping period.

Steinhoff International Holdings NV-owned Mattress Firm Holding Corp. announced its Chapter 11 filing Oct. 5. The company plans to restructure with the help of $525 million in senior secured credit facilities and $250 million in debtor-in-possession financing.

ED MAP Inc., an educational resource management solutions company, filed for bankruptcy Sept. 17, while ATD Corp., a distributor of branded replacement tires, custom wheels and accessories, filed for bankruptcy in October. Apparel retailer Herb Philipson's Army and Navy Stores Inc. filed for bankruptcy Oct. 8.

Retail Sales

Retail sales nudged up 0.1% on a seasonally adjusted basis to $509.04 billion in September from August, according to the monthly report released Oct. 15 by the U.S. Census Bureau.

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"Overall improving economic fundamentals, coupled with increased credit availability, lower unemployment and wage growth, will translate into higher consumer spending for the remainder of the year," Moody's Vice President Manoj Chadha said in an Oct. 15 research note.

Sales at nonstore retailers, a category that includes transactions through catalogs, vending machines and door-to-door sales, rose 1.1% month over month to $58.06 billion.

Furniture and home furniture stores also posted a 1.1% increase, with sales totaling $10.28 billion for the month, while electronics and appliance stores reported a 0.9% rise to $8.46 billion.

Food services and drinking places saw the sharpest decline in September at 1.8% to $60.58 billion. Sales at gasoline stations declined 0.8% to $43.64 billion.

The Census Bureau said it could not isolate the effect of Hurricane Florence on sales but it did receive indications from companies that the storm "had both positive and negative effects on their sales data while others indicated they were not impacted at all."

Similar to retail sales, consumer prices increased 0.1% in September, according to a monthly report released Oct. 11 by the U.S. Bureau of Labor Statistics. Prices rose 2.3% year over year.

Energy prices decreased by 0.5% in September from August, while food prices remained unchanged. Core prices for all items excluding food and energy jumped 0.1% during the month.

Employment

Employment in the retail sector fell by 20,000 jobs in September, down to 15.9 million on a seasonally adjusted basis, according to a monthly report released Oct. 5.

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Miscellaneous store retailers saw the sharpest decline in jobs during September. Employment in that category decreased by 5,400 jobs, or 0.65%, to 825,300 jobs.

Building material and garden supply stores and general merchandise stores also saw employment declines during the month. Employment at building material and garden supply retailers dropped 0.34% to 1.3 million. Employment at general merchandise stores declined 0.13% to 3.1 million.

Meanwhile, gasoline stations added 2,800 jobs, while furniture and home furnishings stores added 1,500 jobs.

Clothing and clothing accessories stores lost 3,900 jobs in September, a month-over-month decline of 0.29%.

U.S. retailers are rushing to hire workers ahead of the 2018 holiday shopping season. Apparel retailer The Gap Inc. plans to hire 65,000 temporary workers across its Gap, Banana Republic, Athleta and Old Navy stores for the holiday season, while Target Corp. plans to hire 120,000 seasonal workers.

Department store operator Macy's Inc. said it intends to employ 80,000 seasonal workers for the holiday shopping season.

General merchandise store operator Dollar Tree Inc. also plans to hire 25,000 workers.

Vulnerability

An October analysis of one-year probability of default scores identified 15 U.S. department stores and apparel companies with scores ranging from 9.9% to 1.7% and corresponding implied credit scores of "ccc+" to "bb-."

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Destination Maternity Corp., which previously held the No. 2 spot on the list, rose to No. 1 with a probability of default of 9.9%, replacing Sears at the top spot after the company filed for bankruptcy.

Delta Apparel Inc., an apparel design, marketing, manufacturing and sourcing company, appeared on the list for the first time. The company took the last spot on the list with a one-year probability of default of 1.7%.

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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, see the PD Model Fundamentals - Public Corporates whitepaper.