The Retail Sector’s Very Bad Week
Thirty percent of the 125 issuers S&P Global Intelligence rates in the retail and restaurant sectors are now rated 'CCC+' or lower, implying at least a 1-in-2 chance they will eventually default.
This was a week of “firsts” for the retail industry.
On Monday, in what is the first major retail bankruptcy since the novel coronavirus struck the US, J Crew filed for Chapter 11 protection.
Then, on Thursday Neiman Marcus became the first major department store to file for bankruptcy during the pandemic.
And as if to emphasize just how bad things are getting for retail now, Gold’s Gym also filed for Chapter 11 bankruptcy protection this week.
These three are the fortunate ones: it appears that they plan to emerge from bankruptcy to continue operations. Lord & Taylor, by contrast, plans to liquidate inventory in its 38 department stores once they are able to open again, according to a report from Reuters. It is bracing for bankruptcy from which it does not expect to emerge, sources told the news wire service.
It will only get worse for retail from here, writes S&P Global Ratings analyst Sarah E Wyeth in a research note released on Monday.
J. Crew Group bankruptcy announcement should not come as a surprise, she wrote. “In our view, this is the first of many that will likely restructure in- or out-of-court in the next one to two years.”
The economic shutdown and lingering social distancing behaviors will trigger a broad shakeout of retail as the industry will be forced to meaningfully reduce its physical footprint and rapidly evolve to reach the post-pandemic consumer, the note says.
“Of the approximately 125 issuers we rate in the retail and restaurant sectors, about 30% are now rated ‘CCC+’ or lower, implying at least a 1-in-2 chance they will eventually default. Which retailers will survive the coronavirus pandemic in some shape or form is the big question.”
The high proportion of distressed retailers portends an elevated default rate of almost 20% for speculative-grade issuers, Wyeth also says. “In contrast, we expect 10% across the broader corporate rated universe. Year to date, eight rated retail and restaurant issuers have defaulted, as many as in all of 2019. These statistics include distressed exchanges, which we consider tantamount to default.”