There were dozens of retail bankruptcies in 2020, and experts say the pain isnt over yet.
S&P Global Market Intelligence tallied 49 bankruptcies in the retail space as of mid-November, including Ann Taylor parent Ascena Retail Group Inc. ASNAQ, +4.07%, luxury department store Neiman Marcus, home goods specialists Sur La Table Inc. and Brooks Brothers Group Inc.
Thats the largest number of bankruptcies since 2009, during the financial crisis.
COVID-19 was the straw that broke many ailing retailers.Companies that were already struggling to keep up with trends, invest innecessary digital upgrades and shift to modern customer experiences simplycouldnt cope with the added pressure of store closures, a massive shift toe-commerce, safety protocols and other side effects of the coronavirus.
The pandemic has accelerated what was going to happen in anumber of years in a shorter period of time, said Mickey Chadha, Moodys vicepresident. The names that have filed for bankruptcy probably were pulledforward.
Read: U.S. will remain biggest retail market as government stimulus, e-commerce push the nation ahead of China
In addition to stores closing due to bankruptcy and restructuring, many retailers have been using the pandemic period to reconsider their fleet of stores. Gap Inc. GPS, +2.07% and Childrens Place Inc. PLCE, +1.22% are just two of the retailers that have talked of rightsizing their store fleets.
Coresight Research counted 8,401 store closures year-to-date in a Dec. 4 report.
With vaccine distribution ramping up and 2021 around thecorner, a retail recovery isnt going to happen like the flip of a switch.Instead, experts and analysts say there are more retail bankruptcies loomingbefore things get better.
There are still a lot of names that are in distress and weak in retail and apparel, said Chadha. The pandemic will accelerate the trends making the weak weaker and the strong stronger.
Watch: How to pick winners in the retail sector amid the pandemic
On a positive note, the bankruptcy process is intended togive businesses that need it a second chance.
In a general sense there might be a stigma about a bankruptcy. We view the bankruptcy process as a tool to help companies restructure their business and balance sheets, said Dan Guyder, partner at international law firm Allen & Overy.
And its a positive for investors to help a company moveback to growth. There might be some broken glass along the way, but thats thecycle of life for some companies.
In recent weeks, J.C. Penney Co. Inc. JCPNQ, +7.63%, for example, has emerged from bankruptcy and has a number of plans to grow the business, including a new womens brand and a beauty strategy.
Consumers need torecover as well
Its not just retailers that have to recover from the coronavirus-induced economic slump. Shoppers do as well. With government protections against foreclosure and eviction expiring and with the additional government stimulus measures still very uncertain, consumers now have to rethink personal budgets and perhaps tighten up spending habits.
This could throw even the best-laid retailer plans intodisarray.
And: Americans are draining their checking accounts as stimulus talks drag on
Theres more pressure on consumers to redirect availablecash to meet those obligations, said Guyder.
Under normal circumstances, the retail industry is a very organized one, which makes the uncertainty brought on by the pandemic - and a bankruptcy perhaps more difficult for retailers to manage.
Retail is a business of seasonality, depending oncategories and time of year, you see growth or margin deterioration, said MattKatz, managing partner at global advisory SSA & Co. Bankruptcy doesnthave a season.
Taking into account that consumers are going to need time to recover as well is something that retailers have to consider.
People are going to have to replenish savings and nest eggs. Theyll probably owe money to landlords and other obligations, said Katz. [T]heres some catch-up theyre going to have to do to put their finances back in place. Thatll taking some time. Were building that thought process into client plans.
Keeping balancesheets in check will be key in 2021
To be sure, some retail categories thrived during the pandemic, including essential retailers like Walmart Inc. WMT, +0.46% and Target Corp. TGT, -0.26% (shares up 22.4% and 34%, respectively), warehouse retailers like Costco Wholesale Corp. COST, +0.23% and BJs Wholesale Club Holdings Inc. BJ, +2.45% (shares up 25.7% and 63.4%, respectively) and home goods retailers including Wayfair Inc. W, +4.38% and At Home Group Inc. HOME, +3.07% (up 202.2% and 190.6%, respectively).
The Amplify Online Retail ETF IBUY, +2.06% has skyrocketed 121.2% for the year to date and the SPDR S&P Retail ETF XRT, +1.88% is up 35.6% for the period. Both have far outpaced the benchmark S&P 500 index SPX, +0.58%, which has gained 14.6%.
And experts see improvement coming in 2021, particularly forthose categories that took a big hit in 2020.
Moodys is forecasting 516% year-over-year operating profit growth at department stores next year, reaching $1.2 billion; a 489% operating profit boost at off-price retailers, to $4.9 billion; and a 114% increase in operating profit growth at apparel and footwear retailers, to $3.2 billion.
But November retail numbers demonstrate that that path to recovery wont be a smooth. Despite the holiday shopping season, sales fell 1.1% and October sales were revised down.
See: Retail sales sink 1.1% in November as COVID-19 buffets restaurants and economy
For the retailers thathaveexcelled during theCOVID-19 pandemic, wrote Bank of America analysts led by Elizabeth Suzuki, thecomparisons in 2021 get particularlytoughin the middle of the year.The relativelydisadvantaged retailers (non-essential and away-from-homecategories) will have easier year-over-year comparisons in 2021 and couldexperience outsized growth relative to the 2020 winners.
It will be critical for retailers to keep their balancesheets in check going forward.
A lot of names that are weak in the space are private-equityowned, said Moodys Chadha. The leverage of these names is high. The only wayto avoid some sort of distress exchange or bankruptcy will be to improveprofitability, which will be difficult.
The other option is to cut debt, which will require cash.Either way, these companies need to right their balance sheet to besustainable, Chadha said.
If a company needs to take on more debt, Greg Portell, headof global consumer industries and retail at global management consulting firmKearney, says intentionality of the debt is significant.
If youre going to put debt on your balance sheet, you wantto make sure its driving expansion and growth, he said. Many that filed forbankruptcy had debt that was financing mechanism not growth.
Portell thinks disappointing earnings from the holidays will drive more bankruptcy filings.
We will see another wave in the first and second quarter based on the fallout from the holiday season, he said. Consumer spending is strong and doing its part, but not everyone is going to win.
Dont miss: No one likes to admit theyre struggling: Americans are feeling guilty this Christmas about their finances. Heres why
And while many are waiting for things to get back tonormal, it may be more accurate to look towards a new normal.
Looking ahead, retailers are hoping that the vaccinerollout will return some normality to our lives heading into 2021, allowingretailers to recoup their losses from 2020, said MarwanForzley, chiefexecutive ofVeem,a payments platform that works with thousands ofU.S.retailers.
However, while brick-and-mortar stores may regain some oftheir popularity as things start to look more normal again, the pandemic hascertainly altered the way we shop forever and e-commerce will still be anessential revenue stream for retailers, regardless of their size.
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