As the US faces an “apocalyptic” level of retail store closures, investors are left nervously wondering what retail brands are going to go down next.
The “retail apocalypse,” or the closing of multiple American retail stores since 2016, has hit the country’s financial market hard, and stores like Toys R Us were forced to file for bankruptcy.
Multiple factors, from the rise of e-shopping to the squeeze on the middle class to the fallout from long standing company debt, have driven this trend, and some worry that it’s on track to get worse in 2018.
Moody’s Corporation, a company that tracks corporations’ credit ratings, said recently that almost 19% of the retail companies it rates are considered high-risk investments. Their lead retail analyst, Charlie O’Shea, recently told CNBC, “I think the early part of next year will be pretty bad … I think it will be tough,” Moody’s lead retail analyst. He worries that “highly leveraged” retailers won’t be able to compete with Walmart and Amazon’s low pricing.
How bad is it?
While some businesses have complained that talk of an “apocalypse” is overblown, the US is believed to have had approximately 8,600 stores close this year. The previous record was 6,163 store closures in 2008, in the depths of the recession, when consumers had put a complete freeze on buying. And, according to Business Insider, another 3,600 store closures are already slated for 2018.
Why it’s happening
In an analysis of the trend, O’Shea remarked that it’s an unusual environment for retail companies to be failing in, as “it’s happening in a macro environment that’s pretty good for retailers,” where consumers are spending. For many of these large-scale retailers, the biggest problems are competition from online shopping and high long-term debt. Many bricks-and-mortar retail outlets carry heavy borrowing debt, making it difficult for them to make the shift to focussing on their online shopping experience.
The “overstored” suburbs
The crisis has hit department stores particularly hard, because of the decades-long “overstoring” of America’s suburbs. As investors put money into commercial suburban real estate, companies filled them with huge category-based stores. These corporations have reaped the whirlwind in 2017, with declining in-store sales making these stores unprofitable liabilities.
Effects on business
Store closures in 2017 have been a nightmare for mall owners. This isn’t just because of the lost traffic from a single closed store, but because these closings often allow remaining retailers to end or renegotiate their leases. In the face of store closures this year, many mall owners have sued the businesses responsible in an effort to keep afloat, and companies like Starbucks and Whole Foods have been forced to keep stores open as a result.
The winners (and losers)
The outlets that did the best during the “retail apocalypse” are those that gave consumers decent quality at bargain prices. “Fast fashion” stores like Zara and Forever 21 thrived, as did dollar stores. The losers have prominently featured departments stores and clothing brands (especially like to be casualties of overbuilding) and electronics companies (crowded out by Amazon). But the losses have hit stores across industries. Here are a few stores that have inspired concern going into 2018.
1. Guitar Center: The business may be one of the largest musical instrument retailers in the world, with more than 260 stores across the US, but its size may not save it from being overwhelmed by debt. Currently, the company has around 1 billion in bond debt that’s due to be repaid in 2019, and many speculate that the guitar giant won’t be able to repay it.
2. General Nutrition Centers: The nutrition supplement retailer is looking decidedly unhealthy going into the new year. After a November debt notice, the company’s shares fell more than 18%, forcing the company to withdraw their proposed plan. Part of this problem that the company faces is that the market for health and nutritional supplements has been going heavily online, making it difficult for the mall-based retailer to compete.
3. Vitamin World: Another ailing nutritional company, Vitamin World has even more cause for concern at the start of 2018. At the end of the third quarter, they tried to pursue a strategy where they filed for bankruptcy and closed 124 of 345 stores, but unforeseen “liquidity concerns” mean that the company is selling off almost all of their assets.
4. Sears Holdings: The company’s a shoe-in for the 2018 death watch, as the company has been hemorrhaging stores and didn’t even bother to buy TV ads during the crucial holiday shopping season. It’s held on by selling off assets and borrowing money and, with $4 billion more in liabilities than in assets at the close of the year, that doesn’t look like a long-term strategy.
5. Sears Hometown and Outlet Stores: The company, which originally developed as part of Sears Holdings, has been doing a little better than its parent company. By September 2017, it managed to reduce its losses from the $93.2 million it was at a year ago to just $10.9 million. However, sales stagnated during the third quarter, and some are concerned that it might see further poor sales in the new year.
6. Neiman Marcus Group: The luxury department store retailer is being watched anxiously, as it recently made two “at risk” lists of companies with the potential to default on their loans. Currently, the company is carrying $5 billion of debt, and they have hired a financial adviser to look into “strategic alternatives,” a move that some worry means the company will default or file for bankruptcy.
7. RadioShack: Given that the company started 2017 by filing for bankruptcy and closing 200 of its stores, the prognosis for the new year is not great. It gets even grimmer when you remember that the company already filed for bankruptcy two years ago, and the moves that it has made since (high sales, partnering with Sprint mobile) have proven unsuccessful.
8. Charming Charlie: One of the companies highest on the recent death watch, the clothing company recently filed for bankruptcy and said that it plans to close over a quarter of its stores in order to “stabilize the business,” according to interim CEO Lana Krauter. Its mall-based real estate has made it difficult for the company to continue to make sales.
9. Claire’s: The cute, casual jewelry company isn’t benefiting from the market’s boost to fast fashion stores. Although it’s doing better than it was a year ago (sales are up by 0.8%), the company hasn’t got much cash to draw on, and it’s been rocked by recent allegations that some of its popular makeup items contain asbestos.
10. J. Crew: Michelle Obama’s former fave is struggling right now, largely because its mall locations are feeling the pinch of lowered foot traffic. In the third quarter (July-September), the company’s comparable store sales – or, how much money individual stores made compared to the same period a year ago – dropped by almost 10%.