Economic changes are impacting the retail sector

After years of struggling major retailers and malls prior to the COVID-19 pandemic and the most vulnerable retailers filing for insolvency in its immediate wake in early 2020, the U.S. economy has rebounded strongly thanks to government assistance and low interest rates. Due to sustained economic growth and consumer spending, Chapter 11 bankruptcy filings, particularly those in the retail sector, reached historic lows towards the end of 2020 and into 2021 However, certain economic changes could trigger an increase in distress in the retail sector. .

Since the economy rebounded from the early months of the pandemic, consumer demand has increased while pandemic-related shutdowns have caused global supply chain issues. The costs of food, vehicles, electricity and housing, among others, have increased exponentially, causing inflation to rise at the fastest rate in 40 years.[1] The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for all items rose 7% for the 12 months ending December 31, 2021 (the largest 12-month increase since June 30, 1982) and continued to increase to reach 2022.[2] Employment data from the Bureau of Labor Statistics also revealed that while average hourly earnings rose, inflation eroded wages at the same time as consumers took on more debt than in any year since before the financial crisis of 2008.[3]

Due to rising consumer debt and expiring government stimulus credits, consumers may be forced to reduce discretionary spending in order to meet their debt burdens. Additionally, as inflation continues to erode wages, consumers may turn to discount options, forcing retailers to make tough decisions in this new environment, including reverting to various forms of discount measures to to fight for market share.

Moreover, despite the creation of a record number of jobs in 2021, traders are struggling to find employees for their stores or warehouses. While these staffing shortages have caused distribution, inventory and operational issues for retailers of all sizes, smaller retailers have had disproportionate difficulty with their ability to combat labor issues, supply chain disruptions, manufacturer preferences and inflation versus large retailers.[4]

Despite the low number of retail bankruptcy filings in the second half of 2021 and the first quarter of 2022, a number of struggling drugstores, clothing retailers and department stores announced efforts to downsize and close stores. In fact, last month, Rite Aid announced its fiscal fourth quarter results and said it expects to generate $170 million in cost savings in the next fiscal year through, among other things, the closure of 145 unprofitable stores.[5] Rite Aid also received a FRISK score of 1 from CreditRiskMonitor, the lowest score available indicating the highest risk of bankruptcy.[6] At the end of 2021, CVS also announced its intention to close 300 stores per year between 2022 and 2024 as part of a shift towards e-commerce.[7] In the clothing sector, American Eagle announced its intention to close 225 stores.[8] Other notable retailers to watch include Party City and The RealReal (each with a FRISK score of 2),[9] Chapter 22 applicants (retailers who recently emerged from Chapter 11 bankruptcy and could file a new case), and some movie theater and fitness center chains.

Although bankruptcy filings remain weak, the combination of continued inflation, rising interest rates, supply chain disruptions, labor issues, debt and spending consumers and the expiry of government assistance could create a new wave of distress and bankruptcy. Retailers, owners, manufacturers, sellers and lenders must remain nimble and consider alternatives to prepare for the changing economic climate and its impact on consumer consumption habits and retail operations in the whole sector.

NOTES

[1] See David Berliner, Retail In The Red: BDO Bi-Annual Bankruptcy Update, An Overview of US Retail Bankruptcies, Store Openings and Closing in the Second Half of 2021, March 2022, BDO US, here.

[2] Identifier.

[3] Identifier.

[4] Identifier.

[5] See Bloomberg, Rite Aid Corporation Reports Strong Fiscal 2022 Fourth Quarter and Full Year Results and Provides Fiscal 2023 Outlook, April 14, 2022, here.

[6] See Marshall Kay, Will Any Retailers File For Chapter 22 In 2022?, Forbes, February 24, 2022, here.

[7] See Jordan Valinsky, CVS closing 900 stores, CNN Business, November 18, 2021, here.

[8] See Berliner, supra.

[9] See Kay, supra.