The Dilemma Facing Retail Today
At Key Corporate Services, our Finance and Accounting division specializes in executive recruiting within multiple industry platforms. At any time, we have several openings needing expertise in the operational turn-around/ restructuring area. Industries face challenges that require professionals in these fields. Today, that is certainly true in the retail segment.
You are probably aware of the struggle retail businesses are experiencing. This year alone, more than 300 retailers have filed for bankruptcy according to data from BankruptcyData.com. That’s up 31% from the same time last year.
Retail has always faced challenges
Experts say the problem stems from consumers shifting away from traditional stores to online shopping. But the industry has always been competitive, facing liquidity issues, management challenges, ailing credit ratings, and exposure to unfavorable borrowing terms. These all cut into margins.
Distressed numbers are on the rise
The ranks of distressed retailers are expected to grow over the next 12 to 18 months, according to a recent Moody’s Investment services report. In February, they rated at least 19 retailers at Caa or lower. That number has now grown to 22. This is the lowest ranking possible on Moody’s rating spectrum.
Particularly vulnerable are department stores and specialty retailers in the B2/B3 retail population. Seven stores in this rating category face $1.1 billion of potential maturities from asset-based loans and revolving credit facilities in 2018. As the risk of default grows, some of these stores may flee to Chapter 11, which allows a company to keep operating while it restructures its debt.
The role of private equity firms in elevating the risk of default
Related to Chapter 11, it’s interesting to note that more than half the filings year-to-date have come from retailers that were previously purchased by private equity firms. Such purchases were the result of leveraged buyouts, where a private equity firm uses a combination of equity and debt to purchase a firm — saddling the company with debt in the process.
The problem with private equity firms gobbling up retailers lies in their operational approach. True to their nature, they seek out undervalued retailers where costs can be squeezed out. This sounds great, but the reality is they often fail to invest sufficient money in critical areas like the brand’s store fleet or digital operations.
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