By Tonya Garcia, MarketWatch
Neiman Marcus and J.Crew may survive the bankruptcy process, thanks to assets like name recognition and favorable store locations, according to experts.
Both retailers announced bankruptcy filings over the past week. They fell victim to heavy debt loads and stale business models that failed to keep up with changing consumer tastes and shopping behavior.
However, Neiman Marcus and J.Crew could use the bankruptcy filing to lay the groundwork for a stronger, post-COVID-19 comeback.
“Fitch notes that while a disproportionate number of retail bankruptcies result in liquidation as compared with other sectors, both of these retailers could emerge as going concerns, given a combination of good brand equity, relatively strong real estate positions in better malls and shopping districts, and reasonable cash flow characteristics prior to debt service expense,” said David Silverman, Fitch senior director.
“Both Neiman Marcus and J.Crew had significant debt loads following leveraged buyouts, and were subsequently unable to support their capital structures with operating growth. Both companies executed distressed debt exchanges in recent years to address debt loads and upcoming maturities, but the debt burden ultimately proved insurmountable, particularly given near-term operating challenges related to the coronavirus pandemic.”
Neiman Marcus can turn the chapter 11 filing into a way to clean up its finances and streamline its operations, says Joseph Acosta, partner in the bankruptcy practice at the international law firm Dorsey & Whitney.
“Neiman Marcus can utilize the tools in a chapter 11 process to shed less profitable locations and deleverage its balance sheet of billions of dollars in debt, through a form of recapitalization, leaving it a much stronger company when it emerges from bankruptcy,” he said.
And while it might seem dire, Jonathan Treiber, chief executive of RevTrax says J.Crew made the right decision.
“The move by J.Crew, like many other retailers, to seek bankruptcy protection from debtors and landlords, is a wise one,” he said.
“They have air cover to do this now while everybody else is in the same boat. There’s no room or need for pride here anymore. The question will be whether J.Crew can convince the bankruptcy courts that they are viable as an apparel retail business going forward. If not, selling for parts or a full liquidation may be the unlucky fate for this iconic brand.”
This environment is ripe for retail bankruptcies, with many experts expecting more to come. There were media reports on Friday that Stage Stores Inc. , with the company announcing the filing and upcoming liquidation process early Monday morning.
“This pandemic is accelerating changes in business with retail, wholesale and digital that were already well under way,” said Brien Rowe, managing director for investment banking at D.A. Davidson. “Bankruptcy filings are expected to increase as the lockdown continues and so many retailers are struggling.”
Department stores, which were struggling for relevance before the pandemic, are particularly vulnerable to these broad shifts and more specific pressures from COVID-19.
“Faced with an unprecedented and largely universal closure of stores across the U.S., most of these companies must contend with a revenue base that has largely dried up,” wrote Moody’s. “With few other options left, virtually everyone is looking to enhance liquidity to ride out the crisis.”
Analysts led by Christina Boni, vice president at Moody’s, say those with stronger credit positions, like Nordstrom Inc. /zigman2/quotes/203902116/composite JWN +0.06% and Kohl’s Corp. /zigman2/quotes/210414114/composite KSS +0.82% , are positioned to come out on the other side of the coronavirus in a better position.
Meanwhile, talk has turned negative for retailers like J.C. Penney Co. Inc. and Macy’s Inc. /zigman2/quotes/201854387/composite M +1.28%
Moody’s says margins will take a pounding as items now going unsold are pushed out online, kept on the floor for a longer period, or packed away.
“Department stores are also facing a pitched battle for market share as more consumers adapt to virtual shopping,” Moody’s said. “This shift is accelerating the pace of online retail sales growth and prompting a hard reassessment about how many physical stores will be needed in future.”
Other factors to consider will be skyrocketing unemployment and sinking consumer confidence.
The SPDR S&P Retail ETF /zigman2/quotes/206947004/composite XRT +0.79% is down 13.8% over the last year. The Amplify Online Retail ETF /zigman2/quotes/206522380/composite IBUY +0.09% has climbed 23.4%. The ProShares Decline of the Retail Stores ETF /zigman2/quotes/200757065/composite EMTY -1.46% as rallied 10.6% for the period. And the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.40% is up 1.7% for the past 12 months.