Summer will soon give way to autumn, which means we’re inching closer and closer to the winter season. As temperatures drop and chilly, inclement weather drives Americans back indoors, experts warn that a second wave of the coronavirus outbreak will strike.
Scientists and doctors aren’t the only experts concerned; retail industry executives worry that a second wave of infections will trigger another domino effect of bankruptcies, shuttered stores, and lasting damage to the retail world.
Their fears aren’t unfounded considering the significant retail losses that COVID-19 precipitated. In May, at least seven major retailers filed for bankruptcy protection, including J.C. Penney, Neiman Marcus, and J. Cew. Then, in a rough two-week span in early July, seven more retailers joined them, including Lucky Brand, Brooks Brothers, and The Paper Store.
Would a second outbreak of coronavirus in the winter turn this bankruptcy flood into a tsunami?
Retail Darwinism In Action
According to tracking by S&P Global Market Intelligence, at least 44 retailers have already filed for bankruptcy protection in 2020, but there are plenty of others considered at high risk of defaulting on their debt and filing for bankruptcy. The meal-kit company Blue Apron and online furniture retailer Wayfair top that list, followed by apparel makers like Christopher & Banks and J.Jill.
“Retail Darwinism was accelerated because of the pandemic,” said Perry Mandarino, head of restructuring and co-head of investment banking for B. Riley FBR. “Whereby certain species survived because they were strong enough to, others have been weighed down by too much debt.”
Now more than 6,000 brick-and-mortar stores have permanently shut their doors in response to COVID-19 difficulties. Some are turning to online sales instead, while others have no choice but to call it quits.
Pressures of the Holiday Season Could Lead to Bankruptcy
Of course, winter isn’t only known for being the flu season. It’s also the holiday season that hosts an endless stream of sales, promotions, and doorbusters. If retailers are desperate to offload merchandise and recoup losses, deep discounts will make the holiday season even more competitive.
At the same time, however, many Americans are hesitant to spend money on non-essentials in the face of so much uncertainty and unemployment.
“I think you are going to start seeing mid- and small-size companies filing in the fall,” predicts Andy Graiser, co-CEO at the restructuring firm A&G Real Estate Partners. ”In some cases, they have gotten government money and have been able to buy time. But if their sales aren’t there, you are going to see more bankruptcies.”
Graiser also suspects that more businesses will file Chapter 7 bankruptcies this fall. Chapter 7 liquidation bankruptcies are more affordable than Chapter 11 bankruptcies which offer reorganization and a path forward to repay old debts. If retailers continue to struggle and ultimately have no choice but to close their doors, they may not be able to afford the time-consuming process of a Chapter 11.
The bottom line? We’ll see what the winter brings. If it’s slow sales, a tsunami of retail bankruptcies is nearly inevitable.