Retail is finally getting a break from 2020’s troubles.
After drawing down $13.86 billion from credit lines last year following the initial Covid-19 outbreak and ending 2020 with more than 45 bankruptcies, the retail and fashion sector is finally getting a much-needed reprieve in 2021.
Armed with federal stimulus checks, consumers in recent months have unleashed their pent-up demand to shop ’til they drop.
So what has this meant for retailers?
Lower inventory levels due to supply chain disruptions plus robust consumer demand translated to stronger full-price selling, driving better margins and higher profits.
Dillard’s, for one, said women’s apparel and shoes “significantly outperformed” other merchandise categories in Q2 sales. “Management attributes the substantial improvement in gross margin to stronger consumer demand and better inventory management leading to decreased markdowns in the second quarter of 2021,” it added.
Increasing margins and tighter cost controls translated to retailers’ second-quarter profits outperforming not just 2020 but often 2019 as well. The National Retail Federation even scrapped its original forecast for 2021 retail sales, now estimating a 10.5 percent to 13.5 percent increase due to “unprecedented growth,” up from the initial guidance of 6.5 percent to 8.2 percent.
After retailers tapped credit lines last year, many subsequently raised new debt to repay those borrowings. Macy’s raised up to $5 billion while youth retailer American Eagle Outfitters launched a $400 million senior note offering. And now that quarterly profits are on the rise, retailers are finding a better use for their extra cash by refinancing their debt to bolster their liquidity and balance sheets.
Gap Inc. on Monday revealed plans to raise new funding to help retire early all tranches of its $2.25 billion debt, saving an estimated $125 million in annual interest for Fiscal Year 2022. That reflects the difference between the current estimated annual average interest burden of $195 million and the estimated annual interest burden of $65 million from the new senior secured note raise.
A recovering economy also has yielded fewer bankruptcy filings, as well as fewer distressed retailers teetering on the brink of a Chapter 11 filing. That in turn has lowered the availability of distressed debt for trading. Many hedge funds trade the bonds of companies either in bankruptcy or close to a filing as a way to gain control once it files its Chapter 11 petition. Perhaps the most notorious example of this strategy came when hedge fund honcho Edward S. Lampert gained control of bankrupt Kmart Corp. through his ESL Investments.
According to data compiled by Bloomberg through Sept. 10, the amount of tradable debt has shrunk from nearly $1 trillion in March 2020 to less than $60 billion as of this month. As of late March 2020 in the immediate wake of the first store shutdowns, the retail sector had about $60 billion in distressed bonds and loans. That pile now stands in the range of $1.1 billion, representing a 98 percent decline, Bloomberg data indicates.
A BDO report last month indicates that just nine retailers filed for Chapter 11 bankruptcy during the first half of this year. Loves Furniture Inc. kicked off the filings in January, closing all but one store and seeking an owner for its remaining location. Internet and direct marketing firm Tea Olive LLC has shut its stores and liquidated its business. Women’s fashion retailer Christopher & Banks. Corp. liquidated all 449 stores, sold its e-commerce business to a prepetition lender and converted the case to a Chapter 11 liquidation.
Belk Inc. filed a prepackaged Chapter 11 plan and is now out of bankruptcy proceedings. Apparel and accessories firm The Collected Group, the owner of Current/Elliott and Equipment brands, has reorganized its business around it e-commerce operations. Beachwear retailer L & L Wings Inc. is trying to restructure debt or obtain new capital. Accessories-focused firm Alex and Ani LLC filed a plan the day after its June 9 Chapter 11 petition to pursue a standalone restructuring and sale.