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This Category Carries the Highest Default Risk Across Retail

The home furnishings category is currently the most financially distressed in all of retail, having the highest odds throughout the industry that any of its merchants will default within one year.

According to a new S&P Global Market Intelligence analysis, on a median basis, home furnishings companies have an 8.9 percent chance of defaulting over the next year as of Oct. 14. The positive news is that the probability for the category, which includes 12 retailers that produce furniture and flooring products, dropped from 9.4 percent as of Sept. 17.

The median probability of default score for all 238 retailers studied as of Oct. 14 was 4.6 percent, up from 4.2 percent as of Sept. 17.

S&P Global’s scores are based primarily on the volatility of share prices for public companies in the sector and considering country and industry-related risks.

The probability that apparel retail and its 29 companies would default rose to 6.7 percent from 5.7 percent in September. Footwear, which totals eight brands, is by far the most stable category listed, with a 0.3 percent chance of default. The category had an even lower probability in September, at 0.2 percent.

Higher end retailers seem very safe from collapsing into bankruptcy, the S&P report says. The 22 retailers that represent the apparel, accessories and luxury goods sector have just a 1.8 percent chance of default, an improvement over the month prior’s 2.3 percent.

Department stores went in the opposite direction, seeing a 4.3 percent chance of bankruptcy within the next year—an increase over the last month’s 3.5 percent odds.

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While S&P Global didn’t name its list of “most vulnerable” public retailers for October, the company’s most recent list in September included names such as Express, Casper, Revlon, J.Jill, Tuesday Morning, Digital Brands Group and Vince. Express had a 24.3 percent chance of defaulting within a year, the highest among apparel retailers and the third-highest overall. J.Jill bore a 15.8 percent chance of bankruptcy, while Tuesday Morning, which already went bankrupt once in 2020, has a 13.2 percent probability of filing again by 2022.

Retail bankruptcy filings have returned to a standstill after a short burst of new filings in late August and the first half of September. As of Oct. 14, 22 U.S. retailers have entered bankruptcy proceedings in 2021, less than half the 46 that filed through the same time period in 2020. The most recent names on the list came in September, with activewear retailer Lorna Jane USA, home furnishing icon ABC Carpet & Home and furniture retailer Mallett Inc. all filing for Chapter 11 that month.

Throughout 2021, apparel and home furnishing retailers including Belk, Christopher & Banks, SOS Furniture Co. and Alex and Ani all underwent bankruptcy.

The list pales in comparison to 2020’s 52 total bankruptcies, many accelerated by the extended store closures and limited apparel demand during the initial outbreak of the Covid-19 pandemic. Last year saw high-profile names like JCPenney, J.Crew, Tailored Brands, Ascena Retail Group, Brooks Brothers and Francesca’s among many others forced to reorganize in some fashion.

Retail isn’t out of the woods, however. Corporate bankruptcies may pick up in 2022 after a period of slowness for the rest of this year, the S&P report said. This could potentially be spurred on by the supply chain disruptions that have been delaying products from getting into warehouse and store shelves, ultimately putting retailers at risk of not being able to fulfill demand during the holiday season.

This industry has produced a record-low inventory-to-sales (I/S) ratio due to this backlog, with Bank of America Securities research finding that the I/S ratio hovers at nearly 1, well below the traditional historical annual average of 1.53. BofA also said that its inventory indicator, which calculates shippers’ views of inventory levels, is down 25 percent year over year.

The S&P report also cited Census Bureau data released Friday in highlighting the strength of apparel and accessories sales, which grew 22.4 percent year over year and 1.1 percent on a monthly basis. Apparel and accessories showed the highest year-over-year growth, while electronics and appliance stores spiked 17.2 percent.

Across retail and including food services, sales jumped 13.9 percent year over year, and 0.7 percent over August totals. Furniture and home furnishings sales increased 13.4 percent from September 2020, and 0.2 percent above the prior month.