While apparel retail executives are pinning their hopes on the strong economy, the benefits related to tax reform and the willingness to spend that consumers demonstrated during the holidays, Moody’s says not so fast.
Though the credit ratings agency agrees that retail is “absolutely” improving, the firm also said the recovery will be uneven. “While some sub-segments of U.S. retail will improve in 2018—even including department stores—weaker issuers will continue to struggle,” Moody’s noted in a report released Wednesday.
The firm said the pattern is illustrated by its current list of distressed retail and apparel companies, which shrunk from 26 to 20. Of the six that are no longer on the list, four companies were upgraded while two filed for bankruptcy.
Moody’s forecasts the default rate for 2018 at 6.34% for retail and apparel, compared to 2 percent for corporate America in general.
The credit agency lists Bon-Ton, Charlotte Russe and Charming Charlie among the most recent to default. And it predicts the rate will peak this month at 12.4%.
“Our forecast translates to at least six retail & apparel issuers defaulting over the next 12 months, with most occurring in the first half of the year,” Moody’s said.
Of the companies that remain on Moody’s distressed list, many wound up there as a result of leveraged buyouts.
“Retail has always been more vulnerable to high leverage given its inherent cyclicality, which has become more acute in recent years with the rapid push online, greater price transparency, changing needs around infrastructure and financial flexibility,” the report noted.
The most recent example is the $5 billion debt load Toys R Us carried as a result of a leveraged buyout in 2005 that dried up liquidity and drove the toy store into bankruptcy in September. The retailer announced plans to close all U.S. doors and liquidate assets on Wednesday.
For small retailers in particular, Moody’s said the problems are magnified, leaving them unable to adapt to the changing retail environment while simultaneously maintaining their stores and competing with lower prices from competitors.
Compounding these issues, Moody’s said maturities will “spike” in 2019.