The coronavirus pandemic isn’t just taking the life of individuals, it’s taking a swing at corporations as well.
This week saw five bankruptcy filings in fashion, starting with men’s custom clothier J. Hilburn, followed by the first major retailer to file, J. Crew Group Inc. Neiman Marcus Group came next, taking the title of the first department store retailer to file. The designer brand John Varvatos also filed, as did footwear and accessories retailer Aldo Group. The joined denim brand True Religion and sports chain Modell’s Sporting Goods, which filed in April and March, respectively, not to mention insolvencies across the pond.
The five filers have a solid chance at emerging from exit Chapter 11 as stronger firms, once their balance sheets are restructured.
With most brick-and-mortar stores still closed due to the coronavirus outbreak, other fashion companies and retailers are expected to follow. Who will be next to join the COVID-19 bankruptcy group? J.C. Penney Co. Inc. and Stage Stores Inc. are projected to file next week, and neither would be unexpected.
Penney’s has been struggling, although lately it appeared to be seeing some green shoots in the still early stages of its transformation under CEO Jill Soltau. But COVID-19 turned up the heat on an already distressed company as store closures slowed revenue to a trickle. The company last month decided not to pay a $12 million interest payment, taking advantage of a 30-day grace period. The second hit came Thursday when the mass merchant elected not to pay a $17 million interest payment, with the clock ticking on a five-day grace period before the retailer is officially in default.
With both deadlines looming next week, Penney’s needs to decide quickly what it’s going to do next. It’s already been in discussions with potential lenders for debtor-in-possession financing, even as a company spokeswoman emphasized that no decision has been made and that all options are still on the table. One source familiar with the retailer’s thinking said Thursday that an announcement will be made next week.
Other sources said a Penney’s bankruptcy filing is imminent.
In the case of Stage, the retailer also appears to be moving closer to a bankruptcy filing. It too has been struggling in the department store business, leading Stage to decide in September to convert all stores to its off-price concept Gordmans.
In recent weeks, the retailer was in talks with landlords and vendors as it sought to renegotiate payment terms. But not everyone is optimistic about its future, particularly because there’s no visibility on whether consumers would want to go shop in the stores even after they reopen. And that’s a problem for factors tasked with telling clients whether or not they will approve orders placed by the retailer. A “no” means vendors will have to decide if they want to go ahead and ship anyway, taking on the risk that Stage might not be able to make payments on those orders down the road. But factors, like in Penney’s, had already stopped approving orders before the coronavirus outbreak, and saw no reason to change that decision now.
Bankruptcies in the fashion and retail sectors are likely to continue, as everyone doing business in both sectors have been impacted by the virus. Others that have been struggling include debt-burdened J. Jill Acquisition, which has now hired a group of advisors to help with restructuring its debt load. And footwear firm Clarks USA is believed to be in talks with advisors about a restructuring strategy. Another cited by credit ratings firms as a possible Chapter 11 candidate is Ascena Retail Group, although the company sought to debunk that speculation in March, noting that bankruptcy is “not being considered.” However, that was just days before retailers began temporarily closing stores to combat the COVID-19 outbreak in the U.S. Lord & Taylor is expected to file a Chapter 11 as well, but that’s more likely so it can conduct an orderly liquidation of the business.
COVID-19’s modus operandi has been to inflict damage across the world, and every rung of the retail and fashion supply chain. Factories are reeling as retailers cancel orders placed months ago, while landlords have to deal with tenants who now don’t want to pay the full rent on their leases because they’d rather preserve cash on their balance sheets to live to see another day. And just how devastating will COVID-19’s damage be? That may depend on what happens if an anticipated second wave of infections strikes.