Will supply-chain constraints spark a new wave of bankruptcies?
The “make-or-break” holiday retail season will be watched especially closely this year, given the production crisis and covid resurgence that have unfolded in recent months with implications for the critical year-end period.
Inventory levels at risk
Inventories have reached their lowest level for the year while supply-chain pressures are expected to persist, potentially spelling disaster for retailers hoping a happy holiday will keep them out of bankruptcy court.
How Holiday 2021 sales will shake out remains to be seen. The National Retail Federation previously raised its annual sales outlook for the year but has yet to publish a holiday forecast. For other prognosticators, however, roughly 7 percent growth seems to be the general consensus, per Bain, Deloitte and Mastercard.
Though many retailers have leveraged pent-up demand to drive full-price sell-through, whether this desire to purchase without promotions and markdowns will continue is debatable for the moment.
In research published last week, Bank of America Securities’ (BofA) economics team found that order backlogs continues to mount while supply delivery times lanegthen, resulting in the lowest retail inventory-to-sales (I/S) ratio since the start of the ISM (Institute for Supply Management) Manufacturing Index, sometimes referred to as PMI (Purchasing Managers’ Index).
The retail I/S ratio now hovers at 1 versus the historical average since 1980 of 1.53. The combination of constrained supply and strong demand caused the retail I/S ration to plunge, starting in May, when both the retail I/S and wholesale I/S ratios were around 1.6. The wholesale I/S ratio has held up better, hovering in the 1.2 range. Proprietary research from BofA on shippers’ view of inventory levels shows the inventory indicator is down 25 percent year-over-year. The August reading of 25.7 indicates that inventories are uncomfortably thin, since the indicator is lower than the year-ago period when inventories were already running low.
“All major retail sectors have I/S ratios below their historic averages. In order for these to return to more ‘equilibrium’ levels either demand needs to fall or companies must find a way to restock inventories,” Michele Meyer, the lead BofA U.S. economist, said in a supply chain report from the U.S. and Global economics teams.
Because supply chain bottlenecks are likely to make restocking of inventories difficult, and demand is expected to remain strong due to wage gains and a strengthening labor market, “I/S ratios could remain depressed for the foreseeable future, which could place more upward pressure on goods prices,” Meyer said.
For apparel and accessories, the retail I/S ratio currently around 1.5 versus the historic average from January 1997 to February 2020 of 2.5, BofA showed in a chart based on BEA data. For furniture and furnishings, the current I/S ratio is near 0.75 versus the historical average of 1.6.
The low-inventory problem has been exacerbated by the growing backlog of anchored ships waiting to dock and unload. Meyer said the congestion at the Port of Los Angeles and Long Beach hit “all-time record highs” on Sept. 10. “In total, 55 vessels are waiting at anchor as the holiday trade season ramps up,” she wrote. “Great port congestion is leading to a strain on the supply of available ships for transport.”
BofA analysts believe inventory levels have deteriorated further, the economist said, citing a separate sentiment review. Businesses continue to report that their companies and suppliers are struggling with record-long supply lead times, as well as continued shortages of raw materials and other supply chain logistics, she added.
The question of retail bankruptcies
So what might supply-chain challenges mean for retail bankruptcies?
Not a whole lot for retailers with stable balance sheets that had the cash and foresight to invest in business-critical digital technology, such as Walmart and Target. Both have resourced their businesses to fuel online order fulfillment and pandemic staples like same-day services.
It may not take much to push some struggling retailers over the edge. Merchants teetering on the brink of some form of restructuring are always at risk. It could be that when sales don’t materialize, cash-crunched retailers could run afoul of certain loan covenants. That becomes a liquidity problem that could push a retailer into bankruptcy or liquidation if they can’t work out some breathing room with lenders.
A BDO report last month indicates that just nine retailers filed for Chapter 11 bankruptcy during the first half of this year, a far cry from the 43 that filed in 2020. Alex and Ani LLC filed a plan the day after its June 9 Chapter 11 petition to pursue a standalone restructuring and sale.
The tide could turn as more distressed firms come under fire.
Since Aug. 31, four companies—three in fashion and one in home—have filed Chapter 11 petitions. The long awaited bankruptcy of troubled brand management firm Sequential Brands Group kicked off the recent spate of filings, followed by struggling ABC Carpet & Home, Global Brands Group Holding. and Lorna Jane, which is hoping to wiggle out of its 21 U.S. leases.
So who else could be under fire?
Probably not men’s big and tall specialty retailer Destination XL. The company, which has been on S&P’s watch list of retailers at risk of default, repaid in full a loan facility ahead of its March 2026 maturity date. With no outstanding long-term debt, the men’s chain is in a better position today than at the start of the year.
The same can’t be said of others on S&P’s watch list.
As of Friday, the index is keeping tabs on publicly traded companies including Express, J.Jill and Vince, as well as off-price home décor firm Tuesday Morning and Casper, the mattress maker. Of the five, Tuesday Morning filed a Chapter 11 petition in May last year, and successfully exited bankruptcy in January.