2024 Not Expected to Be a Big Year for Retail Bankruptcies
Retail bankruptcies in 2024 will be more like 2023, and that means more pressure for home retailers than their fashion counterparts.
It won’t be a fabulous year for fashion retailers, but it won’t be a disaster either, according to BDO principal and national business restructuring and turnaround services leader David Berliner.
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“I think that what we’re going to see are not stellar numbers, but for some that have been struggling, maybe a bit more stability and getting their income and profitability a little bit better,” Berliner said. “That was the case with Gap [Inc.]. Instead of comps being down, they were kind of stable, slightly up.”
He said he’s slightly optimistic, having gotten to March and “we haven’t seen a lot of retailers file yet.” While a handful of retailers are still being closely watched, “it’s not like the huge number we had seen last year at this time.”
While there have been some overseas fashion firms that have gone into administration—Germany’s KaDeWe Group filed for insolvency in January and U.K.’s Frasers Group this month put Matches and three kidswear brands, Base Childrenswear, Kids Cavern and Flannels Junior into the U.K. equivalent of bankruptcy—only one fashion firm has filed thus far in the U.S. Anne Fontaine USA Inc., the U.S. affiliate of the Paris-based luxury fashion house, filed a Chapter 11 petition in January.
On Monday, fabric and crafts retailer Jo-Ann Fabrics, operating as Joann, filed for Chapter 11 bankruptcy court protection. In 2023, it was distress in the home sector that led to a flurry of bankruptcy filings and store closings. Other retailers said to be on credit analysts’ 2024 watch list include Express Inc., Petco Inc. and home big box retailer Big Lots.
Struggling retailers who are now on the hunt for replacement financing could find themselves out of luck as lenders have been tightening up criteria. Berliner does expect that interest rates could see slight reductions later this year, but that still might not be enough to help retailers that have been distressed for some time.
“You don’t want to compete on price,” Berliner said of his advice for retailers. “If you compete on price, it’s easy to go online and find someone else that’s cheaper.” In short, there’s only one winner when you compete on price and that goes to the cheapest player. “It’s very hard to be the cheapest play in alot of these markets. So you want your price to be competitive, and close enough that consumers won’t care about the difference,” Berliner explained.
Because a retailer wants their customers to become repeat shoppers, his advice is for them to focus on having a great experience online and in store, one that’s better than competitors.
“Even if your prices are a little bit higher, if it’s much more enjoyable to shop your website and your stores are better laid out so its easy and convenient and well-stocked, these experiences are good and you can win customers that way,” he said.
Another area BDO is touting centers on investments in AI that can help retailers optimize their costs and improve operations. That was the gist of BDO’s 2024 Retail CFO Outlook Survey from earlier this year.
The retail expert also spoke about store closing announcements thus far this year, citing Macy’s plans to shutter 150 department store doors over three years while it focuses on opening new luxury stores for its Bloomingdale’s and Bluemercury banners.
Berliner doesn’t see much growth in the luxury sector, at least not the kind where sales are being taken from mid-market retailers. Rather, he said sales growth in the luxury sector is more about taking sales from other luxury retailers. And since that means cannibalization within the sector, he thinks that could be a problem for luxury down the road.
“You see what happened with Sears years ago [closing stores] playing out and now Macy’s closing stores. You know, you can only play that game for so long because [at some point] you don’t have any stores left to close,” he said, adding that many of these stores now are having the problem of getting the consumer to spend with them as much as they did before. But with many consumers no longer working in the office five days a week, he expects to see a continued shakeout in where the stores will be located in the future and what types of stores retailers will open.
“We’re seeing a move off the mall, into neighborhood centers, as well as smaller-format stores. It’s all an attempt to capture the customers who, in a relatively short period of time, are now more mobile than they had been up through 2019,” Berliner said.
BDO’s Spring 2024 Retail in the Red report, the firm’s bi-annual bankruptcy update, said that shrinking physical store square footage is “tantamount to store closings” as retailers replace large-format stores with small-format stores.” And the report said some traditionally mall-based retailers are shifting to neighborhood strip centers to take advantage of high-traffic locations with lower rent.
The advantage that U.S. retailers have is a still “very strong jobs market,” BDO restructuring expert said. “As long as people are working, they’re going to be buying something. They may not be splurging as much, but they’re still going to be buying.” And that’s in spite of a U.S. consumer borrowing surge in 2023, the year that saw credit card balances exceed $1.1 trillion and delinquencies rise more than 50 percent, according to the Retail in the Red report, citing to the New York Federal Reserve. Data also indicated that debt that is 90 or more days past due amount to 6.4 percent in the fourth quarter, represening a 59 percent jump from just over 4 percent at the end of 2022.
And while interest rates won’t suddenly shoot in a downward trajectory, Berliner says even slight declines over the next several consecutive months will have a “psychological benefit to people.”
Presuming the Fed can get inflation under control and prices—as well as interest rates—start to come down a bit in the back half, Berliner believes that could bode well for a better holiday season this year than what retailers saw in 2023.
