# Retail bankruptcies in 2020 hit the highest levels in more than a decade, and experts say there are more to come

That’s the largest number of bankruptcies since 2009, during the financial crisis.

COVID-19 was the straw that broke many ailing retailers.
Companies that were already struggling to keep up with trends, invest in
necessary digital upgrades and shift to modern customer experiences simply
couldn’t cope with the added pressure of store closures, a massive shift to
e-commerce, safety protocols and other side effects of the coronavirus.

“The pandemic has accelerated what was going to happen in a
number of years in a shorter period of time,” said Mickey Chadha, Moody’s vice
president. “The names that have filed for bankruptcy probably were pulled
forward.”

Read: U.S. will remain biggest retail market as government stimulus, e-commerce push the nation ahead of China

In addition to stores closing due to bankruptcy and restructuring, many retailers have been using the pandemic period to reconsider their fleet of stores. Gap Inc.
GPS,
+1.32%
and Children’s Place Inc.
PLCE,
+1.01%
are just two of the retailers that have talked of “rightsizing” their store fleets.

Coresight Research counted 8,401 store closures year-to-date in a Dec. 4 report.

With vaccine distribution ramping up and 2021 around the
corner, a retail recovery isn’t going to happen like the flip of a switch.
Instead, experts and analysts say there are more retail bankruptcies looming
before things get better.

“There are still a lot of names that are in distress and weak in retail and apparel,” said Chadha. “The pandemic will accelerate the trends making the weak weaker and the strong stronger.”

Watch: How to pick winners in the retail sector amid the pandemic

On a positive note, the bankruptcy process is intended to
give businesses that need it a second chance.

“In a general sense there might be a stigma about a bankruptcy. We view the bankruptcy process as a tool to help companies restructure their business and balance sheets,” said Dan Guyder, partner at international law firm Allen & Overy.

“And it’s a positive for investors to help a company move
back to growth. There might be some broken glass along the way, but that’s the
cycle of life for some companies.”

In recent weeks, J.C. Penney Co. Inc.
JCPNQ,
+1.91%,
for example, has emerged from bankruptcy and has a number of plans to grow the business, including a new women’s brand and a beauty strategy.

Consumers need to
recover as well

It’s not just retailers that have to recover from the coronavirus-induced economic slump. Shoppers do as well. With government protections against foreclosure and eviction expiring and with the additional government stimulus measures still very uncertain, consumers now have to rethink personal budgets and perhaps tighten up spending habits.

This could throw even the best-laid retailer plans into
disarray.

And: Americans are draining their checking accounts as stimulus talks drag on

“There’s more pressure on consumers to redirect available
cash to meet those obligations,” said Guyder.

Under normal circumstances, the retail industry is a very organized one, which makes the uncertainty brought on by the pandemic –- and a bankruptcy — perhaps more difficult for retailers to manage.

“Retail is a business of seasonality, depending on
categories and time of year, you see growth or margin deterioration,” said Matt
Katz, managing partner at global advisory SSA & Co. “Bankruptcy doesn’t
have a season.”

Taking into account that consumers are going to need time to recover as well is something that retailers have to consider.

“People are going to have to replenish savings and nest eggs. They’ll probably owe money to landlords and other obligations,” said Katz. “[T]here’s some catch-up they’re going to have to do to put their finances back in place. That’ll taking some time. We’re building that thought process into client plans.”

Keeping balance
sheets in check will be key in 2021

To be sure, some retail categories thrived during the pandemic, including essential retailers like Walmart Inc.
WMT,
+0.96%
and Target Corp.
TGT,
+0.68%
(shares up 22.1% and 37.4%, respectively), warehouse retailers like Costco Wholesale Corp.
COST,
+1.93%
and BJ’s Wholesale Club Holdings Inc.
BJ,
-2.49%
(shares up 26.4% and 63.6%, respectively) and home goods retailers including Wayfair Inc.
W,
-5.86%
and At Home Group Inc.
HOME,
-2.37%
(up nearly 163% and 184%, respectively).

The Amplify Online Retail ETF
IBUY,
-1.07%
has skyrocketed 125.5% for the year to date and the SPDR S&P Retail ETF
XRT,
+0.99%
is up 42.4% for the period. Both have far outpaced the benchmark S&P 500 index
SPX,
+0.89%,
which has gained 15.6%.

And experts see improvement coming in 2021, particularly for
those categories that took a big hit in 2020.

Moody’s is forecasting 516% year-over-year operating profit growth at department stores next year, reaching $1.2 billion; a 489% operating profit boost at off-price retailers, to $4.9 billion; and a 114% increase in operating profit growth at apparel and footwear retailers, to $3.2 billion.

But November retail numbers demonstrate that that path to recovery won’t be a smooth. Despite the holiday shopping season, sales fell 1.1% and October sales were revised down.

See: Retail sales sink 1.1% in November as COVID-19 buffets restaurants and economy

“For the retailers that have excelled during the
COVID-19 pandemic,” wrote Bank of America analysts led by Elizabeth Suzuki, “the
comparisons in 2021 get particularly tough in the middle of the year.
The relatively disadvantaged retailers (non-essential and away-from-home
categories) will have easier year-over-year comparisons in 2021 and could
experience outsized growth relative to the 2020 winners.”

It will be critical for retailers to keep their balance
sheets in check going forward.

“A lot of names that are weak in the space are private-equity
owned,” said Moody’s Chadha. “The leverage of these names is high. The only way
to avoid some sort of distress exchange or bankruptcy will be to improve
profitability, which will be difficult.”

The other option is to cut debt, which will require cash.
Either way, these companies need to “right their balance sheet to be
sustainable,” Chadha said.

If a company needs to take on more debt, Greg Portell, head
of global consumer industries and retail at global management consulting firm
Kearney, says “intentionality of the debt” is significant.

“If you’re going to put debt on your balance sheet, you want
to make sure it’s driving expansion and growth,” he said. “Many that filed for
bankruptcy had debt that was financing mechanism not growth.”

Portell thinks disappointing earnings from the holidays will drive more bankruptcy filings.

“We will see another wave in the first and second quarter based on the fallout from the holiday season,” he said. “Consumer spending is strong and doing its part, but not everyone is going to win.”

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And while many are waiting for things to get “back to
normal,” it may be more accurate to look towards a “new normal.”

“Looking ahead, retailers are hoping that the vaccine
rollout will return some ‘normality’ to our lives heading into 2021, allowing
retailers to recoup their losses from 2020,” said Marwan Forzley, chief
executive of Veem,
a payments platform that works with thousands of U.S. retailers.

“However, while brick-and-mortar stores may regain some of
their popularity as things start to look more ‘normal’ again, the pandemic has
certainly altered the way we shop forever and e-commerce will still be an
essential revenue stream for retailers, regardless of their size.”