Wave of Bankruptcies Sweeps Through Retail
The coronavirus shutdowns quickly reordered retail, sending many weaker and heavily indebted chains to court.
By Evan Clark and Sindhu Sundarwith contributions from David Moin, Samantha Conti on December 21, 2020 J. Crew in Brooklyn, New York. Lexie Moreland/WWD When the coronavirus sent millions home to social distance and closed stores across the U.S. and beyond, the clock started ticking — and it ticked much faster for some. Retailers simply aren’t designed to be idle. They are machines that only work when moving and without money coming in the front door, the cost of inventory already being delivered, debt payments, rent expense and the rest will overwhelm all but the strongest of balance sheets. For many retailers, a few quick steps — curbside pickup programs that sprang up overnight, suddenly ship from store web sites, furloughs and pay reductions — were enough to keep afloat, as long as they could convince their backers that there was a place for them post pandemic. But companies that came into the crisis already weakened by bad business decisions or debt — most often the product of adventurous acquisitions or private equity buyouts — there was just no convincing lenders they’d make it to the other side. So all the retailers that were on bankruptcy watch before COVID-19 fell rapidly and were joined by hordes of others that were on the endangered list, but more likely to push on or keep limping ahead. The rush to bankruptcy included private equity-backed Neiman Marcus Group, J. Crew Group and John Varvatos, which all filed for Chapter 11 protection, along with the Ascena Retail Group, Tailored Brands Inc., Centric Brands and Le Tote (along with its Lord & Taylor unit), all of which never quite recovered from their dealmaking. Joining them were J.C. Penney Co. Inc., Brooks Brothers, Retailwinds, Stage Stores, Lucky Brand and True Religion, as well as many more. “We are in the midst of a retail forest fire,” said Greg Portell, global head of Kearney’s consumer practice, in August. “And forest fires are incredibly devastating, but they’re necessary to create new growth.” That’s the hope for both the industry at large, which at least in the U.S. has been battling and overstored and overwrought retail scene for decades, and the individual chains that had to submit to the bankruptcy process, but came out, hopefully, with a lot less debt and a new lease on life. But bankruptcy is rarely easy, especially as it forces unresolved issues into the light and before a judge. Before the rebirth, there’s battle. For Neiman Marcus, it was a bankruptcy court showdown with creditors over a dispute that had been brewing for years — whether it was appropriate for the company’s backers to carve out the Mytheresa web business for themselves. Creditors argued that the valuable Mytheresa asset had been moved out of Neiman’s debt structure into other affiliated entities as a maneuver to keep its value out of creditors’ reach. Neiman’s one time leveraged buyout sponsors, including Ares Management Corp., argued the Mytheresa move was a business decision. The dispute culminated in a settlement before the retailer’s Chapter 11 plan was confirmed, though it also led to a dramatic series of collateral events. Dan Kamensky, who founded the Marble Ridge hedge fund that has since closed, was arrested in September amid allegations that he improperly attempted to meddle in a transaction related to the settlement. Kamensky tried to keep Jefferies Financial Group Inc. from competing with his firm in a transaction involved in the retailer’s restructuring and was recorded saying: “[I]f you’re going to continue to tell them what you just told me, I’m going to jail, OK? Because they’re going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail. But I’m asking you not to put me in jail.” But that is now a footnote. Neiman’s emerged from bankruptcy after five months in September, under owners and having eliminated more than $4 billion of debt. The company’s challenges will be to continue to streamline its store base and headcount; generate more foot traffic in its surviving stores amid the pandemic and convince shoppers it’s safe to return to the stores. It also has to sustain online sales growth, which much of the investment is going, maintain high levels of service despite personnel cutbacks, and project a more modern image that attracts Gen Z and GenX. Neiman’s has disclosed seven store closings and could shutter more. J. Crew also came out of bankruptcy in September, after four months, sharply reducing its debt and bringing in new ownership. Beyond the balance sheet, much is the same at the company. It is still a tale of two brands, J. Crew and Madewell. J. Crew needs to reclaim its cool factor and special place in fashion — a niche between luxury and mainstream, a blend of whimsy, preppy, classic, color, mixing patterns and prints, and never too trendy. Pre-bankruptcy, there were frequent complaints about declining quality. And store closings are likely to continue. Madewell is stabler than its sister division, and continues to grow. It has a different, downtown appeal, a clear fashion voice and a loyal following. It’s casual, laid-back and rooted in denim. J. Crew’s new owners, the Anchorage Capital Group, in November named Libby Wadle chief executive officer, overseeing J. Crew and J. Crew Factory in addition to continuing to lead Madewell. At Penney’s, bankruptcy was a more complicated process with multiple warring factions and the specter of liquidation hanging over the case.
Penney’s had to overcome objections raised by a faction of secured lenders and shareholders before eventually closing a sale of its retail operations to landlords this month. The going concern sale transaction involved the sale of J.C. Penney’s retail business to Simon Property Group and Brookfield Asset Management Inc., and of its real estate business to a group of majority first-lien lenders who had also provided the retailer with debtor-in-possession financing during the bankruptcy. A minority group of first lien lenders argued that the deal prioritized returns for the majority lender group at the expense of other creditors. But as the Texas bankruptcy court sought to facilitate an outcome that would preserve the retailer as a going concern, and conceded that the sale transaction was the only way to achieve that, the parties huddled and worked out a settlement before the sale was approved in November. Shareholders in the case continued to dispute the transaction, saying it would stiff them of recoveries, but the retailer argued that without a sale, the case would plummet into a liquidation that would only end the business and crater recoveries for vendors and other creditors.
Penney’s has been ailing for decades due to frequent leadership changes, a flawed reinvention strategy, dabbling in product categories that didn’t resonate enough with shoppers, and an inability to generate enough revenue through selling merchandise to support the business and invest back into it. Now the company is led by Jill Soltau, who adeptly built a talented new team of managers with strong experience. J.C. Penney was one of the largest retailers to sink into bankruptcy during the COVID-19 crisis. While the U.S. is particularly overstored, the market did not have the bankruptcy trend to itself. The U.K. bore the brunt of bankruptcy filings in Europe, with a host of high street fixtures disappearing due an overall decline in physical retail, and the long months of lockdown when already-fragile businesses were forced to shut, and furlough or lay off staff. Among the headline-grabbing failures was the already-ailing department store chain Debenhams, which failed to find a buyer, and collapsed just hours after Arcadia Group declared bankruptcy at the end of November. Arcadia, the parent of Topshop and Topman, was in the thick of a restructuring plan, having struck a deal last year with its creditors last year. The second national lockdown in England proved to be too much for the business, and now it’s being sold off piecemeal by Deloitte, which is hoping to find a buyer for Topshop, Topman and the other businesses by the end of the year. Among other U.K. bankruptcies this year were Laura Ashley, Cath Kidston, Lulu Guinness and Oasis/Warehouse, all of which shut, but quickly found buyers for their IP and/or assets. The mall operator Intu also collapsed earlier this year, while DVF Fashion, Diane von Furstenberg’s U.K. subsidiary, wound down operations and shut its Bruton Street store in London’s Mayfair. With vaccines now rolling out and the world looking to stabilization in 2021 — and hopefully something like a return to normal — retail can move on, trimmed down by the painful process of bankruptcy and look to charge ahead anew