Retailers Unlikely to Turn to Bankruptcy During Pandemic

Storied department store chains Neiman Marcus and Lord & Taylor are either planning to file for bankruptcy or weighing bankruptcy protection as an option, according to reports by Reuters this week. The two retailers are members of the growing ranks of distressed companies in recent weeks due to the ongoing global pandemic. While Neiman Marcus declined to comment, it previously told Adweek via email that it is weighing a number of financial alternatives, among them bankruptcy. Meanwhile, fashion rental subscription service Le Tote, the parent of Lord & Taylor, said in an email to Adweek today that it is weighing its options with regard to a potential for filing for bankruptcy protection. The company declined to comment further. Hudson’s Bay, which sold Lord & Taylor to Le Tote last year for $100 million consisting of cash and a secured promissory note, did not immediately respond to a request for comment. The Canada-based department store operator committed to paying rent for Lord & Taylor for three years under the merger agreement, amounting to $77 million in total rent liabilities. Despite the chatter, filing for bankruptcy protection during the current pandemic does little for retailers, according to Joseph Malfitano, founder and restructuring adviser at Malfitano Partners. [article_summary section="1"]“Absent an emergency situation, retailers are not rushing to file for bankruptcy given that any plan to restructure or otherwise reduce footprint and maximize inventory values is not possible during a shutdown,” he said. For retailers, Malfitano explained, filing for bankruptcy protection serves two primary purposes: to streamline the liquidation of inventory to generate cash, and to reject unprofitable store leases once the sales are complete in order to reduce liabilities and right-size a business. But because stores are currently mothballed, it is nearly impossible to liquidate inventory to effectuate any turnaround plan. While a wave of court restructurings is expected to begin once stores reopen, any bankruptcies filed before then will either be triggered by a crisis, in which the retailer has completely run out of cash and has no access to new financing, or because the company has put together some sort of prepackaged plan, such as a debt for equity swap, Malfitano explained. [article_summary section="2"]For Neiman Marcus, if the company does indeed end up filing, it could likely mean the company has essentially agreed to hand over ownership to its lenders. It’s also unlikely to entail liquidations on any significant level because the chain has few stores, affordable rents and attractive store economics. On the other hand, department store chains such as JCPenney and Stage Stores are being offered lifelines by their lenders, either in the form of additional financing or debt forbearance agreements, delaying restructurings either in or out-of-court. There is one recent outlier. Premium denim brand True Religion, which has about 100 stores, filed for bankruptcy last week as a condition of obtaining needed financing, Malfitano said. Meanwhile, those that filed bankruptcy prior to the pandemic, such as Modell’s and Pier 1 Imports, were able to have their cases suspended and rent deferred. Though Art Van Furniture attempted to gain court approval for a stay as well, it was rejected by the court, and the home furnishings retailer switched from a Chapter 11 reorganization to a Chapter 7 liquidation. [article_summary section="3"]In that vein, Malfitano said lenders that were perhaps unlikely to come to the assistance of distressed retailers prior to pandemic are now stepping up to the negotiating table to give retailers more time to weather store closures. That’s because if lenders were to force retailers into bankruptcy now, the recovery they would receive on their debt would be much lower than if they were to wait until stores could be reopened, facilitating a more orderly restructuring process. Bankruptcy would generally put many retailers in a more difficult position, ultimately, because they would be required to pay administrative expenses, including rent. Retail sales are anticipated to be down more than 50% once stores begin to reopen. With such a steep decline in sales, almost every retailer is going to need a rent-relief package for the next 12-18 months. To preserve current market rents, landlords and their banks are going to have to come to the table to negotiate this relief, or we will likely see a steep decline in commercial real estate pricing, Malfitano warned.

Data & Insights

Retailers Unlikely to Turn to Bankruptcy During Pandemic

Neiman Marcus and Lord & Taylor have been pegged for filings, but the tactic has its drawbacks

Richard Collings

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Richard Collings