Guitar Center's Bankruptcy Adds to Toll on Retail

Musical instrument chain Guitar Center filed for chapter 11 bankruptcy protection over the weekend in Virginia as the pandemic continues to take a toll on the beleaguered retail sector. However, there's some room for hope: The number of retailers at risk of defaulting and restructuring either in or out of court is declining. Granted, part of the reason so many names were taken off the list is because they have already filed. But a few retailers have figured out how to avoid a trip to court. For example, apparel retailer Land’s End and storage products retailer The Container Store both managed to refinance their debt over the last few months, removing them from danger, said David Silverman, a retail analyst at rating agency Fitch. Several of the usual suspects remain endangered: department store chain Belk; apparel retailers JoAnn Stores, Boardriders, Iconix and J. Jill; and specialty retailers such as Party City, multi-level dietary supplement marketer Isagenix, mattress purveyor Serta Simmons Bedding, sock manufacturer Renfro Brands and online jewelry retailer Blue Nile. Apparel, jewelry and accessories also continue to get beaten up, in part due to shoppers continuing to shelter in place, resulting in less of a need for replacement items in these categories, Silverman said. "While trends at these categories are expected to sequentially improve during the holiday period, revenue across most representative companies is expected to be down meaningfully compared with 2019," Silverman said. The most troubled retailers tend to fall into the apparel category, but several beauty brands are also on the default watchlist, including Revlon, Anastasia Beverly Hills and Rodan & Fields. Clothing aside, the purchase of consumer products is broadly expected to improve at the expense of leisurely activities such as travel and dining, Silverman said. In fact, as consumers shift dollars away from leisure and entertainment, which includes travel, the category has surpassed retail as the most worrying. Among Fitch’s top loans of concern in the space include tourism-dependent ferry operator Hornblower, theater chains Cineworld Cinemas and AMC Entertainment and fitness chains Equinox and L.A. Fitness International. Cinemas did receive some good news, though, with Warner Media planning to release action movie Wonder Woman 1984 this December. Restaurant chains on watch include Red Lobster, Miller's Alehouse, Burger Boss, Checkers Drive-In and Steak ‘n Shake, according to the rating agencies. The leveraged loan default rate for retail remains at a record level of 19.6%, meaning that nearly a fifth of all loans held by retailers were defaulted on during the past 12 months, according to Fitch. “The holiday season will be very difficult to analyze this year, as it essentially began several weeks ago with retailers spreading out discounts over a longer time frame to encourage in-store social distancing,” Silverman said. Fitch is looking at a number of factors that could impact consumer sentiment and purchase decisions, including political news, implications for a future stimulus in 2021, recommended or forced shelter in place activity and vaccine rollout, he said. “We think the holiday will contain many of the same trends we have seen this year, with a number of retail categories continuing to benefit from wallet shifts away from services like travel, entertainment, sporting events, dining out, and so on,” Silverman explained. “The consumer is also benefitting from strength in asset prices like homes and equities." For its part, rating agency S&P expects consumer spending to increase only 0.3%, excluding the purchase of food and beverage, during November and December, well below the 4.6% average increase over the last 20 years. The shopping season will remain constrained as the number of Covid-19 infections rises alongside high unemployment, according to S&P. "Broadly, we expect the trends that have developed during the pandemic to hold for the holidays as well. That is, retailers that cater to home products will fare better than specialty apparel retailers," said Sarah Wyeth, S&P's lead retail analyst. Still, despite the challenging circumstances, it's not all bad news for retailers. “We do expect leading companies with strong omnichannel models, including general merchandisers like Walmart, Target, and Amazon, to benefit as consumers take advantage of seamless shopping between channels,” Silverman said. Thanks to its particular niche as a trusted seller of musical instruments and equipment, Guitar Center has certain advantages other retailers don't necessarily have. “I might argue that Guitar Center has potentially a better shot at recovery than most because, unlike so many storefront retail offerings, buying a musical instrument is tough to do without actually experiencing it firsthand,” said Hayes Roth, a principal at HA Roth Consulting. “And shipping guitars and tubas back and forth to customers for ‘trial use’ gets pretty expensive. So as long as people remain interested in playing musical instruments, there will likely be music stores in which to play and compare them ... and then it comes down, as ever, to brand.” There are other upsides for Guitar Center during what is otherwise a time of struggle for most marketers. As consumers remain more homebound over the winter months, for example, Guitar Center can appeal to shoppers who want a break from TV streaming or baking bread. “This is an excellent opportunity for Guitar Center to restructure itself for the stay-at-home economy. Guitar Center’s customers love this brand, and they are an excellent candidate for a live-streaming shopping channel. We project live-streaming commerce to be bigger than commerce in the next five years,” said Daniel Hodges, CEO and founder of Consumers In Motion. The idea of retail locations as showrooms that emphasize customer experience is yet another area that should support Guitar Center's viability. After all, indoor entertainment venues remain largely closed as much of the country continues to combat spikes of coronavirus cases. Plus, concert halls and clubs are likely to take longer to return to full-scale operations once the pandemic starts to ebb. “Guitar Center is one of those immersive retail experiences that defies logic for the non-musician," said David Lemley, president and head of strategy at Retail Voodoo.. It is concerning that they are in bankruptcy due to Covid-19, especially for people who appreciate and/or need the hands-on expertise of their staff. I believe that GC will come back stronger from bankruptcy and that their marketing shouldn’t be impacted by their current situation." As for Guitar Center's bankruptcy, the company aims to reduce debt by $800 million under its restructuring plan. “This is an important and positive step in our process to significantly reduce our debt and enhance our ability to reinvest in our business to support long-term growth," said CEO Ron Japinga in a statement. "Throughout this process, we will continue to serve our customers and deliver on our mission of putting more music in the world. Given the strong level of support from our lenders and creditors, we expect to complete the process before the end of this year." The retailer lined up $375 million in debtor-in-possession or DIP financing to fund operations while in Chapter 11, it said, and will continue to provide uninterrupted service to its customers. The reorganization is supported by its private equity owner Ares Management in addition to super majorities of its bond holder groups, s well as by new investors, including Brigade Capital Management and Carlyle Group. Ares, Brigade ad Carlyle will inject $165 million of new money into the company, according to an announcement. While pleased with its store footprint, which consists of nearly 300 locations in the U.S., Guitar Center hired A&G Realty to conduct a review of its physical locations. The intent of the review is "to explore opportunities to optimize its real estate portfolio and other agreements to focus on investments that best position the company to return to its growth trajectory prior to COVID-19," according to Guitar Center.