Retail Has Seen Some Growth, but There Are Still Looming Obstacles to Clear

The retail loan default rate could climb to 25% by the end of the year

small houses stacked nearby each other
The retail industry has seen some gains in recent months, but that doesn't mean retailers are in the clear yet. Photo Illustration: Trent Joaquin; Source: Getty Images
Headshot of Richard Collings

Before the pandemic, retail was already troubled, with an elevated default rate of about 7% at the end of December 2019 despite years of economic growth. But Covid-19 proved to be an extra hill many could not climb.

Since the beginning of the year, roughly three dozen major retail, restaurant and apparel brands have filed for bankruptcy, the most recent of which include off-price chain Stein Mart, department store banner Lord & Taylor and men’s apparel retailer Tailored Brands, parent of Men’s Wearhouse.

Those bankruptcies propelled the retail leveraged loan default rate to a record 18.9% in August, according to credit rating agency Fitch. (The default rate is a percentage of all retail loans outstanding that went into default over the past 12 months.) While a large number of distressed retailers have defaulted, largely by filing for Chapter 11 bankruptcy, there are still several that remain endangered and face potentially fatal near-term risks—namely, the lack of a second stimulus package, according to U.S. rating agencies Fitch, S&P and Moody’s.

Among the largest issuers at risk are department store Belk, apparel retailer Lands’ End, crafts supplier Jo-Ann Stores, music instrument retailer Guitar Center and mattress purveyor Serta Simmons Bedding, LLC. Also on rating agencies’ watchlists are special occasion supplier Party City, apparel retailer J.Jill, brand management firm Iconix Brand Group and online jewelry purveyor Blue Nile.

Defaults by Belk and Jo-Ann in particular by the end of the year would push the industry default rate even higher to 25%, according to Fitch.

a belk storefront
Belk, with about $1.6 billion in term loan debt, is among retailers on rating agencies’ watchlists for potential default.Getty Images

The good news for many retailers is that U.S. retail and food services sales were up 2.7% year over year in July to about $536 billion, according to advance estimates released by the U.S. Census Bureau. And as stores open in tandem with layoffs and renegotiated rents, retailers have been able to significantly reduce their cash burn, said David Silverman, a retail analyst at Fitch. This means the industry is regaining solvency.

“Consumers have spent more than we expected them to be spending during the quarantine,” said Sarah Wyeth, lead retail analyst at S&P, citing retailers that sell home goods, grocers and fast-food restaurants as all performing particularly well.

Foot traffic is also gradually improving, though still impacted by Covid-19 limitations. Between the weeks of July 13 and Aug. 10, foot traffic for retail improved to a 13% decline from 15% year over year, according to data provided by

There are still plenty of reasons for merchants to be concerned. Though Covid-19 appears to be in retreat in many parts of the U.S., the virus is surging in certain states. Efforts to contain the outbreak in the Southeast have been complicated by the recent devastation wreaked by Hurricane Laura.

“We’re very skeptical that retail will continue its momentum,” Wyeth said.

The most immediate danger economically speaking, however, is a stalemate between Congress and the White House over a second stimulus package to succeed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provided Pandemic Unemployment Assistance (PUA) for those left unemployed by Covid-19.

Consumer spending accounts for 70% of the overall economy, and continued impasse over a successive package, which poses the largest risk to recovery, could endanger any recent gains, said Wyeth. Silverman concurred, saying it is clear the stimulus supported consumer spending.

joan fabrics and crafts storefront
Though Jo-Ann Stores got a bit of a boost from the sale of materials to make face masks, it remains distressed as the pandemic lingers on.Getty Images

“Frankly, if the government can’t get itself together to provide some help to consumers, I personally think we’re going to see more bankruptcies,” Wyeth said.

An executive order by President Donald Trump that assists states with $300 weekly unemployment checks will soften the blow as it is expected to take effect in the coming weeks. But the move is a short-term fix likely to last only a few weeks, according to experts.

The Consumer Conference Index indicated a steep drop in August, from 91.7 in July to 84.8, according to The Conference Board. It’s a low not seen since 2014, following the expiration of unemployment checks. (Note that the index signals a boost in confidence if it measures above 100, but indicates a pessimistic outlook if it falls below 100.)

Furthermore, while unemployment is falling it remains at a historically elevated level, and experts believe the U.S. is likely in the middle of a recession. “We continue to think GDP will be negative this year from a consumer perspective,” Silverman said. “We believe the country is in a recession and that will carry over into 2021.”

With those kind of challenges, more defaults by retailers are almost guaranteed. According to Mickey Chadha, a senior credit analyst at financial services company Moody’s Corporation, the default rate is going to peak in December with more bankruptcies before the end of the year. He said that the number of distressed retailers has fallen because so many have already defaulted on their debt, not because of sector improvement, and more names are likely to be added.

Chadha said that despite many things working against the U.S., the economy is unlikely to close again, as there is no political appetite for it. What is likely to happen is the nascent recovery will slow down or reverse itself.

But what Chadha is also concerned about is unprofitable sales due to steep discounts as retailers seek to rid themselves of inventory. This will result in 20% to 25% drops in operating profits, which he doesn’t expect to bounce back until 2022, even if revenues get back to normal. He added that the burst in ecommerce adds to the problem because online sales are less profitable due to higher fulfillment and delivery costs.

There is a silver lining, according to Chadha, however. Those retailers that manage to survive will emerge in a stronger position because so many of their competitors will have disappeared.

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@RichCollings Richard Collings is a retail reporter at Adweek.