Long live traditional retail.
âIn the summer, it [retail] will be where we thought the industry would be in five yearsâ
Retailers, though, are facing a cash-flow problem, not a just structural challenge. Theyâre not bringing in money because they canât operate. Any retailer weighing filing for bankruptcy has no idea when stores may reopen again, and what the world will look like when they do.
âFiling for bankruptcy doesnât create a sudden cure for the virus, it doesnât create a cure to open stores â so why incur the expenses of Chapter 11 when youâre not going be able to do anything while business is closed?â said Michael Sirota, co-chair of the bankruptcy and corporate restructuring department at Cole Schotz
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âThere is disruption in the real estate market and a lot of unknown in retail: is the mall going to be there or not? Will I have cash or not?â said Christa Hart, senior managing director at FTI Consulting.
Debt-holders that have the ability to help force a company into bankruptcy if it is late on interest payments or violates its covenants are aware of this reality, say bankruptcy bankers and lawyers. It makes it difficult for them to negotiate the terms of emerging from bankruptcy, because there is no clear view of what retail looks like in one month or three months. There is limited upside forcing a retailer to liquidate because it is nearly impossible to hold a liquidation sale with retailers forced close.
Modellâs recently had to pause its liquidation efforts, because its liquidation sales ran right up against government guidance to stay home.
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âItâs not as if we were using the space or premises and selling inventory and not paying them,â said Sirota who advised Modellâs on the bankruptcy âWe were deprived of that access.â
The landlords agreed in that case to delay rent payments.
With liquidation sales seemingly untenable in the short term, there is also little desire to finance bankruptcies. Financing bankers who spoke to CNBC on the condition of anonymity said while it may be possible to get financing for bankruptcy from existing lenders, the bar has been raised significantly for new lenders. That stands in contrast to bankruptcies like Toys R Us and even Sears, when banks lined up to offer assistance.
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Thatâs not to say there wonât be retail bankruptcies, particularly for companies with impatient investors or with already significantly broken businesses. Once the cloud of uncertainty lifts, there will likely be many more.
But until then, though, for most retailers, the only option is to cut costs. Macyâs and Kohlâs have furloughed most of their employees. Retailers are slashing investment, putting projects on hold, and culling through other expenses like outside consultants. Theyâre also delaying their payments to the brands that have already shipped product to help conserve their cash, say sources familiar with the situation.
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The separation of winners and losers that was already happening in retail will continue, but at an expedited pace. Department stores will suffer, weighed down by large real estate footprints that make little sense to todayâs shoppers. Those that have been strapped with debt and unable to invest in their business will fall further behind. Many apparel brands will struggle to compete. And Walmart will be a survivor.
âIn the summer, it will be where we thought the industry would be in five years,â said FTIâs Hart.