Why Haven’t More Retailers Gone Bankrupt?

The ongoing retail apocalypse is raising an interesting question that few people have tried to answer. The question is “if retail is so bad; why hasn’t a major retailer gone bankrupt yet?”

This is actually a pretty fair question to ask because no major retailer has declared bankruptcy for years. The last two I can remember were Safeway in 2011 and Blockbuster back in 2010.

Radio Shack did declare bankruptcy earlier this year, but by then it was a pale shadow of its former self. Several smaller retailers including Gordman’s Stores and Gander Mountain have declared bankruptcies.

Some observers even point to the lack of bankruptcies (or major bankruptcies) to cast doubt upon all the whole proposition of a retail apocalypse. These critics are mistaken; the lack of bankruptcies does not make the apocalypse fake news. The Dallas Morning News estimated that 5,377 chain store closings had been announced as of May 14, 2017.

Why Hasn’t a Major Retailer gone Bankrupt Yet?

There are actually a number of good reasons why the bankruptcy of a major retailer is unlikely even in today’s retail environment. Some explanations for the lack of bankruptcies include:

• Viable retailers can usually find a buyer long before bankruptcy is necessary. The Wisconsin supermarket chain Roundy’s sold itself to Kroger (NYSE: KR) to avoid collapse in 2015, Rite Aid (NYSE: RAD) is trying to sell itself to Walgreens (NASDAQ: WBA), Whole Foods Market (NASDAQ: WFM) is trying to sell itself to Amazon (NASDAQ: AMZN). Family Dollar was able to sell itself to Dollar Tree Stores (NASDAQ: DLTR). Bankruptcy is far less likely, because many would-be buyers for retailers; such as private equity companies and major competitors, are flush with cash.

 

• Many retailers are in trouble because their operations are simply too large. Macy’s (NYSE: M) and JC Penney’s (NYSE: JCP) have both able to shut down more than 100 stores with little impact on revenues or the bottom. A number of retailers can afford to make far deeper cuts if necessary. They can shed questionable online retail operations; trim their footprints (does Macy’s really need to operate a store in Casper, Wyoming for example?) and stop selling certain products. Perhaps Macy’s should drop housewares and small appliances. A great many retailers will be able to avoid bankruptcy with sensible cutbacks.

• A lot of retailers have assets that can be sold to raise cash. Sears Holdings (NASDAQ: SHLD) has been able to survive by spinning real estate off into a REIT and selling some of its brands such as Craftsman.

 

• Many retailers can survive significant drops in sales. Target (NYSE: TGT) reported $2.786 billion in income on April 30, 2017. Even though its revenues fell by $3.54 billion over the past year. Target reported $72.86 billion in revenues in April 2016 and revenues of $69.32 billion a year later.

• Retail sales are still increasing. Retail spending increased by 4.5% during the 12 months between April 2016 and April 2017. This means underlying conditions are healthy even if many of the retailers themselves are not. That provides a strong incentive for successful retailers to buy failing rivals and private equity firms to buy up bargains.

 

A major retail bankruptcy is unlikely right now except under extraordinary circumstances. Instead we’re more likely to see bankruptcies of smaller regional chains (Marsh and Gordman’s went under earlier this year).

The One Major Retail Bankruptcy we can Expect

Unfortunately there is one major retailer that is in those circumstances and that’s Sears. Sears Holdings is in very sorry shape right now, it reported a loss of -$1.506 billion on April 30, 2017.

Even then Sears may avoid bankruptcy because CEO Eddie Lampert might take it private and liquidate it completely. Lampert seems to view Sears as a real estate investment rather than a retail play and is treating it as such. He created a real estate investment trust called Seritage Growth Properties (NYSE: SRG) specifically to handle Sears and Kmart real estate.

Total liquidation is likely because Sears is in such sorry shape nobody would want to buy it. That being said Sears is a very extraordinary case because it is dying of years of mismanagement and neglect not outside conditions.

Expect Consolidation not Bankruptcy

The most likely scenario for retail is more consolidation not bankruptcies. Expect smaller and weaker brands to be gobbled up as larger retailers like Kroger consolidate their positions in the business.

Also expect players like Amazon and private equity funds to take advantage by buying ailing but viable retailers. Amazon’s Whole Foods Purchase is probably the first of many.

Unless business conditions change radically expect retail bankruptcies to be rare outside the department store and clothing sectors. Despite that investors should be careful because many retail brands (and stock tickers) are going to disappear no matter what happens.