For the second straight year, COVID-19 is upending how things go in retail. But this time, it’s not all bad news. At least, not yet.
The cyclicality of retail bankruptcy – a pause late in the year around the holiday shopping season that extends into January, followed by a surge in filings late in the first quarter and early in the second – hasn’t happened in 2021. After a rash of filings in 2020, there’s a definite wait-and-see mentality this year.
What’s behind that mentality? With more than 3 million Americans now getting vaccinated each day, retail executives and their lenders and private equity sponsors are trying to see how long they can last before things get brighter. Bankruptcy and reimagining their products are ways they’re getting by – in addition to some tried-and-true approaches to cut costs and raise money. But there are also new and adaptive ways of making decisions.
Big picture, we’re in a moment that makes the pre-pandemic calculus around retail look like basic arithmetic – with questions that would have been unthinkable even 14 months ago. Here’s how retailers are trying to cope.
And why we should all have a strong grasp of things come October.
How Retailers Are Getting By
Many retailers who have succeeded since March 2020 are filling specific and sometimes peculiar needs – think above-ground pools and in some cases landlines. Others are like Tailored Brands, the parent company of Men’s Wearhouse and Jos. A Bank. The company exited bankruptcy in December but is seeking a $75 million emergency loan as a company spokesman said this past March “to execute its strategic plan through a number of different economic recovery scenarios.”
Other retailers are reinventing themselves – e.g., Brooks Brothers filing for bankruptcy and then pivoting to athleisure. With so much uncertainty about the immediate future and questions about when life will look like 2019 again, the wild card for retailers like Tailored Brands and Brooks Brothers is the rapidity and efficacy of vaccinations in the United States.
But bankruptcy and reinventing themselves aren’t the only ways retailers can give themselves financial breathing room to wait for a return to normality. They can seek rent relief from landlords who might prefer getting less money each month than no money at all or to looking for new tenants in the current climate. Retailers can also reduce staff, either by layoffs or temporary furloughs, to save operating expenses.
Liquidating inventory is an age-old way to generate cash – but it’s an option that is less appealing than it might have been during other downturns. During the Great Recession, selling sofas and recliners for 40% off might have hurt a company’s bottom line, but it was a viable strategy. That’s not the case when getting people into the store in the first place is the main challenge.
There are also approaches of the once-in-a-century variety. For retailers with large regional or national footprints, staying attuned to the latest virus outbreaks in the coming months will be crucial. Retail executives probably never envisioned a world where they need to overlay maps of their store locations with infectious disease heat maps. But it is a method that can help retailers project which stores will see the return of consumers, and which ones won’t.
That said, mapping outbreaks (and other geographic-specific factors) isn’t the only piece of the puzzle. Last year, it was assumed that GNC, which last year filed for bankruptcy and was eventually sold, would struggle in states with fewer pandemic restrictions and thus, more customers at stores. But GNCs often struggled no matter where they were if nearby gyms, which provided foot traffic, were shuttered.
Circle October on Your Calendars
When vaccination momentum picked up early this year, retailers and their lenders seemed to come to an agreement. With the light at the end of the pandemic tunnel – even if the distance to it was unclear – both sides settled on waiting a few months for the dust to settle.
That sets up back-to-school shopping late this summer and the third quarter generally as key inflection points. If vaccinations continue and outpace new COVID variants, if the country is at or near herd immunity and if offices and schools are back or close to pre-pandemic settings, the third quarter could be a time when there’s a rush to buy more than above-ground pools.
But the reverse is also true. Slowing vaccine momentum, new COVID variants and other factors could slow down reopening and retail’s bounce back.
The ‘Pain Endurance Cliff’
In bankruptcy circles, the term is “liquidity cliff,” – i.e. the date at which time a company decides it will pull the plug if things don’t turn around. But in the pandemic environment – as retailers and those who work with them try to outlast the pandemic – the more appropriate term is probably “the pain tolerance cliff.”
For many retailers and their lenders and sponsors, that cliff is likely October, when they can decide – based on back-to-school shopping and the state of the general economy – whether business has recovered or whether they need to commence liquidation in time for the holiday shopping season.
The October cliff could be further delayed by another round of government stimulus. But at some point, retailers and their lenders will likely be unable to endure more pain.
And some difficult decisions will need to be made.
Jeff Cohen is chair of the bankruptcy practice at Lowenstein Sandler, a national law firm with more than 350 lawyers working from five offices in New York, Palo Alto, New Jersey, Utah, and Washington, D.C.