Debt Is The Real Poison Pill For Retail
Whether you call it an "apocalypse" or just a major correction, the retail sector has had a tough year — and things are expected to get worse.
Industry-wide headwinds will persist as retail chains sink under the weight of debt in the coming years, much of it a legacy of leveraged buyouts done when retail prospects seemed a lot brighter.
The distressed state of U.S. retail is widely attributed to the inroads made by Amazon, changing tastes among millennials and excess retail development from the go-go 1990s. Data compiled by Bloomberg suggests that while those factors are contributing to retail's contraction, a ballooning load of hard-to-refinance debt held by retailers will doom more chains in the coming years than anything else.
The recent massive bankruptcy of Toys R Us Inc., a chain with $6.6B in assets that is actually profitable, speaks to a more aggressive wave of retail failure fueled by debt.
Though making money, Toys R Us has been unable to refi its debt. Lately the chain had been struggling to place just a part of it, $400M out of a total of $5B.
There may be a lot of footloose capital looking for a home these days, but retail is not a darling sector any more — especially as interest rates rise and consumers turn to Amazon and other alternative retail channels. This does not bode well for the industry and has resulted in lenders shying away from the sector.
That leaves overleveraged chains holding some very big bags. Department stores are a prime example.
Sears Holdings — which might not make it to Christmas without declaring bankruptcy — has a long-term debt-to-total assets ratio of 28.8% and a crummy Caa rating from Moody's. Bon-ton Stores is even worse, with the same rating and a whopping 70.7% debt-to-total assets ratio.
Even stores with stronger ratings, such as Kohl's and Macy's, are carrying large debt loads: 34% and 33.9%, respectively.
All together, $100M worth of retail borrowings came due this year. In 2018, the need for refi will really kick in for retail, as $1.9B in high-yield retail debt comes due, according to Fitch Ratings. From 2019 to 2025, the annual average will be nearly $5B.
Many retailers simply will not be able to refinance, meaning more bankruptcies and closures. More closed stores will hit retail employment hard. Employment in the sector has already stopped growing.
As retailers sink, so will retail jobs. That will be especially hard on places — often rural economies — in which a high percentage of workers are in retail, and retail management is one of the few steppingstones into the middle class.
Despite the recovery of the economy during the 2010s, retail closures have outpaced openings throughout the decade. Just during the first three quarters of 2017, about 6,800 stores closed, Bloomberg reports, compared with 3,500 openings (excluding restaurants and grocery stores).
Some retail subsectors are suffering more than others, and for reasons unique to them. Apparel stores, an overbuilt subsector, have been especially prone to failure (with more than 2,500 shutterings so far this year).
Electronics and home entertainment, a business whose milkshake is being drunk by Amazon, has likewise contracted significantly, losing more than 1,900 stores this year.
In any case, these closings are just the beginning.
The prospect of retail job contraction is especially daunting for states such as Arkansas, Florida and Nevada, much of whose employment growth since the end of the recession has been in retail.
