The Lex Newsletter: will retail zombies rise again?

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Dear reader,

The corona plague has carried a stake in the hearts of many retail zombies. These companies, typically defined as those unable to cover their long-term debt service costs, have managed to run around pre-epidemic and have benefited from a low interest rate environment and easy money.

But Covid-19 forced consumers to stay home, while all non-essential businesses closed overnight. Revenues have dried up. All large debt positions became unbearable, forcing a number of these “dead” companies to bury them.

A total of 51 major retailers filed for bankruptcy in the U.S. in 2020 – a decade-long record, according to S&P Global Market Intelligence. The list includes household names like JC Penney, Brooks Brothers, J Crew and Neiman Marcus.

Since then, the number of retail bankruptcy filings has declined sharply, declining by more than half in 2021. The launch of vaccines combined with the relaxation of the Federal Reserve’s monetary policy and huge incentives through Congress have supported the economy.

But these market interventions inadvertently created a new generation of corporate zombies. Other companies that were also swinging on the verge of bankruptcy managed to raise hundreds of millions of dollars of debt financing last year to last a little longer.

This year, however, has brought new pressures on the global economy. Debt trap exposed. With the stimulus point tightening and interest rates rising higher, recession fears are now rising. Apparently another wave of corporate distress began.

Revlon American Cosmetics Group Filed for bankruptcy protection Last month after battling supply chain issues and failing to compete with celebrities backed by celebrities and experienced on social media. It’s the first big name to do so in months. It will not be the last.

With U.S. household budgets stretched by various sources of cost pressures – including energy and food – retailers began to miss their profit targets and report excess inventory. These forces in turn led to the upheavals in Suite C.

This week, the parent company of Old Navy Gap Farewell to its CEO Sonia single as it posted a profit warning. Part of the problem was structural. Gap was caught by the shift of consumers from casual attire to more formal attire and parties, leaving her with a mountain of unsold goods. Increasing operations to clear the inventory will squeeze its profitability.

This comes after the home furniture retailer Bed Bath & Beyond Mark Triton washed his head Last month. The company’s turnaround strategy, the move to private label offerings, has disappointed shareholders. Sales in the first quarter fell by 25% year-on-year.

Even large and financially stable retailers like Target and Walmart have lowered their outlook. The two plague winners were left with inflated inventory after ordering excessively in response to supply chain disruptions. They now have to undo their hoarding strategies to implement summaries and undo orders.

At the moment, retail “Zombipocalypse” does not look close. Gap, despite its lack of growth, remains in a decent financial position. Interest expenses on the $ 1.5 billion debt pile (excluding lease liabilities) were $ 162 million last year. It was easily covered by an operating profit of $ 819 million. However, based on next year’s analyst estimates, this safety margin seems much much tighter.

The immediate situation of Bed Bath & Beyond does indeed seem unsettling. It made a net loss of $ 559 million last year amid a contraction in sales. As of May, the New Jersey-based group’s liabilities exceeded its assets by $ 220 million, warned Neil Saunders, at GlobalData Retail.

There will be winners. Dollar stores should make a profit when cashless shoppers go down. Off-price retailers, who buy surplus inventory from leading brands in pennies on the dollar and resell them, can take advantage of any incoming cash flow from liquidation. The largest of these is TJX, which owns TJ Maxx, Marshalls and HomeGoods.

The misfortune of some retail zombies may bring life to other store chains.

Enjoy the rest of your week.

Pan Kwan Yuk
Super Lex

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The Lex Newsletter: will retail zombies rise again? Source link The Lex Newsletter: will retail zombies rise again?

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