A Look Behind Empty Storefronts and What’s About to Finish Off Some Retailers

Shah Gilani|August 14, 2020

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So far this year retail bankruptcy filings total 43, according to S&P Global Market Intelligence.

That’s only 5 fewer than the 48 bankruptcy filings by retailers in 2010, the worst year for retail during the Great Recession, and we’ve still got four and a half months left in 2020.

There could be dozens, or hundreds, more bankruptcies by the end of this year. I say hundreds because according to S&P Global in 2008 a whopping 441 retailers filed for bankruptcy.

Here’s what’s happening behind shuttered and reopened stores to demand, to supply chains and vendors of apparel companies; and who’s going to make it and who’s not.

The Final Nail in the Retail Coffin

Coronavirus pandemic shelter-in-place orders shuttered stores for weeks, in some parts of the country, for months. Almost immediately consumers’ spending habits changed.

Millions of Americans, many of whom faced pay cuts and job losses, stopped buying apparel because they weren’t going anywhere and if they were working, were working from home.

Apparel retailers were already reeling from the “casualization” of the nation’s workforce and the exploding “athleisure” trend.

Now everyone along the retail chain, especially vendors, are caught in a negative feedback loop facing apparel retailers, which many won’t survive.

With revenue cratering into a black hole, retailers immediately furloughed or fired employees, tapped their revolving lines of credit, skipped rent, and savagely stretched their vendor payment terms.

The supply chain system completely froze, with large retailers such as Macy’s canceling purchase orders across the board. Vendor clients across the U.S., India, Bangladesh, Vietnam, and China, were in a state of shock with multi-million-dollar purchase orders being canceled by one apparel retailer after another,

One supplier who spoke to Retail Dive said, “every retailer and their brother was picking up the phone wanting to cancel” orders after store closures.

“Products tied to canceled orders were everywhere along the supply chain: in warehouses, ports, on the water, on trucks on their way to retailers,” reported Retail Dive.

Everyone thinks how tough it must be on retailers, what they don’t think about is what’s happening to the suppliers of those poor retailers.

Vendors Take A Hit

What’s happening is those “vendors” are in the line of fire and many are facing bankruptcy too.

Vendors’ liquidity and cash flow positions are being decimated by retailer demands for longer payment terms.

Just because a retailer gets cash when a customer makes a purchase doesn’t mean vendors get paid. Along with the cancelations, retailers on 30-day payment terms are asking to pay in 90 days. Those on 90-day terms are asking for another 90 days. Some who already were late on payments are asking to have until next year, and then to pay in installments.

And if waiting months to get paid isn’t tough enough, retailers are demanding discounts and deals from vendors which squeezes vendors’ margins.

Many of them aren’t going to make it.

Members of the American Apparel & Footwear Association that represents retail vendors and suppliers said, “We’re in the middle of this liquidity crisis. We’re very worried about whether we can even stay in business.”

The problem for suppliers is whether and how to insure future shipments against default losses as stores cancel orders, open and close, and potentially end up in bankruptcy.

Economists from consulting firm Econ One estimate that shortfalls in trade credit insurance could – “conservatively” – inhibit supplier output to the tune of $46 billion. That could impact hiring of 155,000 workers at those firms that rely on trade credit insurance.

“There is a real danger that this snowballs out of control, halting the supply of goods, driving up costs and even leading to empty shelves at the very time retailers have begun to reopen physical stores and customers have started to return,” GlobalData apparel analyst Leonie Barrie said in a June press release.

Empty Shelves, Unhappy Consumers

It’s already happening.

Orders, tens of millions of dollars’ worth of back-to-school apparel, now in the pipeline, are being cancelled as retailers hedge against schools not reopening and demand disappearing.

Vendors are going to be left holding the bag, which could be the last straw for some.

And they’re being asked to ship holiday goods already.

They may not be able to.

Stores, if they are open for the holidays, may not have merchandise.

Consumers facing empty shelves won’t be buying, and the negative feedback loop will end abruptly, for vendors and retailers.

That’s what’s happening behind stores too often shuddered doors.

Brooks Brothers is latest apparel retailer to declare bankruptcy. There are plenty of others right behind them.

Buy This, Not That

So, if you’re thinking about buying some beaten-down retailers’ stocks, because they look cheap, think twice. Steer clear of these guys:

• Capri Holdings Ltd. (NYSE:CPRI)
• Express Inc. (NYSE:EXPR),
• Tapestry Inc. (NYSE:TPR),
• Macy’s Inc. (NYSE:M)

Instead BUY survivors and “thrivers.” Here are my favorites:

• Lululemon Athletica (NasdaqGS:LULU)
• Nike Inc. (NYSE:NKE)
• The TJX Companies Inc. (NYSE:TJX)
• Ross Stores Inc. (NasdaqGS:ROST).

For more buy this, not that, make sure you check out my full list. It’s long, it’s versatile, and it covers just about everything: retail, tech, real estate, medicine, and damn near everything in between.

It’s a lightening round of stock trashing and cashing, and you can find it right here.

And stay tuned, because next week I’ll be back with a brand-new list of stocks that make the cut, and even more that will sink your portfolio.

Until then,

Shah Gilani