With the beginnings of the coronavirus pandemic, 2020 brought an onslaught of retail bankruptcy cases. Lord & Taylor, Ascena Brands, Neiman Marcus and JC Penny, among many others – not less than 52 in total. As the economy recovered from the initial shock of the pandemic, the number of retail bankruptcy cases subsided in 2021. According to reports, there were 21 retail cases in 2021 as retail traffic began returning to pre-pandemic levels. 2022, however, brings new pressures on the global economy, and certain that may strike the retail industry with force. This month’s filing by Revlon put a spotlight on the industry and may portend a coming wave of filings in what has been a rather tame year for bankruptcies generally, and in retail in particular.
Revlon highlighted a number of issues that were the cause of its distress and eventual bankruptcy filing. Supply chain disruptions were front and center. The supply chain issues that began in 2020 had reached critical levels in 2022 with new and continuing restrictions in China and elsewhere, suppliers of raw materials needed for Revlon’s products. This left the company unable to produce sufficient product to meet consumer demand. This lack of inventory had the follow-on effect of limiting Revlon’s access to its asset-based revolving credit facility for much needed liquidity. Logistical issues slowed Revlon’s manufacturing operations and increased its costs. These logistical issues included shipping and freight delays and labor shortages. Revlon’s financial weakness led to increased competition for an ever-contracting supply of raw materials and product from the company’s vendors. Suppliers, who had not been paid timely for goods, reduced or eliminated the company’s trade credit and shifted business to other, more liquid customers. These issues all led to the company’s inability to manufacture sufficient product and retailers began imposing fines for failure to deliver promised goods in full and on time. And, of course, inflation. Revlon asserts that inflation rose so quickly that it was unable to allow higher costs to be passed on to customers in the price of product. Lastly, Revlon explained that volatility and the tightening of credit markets generally limited its ability to address its liquidity issues.
Revlon’s troubles are certainly not specific to it. Retailers and consumer product companies are all addressing supply limitations, sourcing constraints, logistical nightmares and rapidly increasing costs. Consumer confidence levels are on the decline, and while they have not reached 2020 levels (yet), they are well below 2019 levels. Interest rates are on the rise, impacting the purchase rates of larger goods. Household debt is at an all-time high while consumers watch wild swings lower in the stock markets. Inventory levels are swelling due to late deliveries and changing purchasing patterns. Inflation is raging and there is little appetite for the government assistance that was a hallmark of 2020. All that said, retail filings have not picked up in 2022. This may be due, in part, to a number of earlier filings that were “pulled forward” during the pandemic according to Fitch Ratings. Will certain of those names be candidates for “chapter 22” in the next 6-12 months? Maybe, but there will certainly be others that tried to fix their balance sheets during the pandemic and are now being hit with a tsunami of more bad news. The factors underlying distress in the retail industry are different than they were in 2020, but they are numerous and far-reaching. Market participants — whether suppliers, retailers, landlords, or lenders – should be preparing for a potential onslaught in the event that market conditions do not shift quickly. Whether that wave comes later in 2022 or in 2023, current market conditions indicate that an uptick in bankruptcy filings is coming.