This year, there have been a record number of retail bankruptcies, but there’s also been a change in the industry. While some of the largest recent retail bankruptcies were preludes to liquidation, lenders and landlords are now working to keep as many stores open as possible after bankruptcy.
Reuters observes that at least 19 major retail chains across the country have shut down, each taking along hundreds of store locations and thousands of jobs. While propping up a failing business is a bad idea in the long run, retailers are now more likely to get another chance.
“We’re seeing a set of situations come together in which the constituencies have more interest in the retailer surviving than not,” a consultant who worked on the bankruptcy of children’s clothing retailer Gymboree told Reuters. Gymboree closed around a quarter of its stores during its Chapter 11 bankruptcy, but will stay in business.
Better off staying open
There are three important groups in any retail bankruptcy: The company’s creditors, the vendors where it sources merchandise, and the landlords that hold leases. All three groups have become more receptive to plans that keep stores in business with more manageable debt loads rather than closing everything down and liquidating.
Retail businesses that are salvageable are familiar mall brands like Toys ‘R’ Us and Payless ShoeSource, which face some challenges from online shopping, but which are still able to attract shoppers and make money.
Toys ‘R’ Us, for example, has $5 billion in debt, but takes in $800 million per year, and could still be a viable business. Payless also used its strong cash flow to explain why it could stay in business if its debt payments became more manageable.
Teen-oriented retailer Rue21 recently completed its own bankruptcy process, with landlords granting an average 20% rent reduction rather than letting stores sit empty, a knowledgeable source told Reuters.
For consumers, this means fewer going out of business sales to attack, but the deals at those aren’t very good anyway.