Many of us were raised to believe that Santa Claus delivers our gifts before we wake up on Christmas Day. If you believe, behave, and send your wish list on time, you are virtually certain to receive what you want for Christmas. As we grow older, some of us (not me) begin to doubt the existence of Santa. But, with the growth of e-commerce within the last decade, no one can deny that more and more gifts are being delivered Santa-style. And for those who do not believe, well, the lesson has been costly.
This observation is not new. Corporate Restructuring Review previously discussed how, based on empirical data, changes in consumer preferences were forcing traditional retailers to adjust their business models from brick-and-mortar operations to a more friendly internet environment. See Lessons from a Retail Giant's Recent Bankruptcy Filing (Sept. 15, 2015). At that time, well-known retailers such as Quicksilver, Radio Shack, Brookstone, Fredrick's of Hollywood, dEliA's, Cache, ALCO Stores and Deb Shops had all been forced into bankruptcy, in large part because of their inability to adapt. But, other retailers have not yet learned their lesson.
This year was another year of a surge in retail bankruptcies, culminating in the closing of Toys "R" Us, Inc.. Other notable casualties included Sears Holding Corp., Mattress Firm Inc., David's Bridal Inc., Claire's, Brookstone (second filing) and Nine West. And such retail bankruptcies are not likely to end in 2019, according to Mark Cohen, director of retail studies at Columbia University's business school and a former Sears executive. Why? As previously discussed, e-commerce is certainly a significant factor.
As recently reported by CNBC, this holiday season (Nov. 1 through Dec. 31) has seen a record $110.6 billion in internet sales, an increase of almost 18% from the prior year. Adobe Analytics, which tracks web transactions of 80 of the top internet retailers in the U.S., predicted online sales of at least $126 billion this holiday. According to Adobe, mobile transactions, alone, reached $33.3 billion before the end of the holiday season, up 57% from a year ago.
Indeed, online sales have doubled their retail market share in the last six years. Online sales currently account for 9.8% of total U.S. retail purchases, according to the U.S. Department of Commerce. And Moody's Investors Service Inc. estimated that such share could grow to 20% in the next five years. That is a staggering change.
Who is currently winning the war of e-commerce? The research company eMarketer estimated in July that Amazon would account for 49.1% of all online sales this year, with eBay Inc. a distant second at 6.6%. Amazon's market share is up from 43.5% in 2017, and it is estimated that Amazon will generate $258.2 billion in online retail sales this year, a dramatic increase of almost 30% from the prior year.
Outside the e-commerce market leaders, some traditional retailers have tried to adapt to the changing retail environment. For the past few years, such retailers have been refocusing investments in physical spaces away from opening new locations or updating current ones to tech advancements to integrate ecommerce tools, said Brian Yarbrough, an analyst at St. Louis-based brokerage firm Edward Jones. One such example is in delivery methods, including the rollout of same-day deliveries, in-store pickups of online purchases and curbside pickup.
Leading the efforts are companies, like Walmart Inc. and Target Corp., which doubled down on investments in their brick-and-mortar shops and e-commerce operations in 2018 — remodeling stores and adding faster shipping options. For example, Target acquired Shipt in December 2017 and has rapidly expanded its delivery services as it now can offer same-day delivery to millions of customers in 46 states. Walmart has been plowing store profits into e-commerce investments, capped by this Spring’s $16 billion acquisition of Indian firm Flipkart. According to the Wall Street Journal, these retailers, who invested heavily in e-commerce and in-store experiences, are expected to have had a strong 2018 (and likely 2019) as a result.
In 2018, more than 3,800 stores were expected to close across the U.S., as compared to 6,400 stores in 2017. The pace of closures slowed from 2017, when more than 20 retailers including Toys R Us, Hhgregg and Gymboree went bust. However, in 2018 more than 146 million square feet of retail space was expected to shut down across the U.S. in malls and shopping centers, according to real estate group CoStar. That is more than the 105 million square feet of space that was announced for closure in 2017. Clearly, malls are losing their store fronts, and many are being abandoned due to a rise of e-commerce and declining foot traffic.
The biggest bankruptcy of 2018 was Sears, a 125-year-old business that was once the largest retailer in the U.S.. The department store chain struggled to revive its business as it shut 100 Kmart and 138 Sears stores and sold other assets in an attempt to raise cash. But, Sears racked up nearly $1.9 billion in losses through November 2018, despite its costs cutting and revenue initiatives. That's more than triple what the Illinois-based company reported in the same period in 2017. More than half the losses came during the three months leading up to Sears' Chapter 11 filing in October 2018. While the Company slashed costs by about 25 per cent during the first nine months of 2018, sales of merchandise and services dropped faster. Sears' fate is still uncertain heading into 2019, as the Company's chairman, Eddie Lampert, has been trying to buy back Sears' remaining stores and prevent them from closing for good, like Toys "R" Us.
Brookstone filed for Chapter 11 bankruptcy protection in August. The retailer, known for selling massage chairs and other tech gadgets and giftable items, has closed its 101 locations in U.S. shopping malls. By the end of the summer, Brookstone solely operated through 34 airport locations and its ecommerce business and wholesale operations, the New York Business Journal reported. In October, BlueStar Alliance bought Brookstone out of bankruptcy for $72 million. The Company recently announced that it would be bringing the brand back to malls on a smaller scale, with dedicated shelves and shops at Macy’s, Bed Bath & Beyond and Bloomingdales.
San Francisco-based department store operator Gump’s Holdings filed for Chapter 11 bankruptcy in August. The 157-year old company cited an “overwhelmingly difficult retail environment” as the reason for its bankruptcy. It was also unable to secure a buyer or financing to keep its doors open, CNBC reported. At the time of the filing, it had one flagship store as well as a catalog and online business. After Gump’s declared bankruptcy, it announced that its stores were going out of business and held a sale on all merchandise. Gump’s stated that its inventory was worth $25.5 million at retail value, but its liquidation value was just worth $8.6 million, according to the California Apparel News. The Company is currently seeking to sell its remaining IP assets, worth less than $200,000 according to recent court filings.
Shoe company Rockport Group filed for Chapter 11 bankruptcy protection in May, following similar moves by peers in the shoe industry like Nine West and Payless. Through the bankruptcy, the Company closed 60 of its retail stores in North America. Rockport agreed to sell itself to private equity group Charlesbank Capital Partners in a deal that closed in July. As part of the sale, Charlesbank acquired Rockport's wholesale business, e-commerce platform and retail operations in Asia and Europe.
Footwear and apparel company Nine West filed for bankruptcy in April, announcing at the time that it planned to sell some of its brands to Authentic Brands Group and shutter all 70 of its brick-and-mortar shops. In its bankruptcy filing, the company listed debts of more than $1 billion. Earlier in October, Nine West filed a revised plan of reorganization providing for the sale of its remaining brands — One Jeanswear Group, The Jewelry Group, Kasper Group and Anne Klein — with the support of most of its creditors. Nine West was financially stymied as some of its retail partners — chiefly department store chains — shuttered stores and went bankrupt.
Accessories chain Claire's filed for Chapter 11 bankruptcy protection in March, with the goal of trimming its debt by nearly $2 billion. The mall-based retailer — owned by private equity firm Apollo Global Management — struggled with a steep debt load it was unable to maintain as purchases increasingly shifted online and its sales declined. Claire's continued to run its roughly 1,600 Claire's and Icing-branded shops across the U.S. during the restructuring process, and it later emerged from bankruptcy in mid-October. The retailer said it had $575 million of capital to help it through the holidays.
The Walking Company filed for Chapter 11 bankruptcy protection in March, making it the second time the Company did so within the last decade. It announced in June that it successfully reorganized its debt and emerged from the bankruptcy process. The Company has almost 200 stores, primarily in shopping malls, across the U.S.
Department store chain Bon-Ton filed for Chapter 11 bankruptcy protection in February, with the goal at the time of selling the business while it trimmed some of its real estate portfolio. Ultimately, the retailer was forced into liquidation when a bid by mall owners fell through. It is currently in the process of closing its more than 200 locations across U.S. shopping malls.
As reported by CNBC in January, U.S. department store chains were struggling more than ever headed into 2019. The products they sell from the likes of Nike or Coach can just as easily be bought directly from those brands' own stores or online. While department stores accounted for 14.5% of all retail purchases in 1985 in North America, that fell to 4.3% last year and is still dropping, according to Neil Saunders, managing director of GlobalData Retail.
In addition to a steady stream of store closures from Sears, Bon-Ton, and J.C. Penney, companies like Gap, Express and L Brands Inc., the parent of Victoria's Secret, have similarly hinted at more store closures. And while mall and shopping center owners appear to be holding their own at the moment, that could soon change, with another wave of closures expected in 2019.
"One would like to believe there's a massive answer [to fill closed stores] but there's not," said Neill Kelly, head of the retail restructuring practice at commercial real estate services provider CBRE.
Some retailers that recently exited bankruptcy are still struggling. Payless emerged from bankruptcy last August. As it exited, the retailer said it would close 900 stores and shed $435 million in debt. According to sources for Debtwire, with a much smaller footprint, Payless is struggling to drive the kind of results it needs to stabilize its business. Since exiting bankruptcy, the shoe retailer's earnings have fallen short of its forecast.
Children’s retailer Gymboree Group Inc. is shopping for a bankruptcy loan as it prepares for a second chapter 11 filing in less than two years, according to people familiar with the situation. The bankruptcy filing, which could come as soon as January 2019, would allow the struggling children’s apparel retailer to close most of its 900 stores. However, the Company is seeking a bankruptcy loan that would give it the opportunity to keep some of its stores open while it searches for a buyer. Gymboree has earmarked more than 100 stores — namely its well-performing Janie & Jack outlets — to put up for sale.
Then there are those retailers that, while new to bankruptcy, have been struggling for a while. For example, efforts to sell Wisconsin-based Shopko are falling through and the rural discount chain is considering a bankruptcy filing, Bloomberg reports. The chain has been buffeted by intense pressures in retail, some perennial and some part of more recent changes in American demographics, the economy and innovations like e-commerce spurring new customer expectations.
As recently reported in Forbes, Pier 1 Imports Inc.'s CEO Alasdair James recently stepped down as it struggles with falling sales. It has been struggling to compete with home furnishing companies, like Williams-Sonoma, and its three-year turnaround plan, aimed at reducing store clutter and inventory to drive revenue growth, did not deliver quick enough results. Pier 1 has not posted a profit for the last three consecutive quarters and said it has hired Credit Suisse to help it evaluate a full range of strategic alternatives.
Mark Cohen of Columbia University recently noted that “[e]ventually circling the drain, in my opinion, is J.C. Penney, which is not in any kind of financial danger at the moment.” In March, J.C. Penney announced it would cut 360 store and corporate jobs, following its more than 5,000 layoffs and almost 140 store closures in 2017. Cohen said: “I think they’ve got consequential, existential issues that they are not likely to solve.” Indeed, J.C. Penney headed into 2019 with a bleak outlook, as its stock fell below $1 in December. According to the Wall Street Journal, the Company's $4 billion in debt did not help the stock price, and it's losses of $330 million (comparable to 2017's losses) similarly could not have helped investor confidence.
Meanwhile, Hudson's Bay, the parent company of Lord & Taylor and Saks Fifth Avenue, has been shutting some of its flagship stores in the U.S. Separately, Neiman Marcus has significant debt coming due in 2020 and 2021.
Ryan Fisher, a partner in consultancy firm A.T. Kearney, recently concluded: "To me the pressure is on [retailers] in 2019 to push their online and in-store experiences." And many department store operators still have too much bricks-and-mortar space that needs to be "rationalized," he added, meaning more store closures by some of these businesses are inevitable.
Experts also fault the tendency of private equity owners to burden retailers with too much debt, leaving them little room to respond to market disruptions, such as those posed by Amazon's increasing dominance.
2017 and 2018 have come and gone, and there are many lessons to be learned. In the upcoming year, we will see whether more traditional retailers are able to adapt to changing consumer habits a lot quicker. To be clear, while e-commerce will certainly continue to pose a challenge for traditional retailers, it is not the only factor that is plaguing this industry. As briefly mentioned, significant debt obligations, improving in-store buying experiences, investing in other forms of modernization and reducing operating expenses are among other factors that need to be more carefully explored and addressed--in the near future. Even a possible trade war with China, which would increase the price of consumer goods, could affect the landscape in 2019.
But, one thing is a virtual certainty. If retailers ignore the experiences in 2017 and 2018, their fate could easily be the same as those of Toys "R" Us, Radio Shack, Bon-Ton, Ames, Waldenbooks, Borders, Wet Seal and Limited Too, all of which shut their doors. Time is truly running out for retailers to find the right solutions to their problems.