In retail, it’s getting harder and harder for the have-nots to join the haves.
As Amazon, Walmart and Target increasingly suck up the retail oxygen, a slew of high-profile competitors are wheezing, turning the always-crucial holiday shopping season into a make-or-break scenario for some.
Department store chains Sears, J.C. Penney and Neiman Marcus are ailing, while strip-mall stalwarts Kmart and Bed Bath & Beyond are struggling to lure customers. And flailing mall retailers like Claire's and Charlotte Russe must deliver results.
Many major retailers are already showing signs of suffocation. Seventeen have defaulted on their debts since the start of 2017, including Sears, Payless, GNC, Rue 21, Bon-Ton Stores and David's Bridal, according to S&P Global Ratings.
Even during the financial crisis it wasn’t this bad. Only five defaulted in 2009 and five in 2010, the worst individual years until 2017.
Companies that fail to pay their debts on originally promised terms qualify as defaulters and are often considered at serious risk of bankruptcy — if they’re not already there.
Even with consumer confidence notching an 18-year high, many retailers can't get traction.
“With the economy doing pretty well and consumer spending doing pretty well, these companies … are still defaulting” because of their sagging business prospects, said S&P Global Ratings managing director Robert Schulze, who tracks retail.
It's not all bad.
Flourishing apparel retailers like T.J. Maxx and Marshalls — part of parent company TJX Companies — as well as adaptable specialty chains like Best Buy are proving that retailers can succeed when they cater to their customers. TJX has generated loyal customers with its treasure-hunt-style shopping experience, while Best Buy has nicely integrated its digital and physical stores.
But they are the exception to the rule in the retail business, as many others are grasping for traction, especially retailers that rely heavily on mall foot traffic. Vacancy rates at regional and super-regional malls hit 8.6 percent in the second quarter, marking a six-year high, according to a recent survey by commercial real estate data source Reis.
Amazon, Walmart and Target aren't showing mercy. During the 2017 holiday shopping season, they dialed up discounts in an attempt to put Toys R Us out of business after it filed for Chapter 11 bankruptcy protection, the toy retailer alleged.
Unable to keep pace, Toys R Us ended up posting a poor holiday season and liquidating in 2018.
Here are several key retailers that can't afford a bad holiday season this year:
1. Sears and Kmart
This is the most obvious example. Parent company Sears Holdings filed for Chapter 11 bankruptcy protection in October after years of sales declines, ballooning debt, steep pension costs and a failure to adapt to digital competition.
The company, which is already closing 188 of its remaining 687 stores, is at serious risk of total liquidation if it can’t obtain new financing and reach a restructuring deal with its creditors.
A glimmer of hope in the holiday season could go a long way in proving that Sears deserves a second chance.
But competitors may try to capitalize on the company’s troubles, Schulze said. For example, Home Depot and Lowe’s could try to lure appliance buyers who otherwise would have shopped at Sears.
“It’s important for Sears to have a good holiday just because of their so-far stated plan to reorganize and emerge,” he said.
Sears declined to comment for this story.
As a department store, Sears is stuck in a sector that has struggled to define its appeal to customers in the digital age.
And as a discount retailer, the company’s Kmart chain hasn’t been able to keep pace with its much more powerful rivals — Amazon, Walmart and Target — not to mention dollar stores and other nimble competitors.
2. J.C. Penney
Sears department store rival J.C. Penney is in better financial shape but not by much. The company’s stock plunged below $2 in August and has continued to drift downward.
After CEO Marvin Ellison suddenly left the company in the spring to become CEO of Lowe's, investors feared J.C. Penney was rudderless at the worst time. The company named former Joann Stores CEO Jill Soltau as its new CEO effective Oct. 15, but her ability to make an impact on the holidays is likely limited since it's too late to dramatically alter the company's strategy.
Still, she might be the company’s last hope at a true turnaround.
“J.C. Penney has had a lot of change and continues to try to address its apparel,” said Christina Boni, a Moody's Investors Service vice president, who tracks retail. “They have new management, but obviously these things take time to make changes."
The company’s foray into appliances and toys haven’t paid off yet. While in-store beauty partner Sephora has helped deliver foot traffic, J.C. Penney faces a similar challenge as Sears: defining its appeal to customers in a digital age that has diminished the usefulness of variety.
“It’s about how do you recreate the magic of retail?” said Greg Portell, lead partner in the global consumer and retail practice of A.T. Kearney, a strategy and management consulting firm. “And the less-defined brands will struggle with that.”
J.C. Penney did not agree to comment for this story.
3. Bed Bath & Beyond
Too many stores, insufficient digital sales and intense physical competition have prompted S&P to downgrade the home furnishing retailer’s credit rating twice so far in 2018.
While the company’s prospects are not closely tied to the holiday shopping season, that may not be a good thing.
For years Bed Bath & Beyond has sold “stocking stuffers,” “little gifts” and “teachers’ presents,” Portell noted. “They’re a retailer that has a history of trying to find the right narrative.”
But Bed Bath & Beyond is still losing ground in part because its brand as a source of general home goods doesn’t stand out for choosy shoppers, analysts said.
That’s led the company to resort to discounting to maintain sales, which is hurting profitability, Schulze said.
S&P downgraded Bed Bath & Beyond’s credit rating on Oct. 24 from BBB- to BB+, which indicates a “significant” degree of speculation for lenders.
To be sure, the company doesn’t have a significant amount of debt, Schulze said. That could insulate it from an immediate crisis.
But a strong holiday season would go a long way toward getting Bed Bath & Beyond back on track. The company did not agree to comment for this story.
4. Neiman Marcus
The luxury department store chain is ailing from too much debt, partly due to its $6 billion sale in 2013 to Ares Management LLC and the Canada Pension Plan Investment Board.
S&P downgraded the retailer’s credit rating from CCC to CCC- on Monday, which indicates the company is "vulnerable to nonpayment" of its debts. Moody’s rates Neiman as Caa2, which indicates the retailer is "subject to very high credit risk."
The Wall Street Journal reported Oct. 24 that Neiman Marcus is discussing debt restructuring with its creditors in hopes of avoiding bankruptcy.
“Neiman continues to make progress,” but “clearly it has an unsustainable capital structure. The company would be more competitive if they could rid themselves of it,” Moody’s analyst Boni said.
Hudson Bay Co., owner of the Sak’s and Lord & Taylor department stores, is widely considered a potential buyer of Neiman Marcus at some point.
But that’s unlikely to happen unless and until Neiman Marcus improves its e-commerce sales and fixes its finances, Cowen retail analyst Oliver Chen said in a research note.
Neiman Marcus did not respond to a request seeking comment.
5. Claire’s Stores, Charlotte Russe and J. Crew
These mall retail chains have struggled to keep up as they faced huge debts and declining mall foot traffic. Each one must find a compelling reason this holiday season to convince shoppers to stop by. Of the three, none responded to requests seeking comment.
“It’s not that people aren’t going to malls — it’s just that when they’re going to malls they’re visiting fewer stores,” Boni said. “When the customer goes in, she visits fewer stores, she knows what she wants when gets there.”
Teen jewelry chain Claire’s emerged from Chapter 11 bankruptcy on Oct. 12 after eliminating $1.9 billion in debt, much of it accumulated from a botched private equity deal. Now the pressure is on to deliver sustainable sales.
Women’s fashion retailer Charlotte Russe negotiated a deal in February to reduce its debts in exchange for the company’s equity. This holiday season will mark its first big chance to regain financial momentum following that restructuring deal.
And fashion retailer J. Crew is under fire to prove its worth to shoppers this holiday season. Both Moody’s and S&P have ranked it as a risk to fail to pay its debts.
J. Crew has started selling some products on Amazon and started offering same-day in-store pickup for online orders. But without a mobile app, J. Crew’s may struggle to attract shoppers in the smartphone age.