The steep discounting by retailers that began earlier this holiday shopping season than in the past is symptomatic of a retail industry rife with bankruptcies, liquidations and store closings, according to retail experts.
Nineteen retailers with assets of more than $50 million have filed for bankruptcy reorganization or liquidation so far this year, according to the credit insurance firm Euler Hermes ACI based in Owings Mills, Md.
The collapse of the subprime mortgage market earlier this year that brought on a credit crunch in the banking industry has spread like an aggressive cancer, making it difficult for many retailers to maintain credit lines and forcing them to sell off inventory at ever-steeper discounts to maintain cash flow, experts say.
Early Sales
The discounting has had a further negative effect. Because retailers rely on their existing inventory as collateral, the value of that collateral has declined, according to Ken Simon, a managing director with Loughlin Meghji and Co., which advises financially troubled firms.
Circuit City, the electronic discount chain, filed for bankruptcy earlier this month because suppliers wanted cash up front before they would ship flat screen TVs and digital cameras to its stores. The Richmond, Va.-based chain announced store closings and a repackaging of its bank credit lines as part of its initial reorganization plan.
Typically, financially troubled retailers often wait until the first quarter of the New Year to announce store closings or to file for bankruptcy, according to Steve Lapsley, retail industry manager for Euler Hermes.
“Bankruptcies are rampant and it’s happening before the holiday because they can’t get financing to go forward,” retail consultant Howard Davidowitz said. He predicted most retailers that file for bankruptcy reorganization won’t be able to survive.
“We are no longer in a world of reorganization. We are no longer in world of consolidation. We are in a world of liquidation,” Davidowitz said.
The largest of the chains closing all their stories and liquidating inventory is Linens ‘n Things, which listed $1.7 billion in assets when it filed for bankruptcy in May. The chain operated nine stores in Connecticut, including in Manchester and Enfield.
Part of the problem is a change in the federal bankruptcy code enacted by Congress three years ago that gives leaseholders a shorter time — about seven months — to decide whether to assume the full cost of a long-term lease or to reject it and vacate the premises. But the effective result is that a retailer must decide within three months whether to keep the store because a liquidation sale takes three or four months to complete, Simon said.
Unless a retailer has a reorganization plan ready before filing for bankruptcy, Simon said there’s a high probability it will end up turning into a liquidation.
The upside for the retail sector is that the consolidation is long overdue.
“We have too much capacity,” said Davidowitz, who estimates there is 19.5 square feet of retail floor space for person in the United States. “We have too many shopping centers. We have too many stores and we have too many people doing the same thing.”
For local governments dependent on property taxes to pay for schools and public safety services, however, it will translate into more lost revenue on top of the drop in housing values.
As much as 25 percent of the nation’s store space could close, Davidowitz said.
As for the retailers that survive, Simon said, “They have an opportunity to get stronger and open in new locations.”
For shoppers who have the disposable income to spend, bargains abound. And the discounting could get even steeper come December.
But many consumers don’t have the cash to spend as unemployment climbs and millions of homeowners find their houses worth less than they owe on it.
In addition, some consumers have had their credit limits reduced by their credit card issuer, crimping their ability to take on new debt.
“It’s challenging,” said Scott Krugman, vice president of industry relations for the National Retail Federation. “There are a lot of unknowns right now consumers are facing, and retailers are impacted by that.”
