With the onset of the coronavirus pandemic, 2020 brought an onslaught of retail bankruptcies. Lord & Taylor, Ascena Brands, Neiman Marcus and JC Penny, among many others – no less than 52 in all. As the economy recovered from the initial shock of the pandemic, the number of retail bankruptcies declined in 2021. There were reported 21 retail cases in 2021 as retail traffic returned to pre-pandemic levels. However, 2022 will bring new pressures on the global economy and that will certainly hit the retail industry hard. Revlon’s filing this month has put the industry in the spotlight and could portend a coming wave of filings in a rather tame year for bankruptcies in general and retail in particular.
Revlon highlighted a number of issues that were at the root of the distress and eventual bankruptcy filing. Supply chain disruptions were a priority. Supply chain problems that began in 2020 had reached critical levels in 2022 with new and ongoing restrictions in China and elsewhere on suppliers of raw materials needed for Revlon’s products. This left the company unable to produce enough products to meet consumer demand. This lack of inventory had the corollary of restricting Revlon’s access to its asset-based revolving credit facility for much-needed liquidity. Logistical problems slowed Revlon’s production processes and increased costs. These logistical problems included shipping and freight delays and labor shortages. Revlon’s financial weakness led to increased competition for an increasingly scarce supply of raw materials and products from the company’s suppliers. Suppliers who had not been paid for goods on time reduced or eliminated the company’s trade credits and shifted business to other, more liquid customers. These problems all resulted in the company’s inability to manufacture sufficient products, and retailers began imposing penalties when promised goods were not delivered in full and on time. And of course inflation. Revlon claims that inflation has risen so rapidly that higher costs cannot be passed on to customers in the product price. Finally, Revlon stated that volatility and tightening credit markets in general limited its ability to address its liquidity problems.
Revlon’s problems are certainly not specific to this. Retailers and consumer goods companies all struggle with supply constraints, sourcing constraints, logistical nightmares, and rapidly escalating costs. Consumer confidence is declining, and while not (yet) reaching 2020 levels, it is well below 2019 levels. Interest rates are rising, affecting purchase rates of larger commodities. Household debt is at an all-time high while consumers are watching stock markets wildly lower. Inventory levels are rising due to late shipments and changing shopping patterns. Inflation is raging and there is little appetite for the government support that has been a hallmark of 2020. All things considered, retail filings have not recovered in 2022. This may be due in part to a number of previous filings being “pulled forward” during the pandemic, according to Fitch Ratings. Will any of these names be candidates for “Chapter 22” in the next 6-12 months? Maybe, but there will certainly be others who have been trying to put their balance sheets in order during the pandemic and are now being hit with a tsunami of more bad news. The factors underlying the retail distress are different than in 2020, but they are numerous and far-reaching. Market participants – whether suppliers, retailers, landlords or lenders – should prepare for a possible attack if market conditions do not change quickly. Whether that wave comes later in 2022 or in 2023, current market conditions suggest a surge in bankruptcy filings is imminent.