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Rush of Bankruptcies May Be the Turning Point for Retail

By Linda McDonough on June 14, 2017

If there were a way to structure the trade, I’d be long bankruptcy lawyers. With all the retail bankruptcies and debt restructurings popping up in retail, these are a busy group of workers. Just this week retailer Gymboree filed for bankruptcy. The chapter 11 filing by the purveyor of toddler clothing lifted the year to date retail bankruptcy count above 13.

This total eclipses the number of filings for the whole year 2016 and puts 2017 on track to beat the old record of 18 retail bankruptcies, filed in 2009 post the financial meltdown.

Also, some of those chains filling out the chapter 11 paperwork are repeat customers. American Apparel and Wet Seal, two firms that recently filed for bankruptcy can count this as their second offense. American Apparel’s filing last November was its second trip to the bankruptcy courts in less than a year. It seems those with gigantic debt loads can’t get profits high enough to cover repayments.

And the end is not in sight. Prepster J Crew, who was taken private in 2011 by private equity, is hoping to restructure its debt to avoid bankruptcy. The proposal asks bondholders to swap their debt for a longer maturity date and to swap some into preferred stock.

If J Crew isn’t successful in convincing stakeholders that they should accept these new terms, it may find itself knocking on the door of a bankruptcy firm.

Underneath these dire stories are rays of hope. BCBG Max Azria, a firm that just went under in March has already found buyers for its brand and other assets. Publically traded retail stocks are starting to poke up their heads on a whiff of good news.

Williams-Sonoma, The Container Store, and Deckers are just three of many retail-related stocks that have spiked on better than expected sales. While some of this boost may be due to short covering buyers, the stocks are cheap enough that I think long buyers are wading back into this group of stocks.

It’s no shock that mall-based retail chains are having a hard time staying above water. Home delivery via Amazon Prime and the stampede of customer traffic to the web have sucked foot traffic out of malls.

Not only does this trend impact the store who lost the sale to the web, but it also eliminates the chance of the impulse purchase that might happen when you’re wandering by a sales rack on the way to the parking lot.

I consider myself a pretty focused shopper and a frugal one at that. Just last week, I found myself at the local mall returning online purchases. I was lured over to a cosmetic counter showcasing a product about which a friend had raved. Forty dollars later I walked out with a totally unplanned purchase in my bag. These are the sales that really goose profits for retailers.

So why are some retail stocks popping? Many retailers with off-mall locations continue to do well. These stores are typically located strip malls, strategically placed near a grocery store or a liquor store. Although many home delivery options exist for groceries and alcohol, the majority of consumers still make a physical trip to these stores. An impulse visit to a nearby retailer is quick and easy.

Analysts estimate more than 8.500 retail doors will close this year. That number is more than four times larger than last year’s number and will bring the three-year total of closings above 15,000.

While it’s hard to find data on the total number of retail doors in the U.S., as that number dwindles, consumers will shift some demand to those that remain open. Many chains are closing stores in class C and D malls and opening new ones in outdoor “lifestyle” centers that consumers love to visit.

I just added a retail stock to my Profit Catalyst Portfolio for just these reasons and have another three or four that will likely be added soon. With stocks in many other industries trading at 52-week highs and over-stuffed valuations, I’m finding some great buys on the retail sale rack.

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