FINANCE

Toys “R” Us to close some stores in the U.K.

BY Marianne Wilson

Toys “R” wants to trim its store portfolio in Britain.

The retailer, as part of its ongoing financial restructuring efforts, is seeking approval to close at least 26 of its approximate 105 stores in the United Kingdom in 2018. Toys “R” Us, which filed for Chapter 11 in September, said its British arm has submitted a Company Voluntary Arrangement (CVA) plan to its creditors and would seek their approval in the next 17 days. (Toys “R Us in the U.K. is owned by its U.S. namesake, but run as a separate financial entity.)

“As we continued to work through the financial restructuring process, we made the decision to take action to put our UK operation on stronger financial footing,” said chairman and CEO Dave Brandon. “Through the CVA process, we hope to receive authorization to restructure our U.K. lease obligations so that we will be better able to invest in our U.K. business and further improve the customer experience. Importantly, our stores and operations in our other global markets will not be impacted by this process.”

Toys “R” Us said all its U.K. stores would remain open as normal through Christmas and into the new year.

In a statement to Bloomberg, Toys “R” Us U.K. managing director Steve Knights said “the business has been loss-making in recent years and so we need to take strong and decisive action to accelerate the transformation.”

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2018 Economic Forecast: The outlook is mostly sunny, but some clouds loom

BY Phillip M. Perry

Fair weather ahead. That’s the economic forecast for 2018. Retailers should benefit from an improving employment picture, growing disposable consumer income, and an easy credit environment.

“We estimate core retail sales will increase by 4.7% in 2018,” said Scott Hoyt, senior director of consumer economics for Moody’s Analytics, a research firm based in West Chester, Pa. (economy.com). “That’s an improvement over the 3.8% increase of 2017, which was virtually flat with the previous year.” (Core retail sales exclude volatile auto and gasoline segments).

The retail outlook reflects robust growth in the overall economy. For 2018, Moody’s expects gross domestic product (GDP) to grow by 2.9%, thanks mostly to vigorous residential investment and government spending. That’s a healthy increase from the 2.19% expected to be recorded for 2017 when numbers are finally tallied, a figure up from the 1.49% of the previous year.

Brisk tail winds should keep the economy in full sail

“A revival in corporate profitability, record stock prices, and rock-bottom borrowing costs are buoying businesses,” said Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics.

Even the global picture is brighter.

“All of the major economies are expanding in unison for the first time in a decade,” she said.

STRONG LABOR MARKET: Perhaps the most important factor is a strengthening labor market which should put more spendable cash in consumers’ pockets.

“We expect well over two million jobs to be created in 2017,” said Koropeckyj. “This is about the same growth experienced since the expansion

Strong job growth resulted in an unemployment rate of 4.4% by the end of 2017, and that’s expected to fall to 3.94% by the end of 2018.

As unemployment declines, employers have more difficulty finding sufficient workers. That bodes well for wage growth, and for a resultant increase in consumer income that can be spent at retailers. Moody’s expects average hourly earnings to grow by 3% in 2018, up from the 2.6% increase of 2017, which was little changed from the previous year.

LOOMING CLOUDS: While consumer and business confidence remains high, the road ahead is not entirely clear.

“Lack of retail pricing power remains a big issue, with competition from online sales a big contributor to that,” said Hoyt.

And while higher wages mean fatter shopper pocketbooks, they also have drawbacks.

“There is a challenge to finding and retaining the right workers, and working out what to pay them and still deal with downward pricing pressures,” he said.

Other potential problems include uncertainties in Washington legislation, especially for the corporate tax cuts that are built into Moody’s sunny forecast. Additionally, retailers may be harmed by protectionist measures promised during the campaign of Donald Trump, if instituted. On the positive side, there has been no recent talk about a border adjustment tax.

Finally, retailers need to keep a watchful eye on the health of the banking industry.

“I continue to worry about the strength of the financial system,” said Walter Simson, principal of Chatham, N.J., -based Ventor Consulting. “When the value of assets such as the stock market and real estate goes up so high, that usually means there is too much easy money around.”

Simson is also wary about the increase in debt for student loans, credit cards, and longer-term auto loans. Furthermore, he added, financial institutions are introducing more high-risk derivative-backed CDs, and engaging in more of the loan bundling that contributed to the Great Recession in 2008.

The end result?

“Some lenders might have too many high-risk loans on their books,” said Simson. “If they cannot collect, the whole banking system will again be at risk.”

Running Start: As retailers enter the first months of 2018, Hoyt suggests keeping a watchful eye on some key indicators for the year’s economic trajectory. The first is Washington legislation.

“Will there be a program of fiscal stimulus?” posed. Hoyt. “If so, that will bolster the economic environment.”

Hoyt also suggests staying alert to reports of wage increases which would stimulate consumer spending. Finally, he said that any increase in retail pricing power will bode well for the remainder of the year.

Philip M. Perry is a New York-based business writer.

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Fitch Ratings: Liquidations common in retail bankruptcy cases

BY Marianne Wilson

U.S. retail bankruptcy cases more frequently end up in liquidation than other sectors, and tend to have outstanding first-lien recoveries.

That’s according to the latest addition to Fitch Ratings’ case study series, “Retail Bankruptcy Enterprise Values and Creditor Recoveries.” Fitch examined 39 U.S. retail cases filed since 2005, including nine new cases resolved since its September 2016 retail sector bankruptcy study. The new cases were Gymboree, Payless, rue21, True Religion Apparel, Aeropostale, BCBG Max Azria Global Holdings, Golfsmith International, Hancock Fabrics, and Pacific Sunwear.

“Bankrupt retailers often find themselves without a reason to exist from a consumers’ standpoint or a financial lifeline to help them rebuild, making liquidation a relatively common solution,” said Sharon Bonelli, senior director, leveraged finance. “Sometimes the operating challenges that cause a retailer to spiral into distress in the first place follow them into the bankruptcy process, creating obstacles to turning around a fallen brand.”

More than half of the 33 general retail cases studied since 2005 ended in liquidation. A number of recent retailer bankruptcies were resolved as going-concerns, albeit often with a smaller store footprint. Recent examples include Aeropostale, Gymboree, Pacific Sun, Payless, rue21, and True Religion.

Fitch believes the retail sector will remain under pressure over the next year.

“We have 17 retailers on our Primary Bonds and Loans of Concern lists, which indicate a material likelihood of default,” the company stated. “At end-November 2017, the U.S. retail term loan default rate stood at 8% — much higher than the 0.4% recorded at end-2016.”

Fitch forecasts the retail sector default rates could rise to 7% for bonds and 10% for institutional term loans by end-2018.

The full report, “Retail Bankruptcy Enterprise Values and Creditor Recoveries: Fitch Case Studies — 18th edition,” is available at Fitchratings.com.

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