Insights

Chapter 22: Why Some Retailers Emerge from Bankruptcy Only to File Again

BY David Berliner and Nick Weber

As of August 31, 16 retailers have filed for Chapter 11 bankruptcy in 2017. Four of those sixteen retailers are filing for “Chapter 22”, meaning this is their second time declaring bankruptcy. Chapter 22 cases show that the first bankruptcy failed and that the firm and its advisors were too optimistic regarding the firm’s viability out of bankruptcy. The chart below summarizes the four Chapter 22 filings over the past year:

1 Emergence from 1st to 2nd filing.

In all of these Chapter 22 cases, the companies’ attempts to improve core operations were not successful. The restructuring of these companies after the Chapter 11 filings did not go far enough to address their various operational problems — instead the efforts focused on improving the appearance of their balance sheets. This was likely due in part to the secured creditors’ desire to expedite the Chapter 11 process to minimize costs.

Inability To Adapt

One of the central reasons why these firms were unable to improve operations was their inability to adapt to changing consumer preferences and competitive landscapes, while still being overburdened with debt. Radioshack’s product assortment was generally antiquated and did not match the products sought by their customer base. American Apparel, Wet Seal and Bob’s Stores did not draw enough foot traffic to return to profitability, in part because competitors offered more desirable products at a better value.

Closing unprofitable stores without changing the underlying economics and developing a consumer-focused strategy is an ineffective way to emerge from bankruptcy for retailers. Inefficient supply chains with slow design, manufacturing and shipment processes make retailers unable to quickly change their products to match current trends. The typical 4-wall EBITDA analysis views the historical results of each store in a vacuum and does not fully consider changing competitive dynamics that could affect future results — like if a competitor recently opened or plans to open a location near a historically profitable store. Also, the 4-wall EBITDA analysis does not consider what is happening with other primary drivers of traffic within the shopping center. For example, customer traffic and future profits would likely be lower if a large department store or other tenants close stores in a mall.

Short Lease Renewal Time

Currently, bankrupt retailers have only an initial 120 days to assume or reject leases and can only receive one additional 90-day extension without landlord approval. One reason why retailers have to rush their decision as to which stores should assume or reject leases is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BACPA). Before BACPA, bankrupt retailers could essentially seek as many extensions that a Bankruptcy Court would approve. This enabled bankrupt retailers to keep stores open through at least one holiday season and take their time to determine if these stores should continue operating. Bankrupt firms were able to wait until after the holidays to decide which stores to close so that the sales associated with holiday season spending could be used in their analysis. BACPA, however, eliminated this option to continue to extend the decision as to whether to assume or reject leases.

In addition to the short lease renewal timeline, retailers typically face pressure from secured lenders who force shorter rejection timelines to ensure that their collateral, often their inventory, is liquidated before the 210 days. Without current sales data from an additional holiday season, retailers are unlikely to properly forecast the future operating results of all their locations, and may end up with the wrong mix of stores as well as more underperforming stores than expected.

As the saying goes, history tends to repeat itself. With this in mind, potentially bankrupt retailers should learn from the mistakes of previous Chapter 22 filings. Aggressive restructuring of operations, including revamping the product assortment, fixing supply chains and implementing a well-planned lease rejection strategy prior to filing are essential to improve the prospects for a successful restructuring. Unless the retailer is prepared to adequately address the core operational issues that led to the original bankruptcy filing, expediting the process to quickly emerge from Chapter 11 increases the likelihood that the restructuring will fail, thereby resulting in a Chapter 22 filing in the near future.


David Berliner is partner and leader of BDO’s business restructuring &amp turnaround services practice. BDO is an international network of public accounting, tax, consulting and business advisory firms.

(Nick Weber of BDO’s business restructuring &amp turnaround services practice contributed to this article.)

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J.Freedman says:
Oct-09-2017 02:03 pm

Re: the Reasons for the Wet Seal Bankruptcy I disagree that competition from WalMart and Target contributed as much as competition from Forever 21, H&M and other fast fashion chains with more choices. I was not seeing the Wet Seal customer purchasing clothing in WalMart

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FINANCE

Embattled department store retailer gets fresh cash infusion from owner

BY Marianne Wilson

As it heads into its most important selling season, Sears Holding Corp. is receiving another cash infusion from its CEO and largest shareholder.

Sears is borrowing $100 million from units of CEO Eddie Lampert's hedge fund ESL Investments for "general corporate purposes," according to a regulatory filing. The new infusion brings the total of Lampert's outstanding loans to Sears to $499.4 million.

Under the amended terms of the new loan, the retailer can borrow up to another $100 million — if needed — by pledging additional properties or assets as collateral. The loans carry an interest rate of 11%.

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BUSINESS INTELLIGENCE/ANALYTICS

Shop.org Takeaway: Three steps to next-gen personalization

BY Deena M. Amato-McCoy

Consumers are becoming more digitally influenced on a seemingly daily basis — but omnichannel retailers find themselves hard-pressed to keep up the pace. Retailers need to meet their needs across all touchpoints, and create a frictionless shopping experience despite where the shopping journey starts and ends.

To achieve this goal, successful retailers are adopting a new digital tools that allow them to “connect the dots,” and personally engage shoppers before, during and following the shopping experience. Industry observers discussed this new level of personalization during Shop.org, held in Los Angeles, Sept. 25-28.

Among the top solutions are:

Voice: Conversational commerce is shaping up to be one of the year’s hottest disruptors, and momentum continues to grow. As customers grow more comfortable using digital voice assistants found on devices like Amazon Echo and Dot, Google Home, and others, retailers have a new way to personalize the shopping experience, and remove some of the friction that still occurs via online and mobile transactions.

Jet.com Walmart’s e-commerce arm, is so bullish on voice that it is one of the company’s “top priorities this year,” Marc Lore, president and CEO, of Walmart e-commerce U.S., said at shop.org.

“You have to look beyond the technology and toward what it enables,” Lore added. “It’s more than a tool that helps customers order product for delivery. It gives us the chance to connect with shoppers one-on-one. And we can use data to become better merchandisers.”

Artificial intelligence: Retailers that use AI are essentially adopting programs that teach their computers to learn patterns. Then brands can use results to deliver better customer experiences.

AI is playing a critical role across Disney’s retail channels. Committed to delivering “a more immersive, personalized, and robust omnichannel experience than ever before, “Disney is adding AI to our e-commerce site so we can help improve the guest experience online and in-store,” said Mike White, senior VP and chief technology officer for Disney consumer products and interactive media.

AI is helping Disney understand its best-selling category SKUs searched online, and then using this data to evaluate customer affinities. “Then we can expand online and in-store assortments, which add more value to their experiences,” he added.

Next-gen search tools: Kohl’s is becoming increasingly bullish on the value of its search tools. Why?

“Search is the top way that most of our customers begin their purchase journey — and most searches are happening on customers’ smartphones,” Sarah Rasmusen, the company’s VP, digital/e-commerce, merchandising &amp analytics.

That’s why the company is already exploring how to expand the value — and functionality — of this important omnichannel tool. For Kohl’s, this could include a new component Rasmusen described as “findability.”

Kohl’s envisions a solution that will bridge the gap between digital and physical stores. It could also solve what she described as “analysis paralysis,” or collecting so much information that the shopper can’t make a buying decision.

By integrating findability functionality within search, customers will “gain specific details on desired merchandise and where to find it inside of a store,” she explained. “This is the next evolution of search — and it will only be successful if it can merge physical and digital retailing.”

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