By TLB Contributing author: Sally Phillips
Retail Bankruptcies On the Rise, Despite Overall Drop in Filings
Only three months into 2017 and nine retailers in the U.S. Have already filed for bankruptcy. This equals the entire number of filings for 2016. If it continues at this rate, the industry could experience the highest number of bankruptcies in around eight years. Online shopping has hit retailers where it hurts. Furthermore, consumers now want to spend more of their money on experiences and traveling, rather than on in-store items. This has seen the number of stores exceeding shopper demand and significantly impacting retail profits.
Overall drop in bankruptcy filings for 2016
But despite the bad news for retail, the overall number of bankruptcy filings recorded for 2016, fell by 5.9% from the previous year to 794,960. This is the lowest number of filings since 2006, according to the Administrative Office of the U.S. Courts. Most of these filings are for non-business debts, totaling 770,846.
Three types of business bankruptcy
Bankruptcy goes through federal court and helps businesses eliminate or repay debt under the protection of the bankruptcy court. For businesses, there are three types of bankruptcy that they can file under, depending on the type of business. Sole proprietors, responsible for all liabilities and assets of the business, can file under Chapter 7, Chapter 11, or Chapter 13. Corporations and partnerships are separate from the owners and can file for protection under Chapter 7 or Chapter 11.
50% of filings by retailers are bought by private equity firms
Retailers who are struggling to survive and are facing bankruptcy can’t just blame a change in buying habits. Over 50% of the filings in the last year, came from retailers bought out by a private equity firm. These firms use equity and debt to purchase a business, but the purchased company ends up having to carry the debt. The number of retailers predicted to be at risk is at its highest level since the Great Recession. Several chains targeted by private equity firms such as J. Crew and Claire’s Stores are now struggling to save their businesses.
Failure to invest leads to retailers’ downfall
Many private equity firms fail to invest sufficient money into stores or digital operations, which is vital for the business to survive. For already vulnerable chains, their problems are only going to get worse. The gradual increase in interest rates, will make it much harder for them to refinance their debt.
Whatever the reason for a company to file for bankruptcy, an increasing number of retailers who enter Chapter 11 end up dissolved. Since 2005, they only have 210 days to decide whether to continue their store’s lease. Previously, they had over a year, which gave retailers more time to consider their options. As retailers either dissolve or restructure, most, if not all of their stores shut down. An example of which is Aeropostale, who closed around 600 stores in its reorganization last year. Similarly, Sports Authority’s shut 460 locations. But it isn’t just bankrupt retailers closing stores; Macy’s, J.C. Penney, Sears and Kmart are in the process of closing nearly 400 stores.
What’s in store for the rest of 2017?
Of course, no one can truly know what is likely to happen for the rest of this year. However, some experts believe that the number of bankruptcy filings will remain the same, as long as the economy stays relatively stable. Some have gone as far as estimating that in the U.S. there will be around 767,000 bankruptcy filings this year. And although some retailers are closing, others are hoping to cash in on the available market left behind. But to truly take advantage, traditional chain stores must compete with online stores like Amazon, which won’t be easy.
About the Author: Sally Phillips is an author and concerned citizen who feels it is her mission to make people aware of the facts behind the many issues they face in their daily lives.
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