May 11, 2020
Categories:
COVID-19 Ushers in a New Chapter in the Retail Apocalypse
Last week marked a new chapter in the retail apocalypse when J. Crew became the first major retailer to file for bankruptcy during the COVID-19 crisis. While J. Crew was the first, Neiman Marcus quickly followed suit and many more are expected to follow. Retailers that had previously filed during the COVID-19 pandemic have included True Religion and Roots.
The retail apocalypse has been going on for quite few years now as traditional brick and mortar stores have been unable or unwilling to adapt to American consumers who are increasingly buying more and more products online. At the same time, ownership of these retailers has often times changed hands with the new owners taking on massive debt in order to purchase these retailers. Not only have they found themselves unable to pay off this debt due to declining revenues, but it has prevented them from being able to reinvest in their stores and online presence in order to retain existing customers and bring in new customers. Perhaps the most high-profile bankruptcy and subsequent closure to date has been that of Toys’R’Us who filed for bankruptcy in September 2017, and closed all of their stores in June 2018. They were quickly followed by Sears who filed for bankruptcy in October 2018, although they have managed to keep some of their stores open. But these are far from the only two retailers to seek bankruptcy protection.
Department stores, and other mall-based retailers have been hit particularly hard. Bon Ton, who operated a handful of department stores nationwide including Carson’s and Bergner’s, filed and subsequently went out of business in 2018. Many mall-based retailers such as The Limited have also closed up shop.
Prior to the COVID-19 pandemic, there was already a long list of retailers who either filed or were in danger of filing for bankruptcy. Just prior to the start of the pandemic in the US, Art Van Furniture filed for bankruptcy protection, but their going out of business sale was cut short when the pandemic forced them to close all of their stores. The same could happen to Forever 21, who filed for bankruptcy protection before the pandemic struck and has had liquidation sales canceled as a result of it.
Last Monday J. Crew, a mall-based retailer, became the first major retailer to file during the COVID-19 pandemic. They were followed by department store Neiman Marcus on Thursday. Meanwhile, department store Lord & Taylor is holding off on filing for bankruptcy but has announced they will be having liquidation sales start as soon as they are allowed to reopen their stores. There have been further reports that J.C. Penney and Stage Stores could both possibly be filing this week. J.C. Penney has already missed several interest payments, and if they fail to pay them by the end of the week they will be in default and could be forced into bankruptcy. Although other stores seem to think that they should be able to survive. Nordstrom secured $600 million in financing to keep the business operational during the pandemic, but still announced that 16 of their stores will be permanently closed as a result of the pandemic. Macy’s, who also owns Bloomingdale’s, announced that they had no plans to file for bankruptcy. However, Macy’s already had plans to close 125 stores prior to the pandemic, and is now seeking $5 billion in financing which they are yet to receive.
If the retail environment wasn’t scary enough prior to the pandemic, it just got a whole lot scarier. For wholesalers who sell to these companies it is more important than ever to make sure that your customers will be able to pay their bills. Unfortunately, credit insurance is no longer an option for most wholesalers. Credit insurance companies have stopped issuing new policies, and they have slashed credit limits on existing policies. Of course, the companies that have filed or are expected to file for bankruptcy protection were already severely distressed prior to the pandemic. It is unlikely that the credit insurance companies would have been issuing credit limits for them even before the pandemic hit. However, for retailers that had generous credit limits prior to the pandemic, those credit limits have all been slashed. So while receivables that date back before the start of the pandemic may be covered, it is highly unlikely that any new receivables will receive coverage. Furthermore, it has been reported that credit insurance companies who have been helpful in the past in explaining rules and regulations of their policies, are no longer being helpful and aren’t assisting their clients in filing claims.
With credit insurance no longer available, many wholesalers are now wondering how they can safely fulfill purchase orders at a time when retailers are struggling. For many wholesalers, the answer is non-recourse factoring. With non-recourse factoring not only are your receivables insured, but you also receive an advance on your receivables. That means you get funded for your receivables the same day you invoice your customers. This can prove more important than ever as even retailers who are expected to survive, and maybe even thrive afterwards, are extending their payment terms from net 30 to net 60 or even net 90. Now factoring companies are not in the business of losing money, so don’t expect them to approve an order for J.C. Penney, but for retailers who are expected to come out of this pandemic in reasonably good shape, they will still get approved. Furthermore, by partnering with a factoring company, you will ensure that your receivables will get paid as your factor won’t approve accounts that don’t have the ability to pay. DSA Factors is proud to offer non-recourse factoring to all of our wholesale clients, so if you are looking to insure your receivables please give us a call or send us an email, we will be happy to help.
