Why the retail industry is facing a bankruptcy wave

The retail industry is up against a potential wave of bankruptcies following a monthslong slowdown in restructuring activity.

There could be an increase in distressed retailers beginning later this year, experts say, as ballooning prices dent demand for certain goods, stores contend with bloated inventory levels and a potential recession looms.

Last week, 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection, making it the first household consumer-facing name to do so in months.

Now the questions are: Which retailer will be next? And how soon?

“Retail is in flux,” said Perry Mandarino, co-head of investment banking and head of corporate restructuring at B. Riley Securities. “And within the next five years, the landscape will be much different than it is today.”

The industry had seen a dramatic pullback in restructurings in 2021 and early 2022 as companies — including those that had been on so-called bankruptcy watch lists — received relief from fiscal stimulus that offered cash infusions to businesses and stimulus dollars to consumers. The pause followed a flood of distress in 2020, near the onset of the pandemic, as dozens of retailers including J.C. Penney, Brooks Brothers, J. Crew and Neiman Marcus headed to bankruptcy court.

Including Revlon’s filing, there have been just four retail bankruptcies so far this year, according to S&P Global Market Intelligence. That’s the lowest number the firm has tracked in at least 12 years.

It’s not exactly clear when that tally could begin to grow, but restructuring experts say they’re preparing for more trouble across the industry as the all-important holiday season approaches.

An analysis by Fitch Ratings shows that the consumer and retail companies most in danger of default include mattress maker Serta Simmons, cosmetics line Anastasia Beverly Hills, skin-care marketing company Rodan & Fields, Billabong owner Boardriders, men’s suit chain Men’s Wearhouse, supplements marketing company Isagenix International and sportswear manufacturer Outerstuff.

“We have potentially a perfect storm brewing,” said Sally Henry, a professor of law at Texas Tech Law School and former partner at Skadden, Arps, Slate, Meagher & Flom LLP. “I wouldn’t be surprised to see an uptick in retail bankruptcies.”

Still, advisors who have worked on retail bankruptcies in recent years believe, for the most part, that any looming distress in the industry shouldn’t be as intense as the massive shakeout in 2020. Instead, bankruptcies could be more spread out, they said.

“What you saw in 2020 was a tremendous amount of restructuring activity getting pulled forward,” said Spencer Ware, managing director and retail practice leader at Riveron, an advisory firm. “Then we got from 2020 through today with a tremendous amount of stimulus. What’s going to happen now? It’s a bit of a mixed bag.”

A split…