A recent Wall Street Journal article in the addressed an issue that is facing many middle market retailers who are grappling with slow sales growth and tight margins – will they be able to survive once higher interest rates return? The current market of easy credit has allowed middle market retailers the ability to secure additional financing. Once higher interest rates return, additional funding may not be so easy to come by and some retailers may be forced to either file for bankruptcy and/or liquidate.
Middle market retailers such as Sears Holdings Corp., RadioShack Corp., and J.C. Penney Co., despite having their respective market shares plunge, have all been able to secure additional financing. Sears secured an additional $1 billion loan despite reporting a month earlier that it had a loss of $194 million; RadioShack, who has lost market share in recent years, secured an $835 million financing deal; and J.C. Penney, who has been working to right itself after its last chief executive officer, Ron Johnson, put the company in peril, secured $1.75 billion in financing and raised additional funds in a stock sale. With interest rates so low, investors who are seeking higher returns are lending to these chains. According to Moody’s Investor Service, the U.S. default rate for junk-rated borrowers such as Sears, RadioShack, and J.C. Penney was just 2.5% in October, down from 3.6% a year earlier.
Yet these retailers will likely continue to grapple with slow growth, tight margins, and consumers who only buy when deep discounts are offered. Additional obstacles in today’s retail world include retailers cannibalizing their own sales, with competing on-line sales against retail store sales, to competing internet giants like Amazon which offers discounted pricing with fast delivery options. Access to funding has allowed these companies to bide their time and possibly come up with a turnaround strategy. It is likely that access to funding has delayed the inevitable, however, and that the day of reckoning will come for at least one if not more of these companies.
By comparison, both the discount retailers and luxury oriented retailers are gaining market share. Many middle-class Americans have faced a decrease in household income and as a result are now bargain hunting, while the income for the top-wage earners increased by 31.4% from 2009 to 2012. Accordingly, retailers such as Dollar General Corp., at the low end, and Nordstrom Inc., at the high end, have both increased market share in recent years.
What will happen next remains to be seen, but we have all seen retailers such as Circuit City and Linens n’ Things file for bankruptcy and rapidly liquidate. Are we at the cusp of another wave of retail bankruptcies? What do you think?