With consistent weakness in department stores’ fourth quarter financials being widely reported in recent weeks, there’s quite a bit of buzz in the insolvency community that some form of a retail bankruptcy boom may be looming.
In January, Macy’s and Kohl’s downgraded their earnings guidance following a 2.1% year-over-year decline in same-store sales in November and December, and Sears reported that its comparable store sales fell 12%. And when The Limited filed its liquidating chapter 11 on January 17, it pointed to an 8% decline in mall traffic in 2015-16 as the final nail in the coffin.
But while the downward trend certainly has some strong empirical indicators and bench depth— Macy’s and Sears closed hundreds of stores in recent months and J.C. Penney has announced it will soon follow suit—not everyone on the brick-and-mortar side of the business is suffering. In reporting its fourth quarter results this month, Simon Property Group (the country’s largest mall operator) said that it only had one dark department store in its portfolio of more than 430. And there’s certainly a quantum of solid metrics that point to continued success for higher-end “A” mall properties: a recent analyst’s report concluded that 75% of the country’s shopping mall revenues are generated by the top 20% of malls.
So do we have the makings for a sector-wide march to the bankruptcy courts? Or is this simply a matter of routine consolidation and adaptation to steadily increasing (but not overwhelming) internet demand and changing tastes?
If the polls still have any credibility, the answer is: retail restructuring is going to be hot-hot. According to a 2016 survey by mega-turnaround firm Alix Partners, retail was the most likely sector to face distress in 2017, with 67% of the restructuring professionals surveyed placing it in the top spot, ahead of oil and gas (57%), and healthcare (31%). (Respondents were asked to pick three sectors.)
It’s unlikely that there will be a collapse of all things brick-and-mortar in 2017—demand is simply too strong, capital markets liquidity is still easy to come by, and the big mall operators are already ahead of the curve in their efforts to consolidate investment in their performing properties. And even if there is a rash of department store bankruptcies, if recent history provides any guidance, they largely will be uneventful going-out-of-business (GOB) liquidations with en masse, run-of-the-mill lease rejections.
But there may be room for a tranche of anchor/big box retailers to stay afloat as streamlined or repurposed mall tenants if the distressed acquisition market has an appetite. If that proves to be the case, it may be time for the chapter 11 lawyers to dust off the Bankruptcy Code’s rather complex and nuanced compendium of rules and restrictions that control the go-forward assumption of shopping center leases—a technical but significant strategic consideration that both landlords and distressed buyers and should not overlook. Only time will tell.
*Stuart A. Laven, Jr., a Shareholder in the firm’s Business Law and Capital and Finance Groups, represents landlords, buyers, and tenants in Chapter 11 and other, non-bankruptcy distressed commercial real estate lease and transactional matters.
(Sources of Facts and Figures: “While You’ve Been Paying Attention to Failing Malls…,” K. Gustafson, CNBC.com, January 26, 2017 (citing a Fung Global Retail & Technology analysis); “Debt Restructuring Could be the Biggest Growth Industry of 2017,” W. Richter, BusinessInsider.com, February 7, 2017; “What the CEO of the Country’s Largest Mall Operator Won’t Bother Getting Into,” K. Gustafson, CNBC.com, February 1, 2017, TheStreet.com)