KEY POINTS
  • Retail bankruptcies are piling up.
  • While retailers have typically used bankruptcies to close underperforming stores and emerge a stronger company, that plan may not work during the coronavirus pandemic.
  • If more retailers liquidate, that could mean many more jobs lost. 

Bankruptcy doesn't need to mean the end of a company. It can be a shot to shed debt, reorganize and come out stronger. 

But during the coronavirus pandemic, bankruptcy filings are increasingly spelling doom for retailers. In turn, it threatens thousands of more workers in an economy that has already suffered tens of millions of lost jobs.

Retailers' woes could also have an impact on this year's election campaign as employment will increasingly become a focus for politicians looking to appeal to the working class.

The bad news for retailers and their employees keeps piling up. Home goods chain Pier 1 this week announced plans to liquidate its business after failing to find a buyer. Modell's announced plans to shutter its business in March. Grocer Earth Fare, which filed for bankruptcy in February, only found a buyer for parts of it.

Contrast their fortunes with retailers like Macy's and Mattress Firm, which have utilized court protection to get out of bad leases and downsize to their most profitable stores. Some, like Gymboree and Payless ShoeSource, emerged from bankruptcy only to fall back in. But at least they had a shot to come back.

Those shots are likely to be fewer in the aftermath of the coronavirus outbreak, according to retail and restructuring experts. Retail was already facing broader challenges as shoppers increasingly abandoned malls for online commerce. Now, the financing for retail isn't there as banks tighten their purse strings. It's not clear that shoppers are going to be there, either. A second wave of the coronavirus could be on the way later this year as states relax social-distancing guidelines and reopen their economies under the guidance of the Trump administration.

"Given the fact that unemployment on its way to 20% and social distancing is an unpleasant reality – it's difficult for me to envision a world where a bankrupt company trying to emerge from a Chapter 11 proceeding is going to be able to put financial projections that lenders have confidence in," said Eric Danner, a partner with CohnReznick Advisory's Restructuring & Dispute Resolution Practice.

So far this year, the number of liquidation plans by bankrupt retailers has not outpaced previous years. Five of the 15 retailers that have filed for bankruptcy to date have announced plans to shutter their businesses, according to data provider Debtwire, though some of those retailers could still turn into a liquidation. Last year, 16 of the 25 retailers that filed for bankruptcy liquidated. The year prior, 11 of 23 bankrupt retailers shuttered their doors.

But it's only May.

Modell's Sporting Goods store in New York City.

The full impact of the pandemic on retail has only begun to be felt. Neiman Marcus, J. Crew, Stage Stores, J.C. Penney and Centric Brands have filed for bankruptcy. Many more are expected to come as the coronavirus' fallout strains the economy, restructuring advisors say.

Stage Stores, which has 700 department stores predominately in mid-sized markets and rural communities, has warned it may need to liquidate if it cannot find a buyer. It said in a court hearing Thursday it is in talks with 21 parties, eight of whom are interested in buying a large subset of its current store footprint, some distribution centers, and, in certain cases, its headquarters.

More bankruptcies and liquidations would put further pressure on many of the remaining retailers instead of letting them benefit from reduced competition. As malls lose their anchor stores, shoppers have even less reason to visit there.

"When those stores disappear, volume almost disappears from the market – and it's not replicated in other channels easily," said Michael Dart, a partner at A.T. Kearney and author of "Retail's Seismic Shift."

That means even more job losses in an industry that is one of the country's largest drivers of employment. The retail industry lost 2.1 million jobs in April alone, according to the U.S. Bureau of Labor Statistics. 

85,000 jobs at stake at J.C. Penney

For J.C. Penney, the ability to emerge from bankruptcy could affect as many as 85,000 employees. The retailer filed for bankruptcy on May 15 after years of waning sales and an attempted turnaround by CEO Jill Soltau gots sideswiped the pandemic. 

Soltau, who joined the company in 2018, had sought to turn the retailer around by refocusing on the in-store experience and apparel. Those efforts had been working before the pandemic pulled the rug out from under the retailer, bankruptcy attorneys told the bankruptcy court in a hearing Saturday. The retailer had been making headway with lenders on a $4.9 billion debt load, finance chief Bill Wafford said in a court declaration.

But then the pandemic brought bricks-and-mortar sales, where J.C. Penney does the majority of its business, to almost $0.

An empty parking lot is seen outside a closed JC Penney Co. store in Mt. Juliet, Tennessee, on Thursday, April 16, 2020.

In bankruptcy, the retailer is hoping to expedite its sought-after turnaround. It is evaluating spinning off its real estate into a real estate investment trust and has said it is shuttering nearly 30% of its stores.

To support its business in bankruptcy, J.C. Penney has $500 million in cash it had when it filed for bankruptcy and $450 million in new financing from its creditors, largely hedge funds. But it is only guaranteed half of those loan funds. It would get the second half if it meets a list of milestones and abides by tough covenants. Roughly a quarter of the $450 million in financing is going towards paying restructuring advisors, people familiar with the situation said. 

That leaves limited cash to fuel J.C Penney's ambition. According to experts, that limited cash pool could hurt its ability to climb out of bankruptcy.

"Penney's needs every dime it can get to remodel stores and persuade vendors to keep shipping to them," Erik Gordon, a professor at the University of Michigan's Ross School of Business. "It's not a reorganization where just reducing debt will put things right."

The terms of the financing agreement stoked ire from a creditor in a bankruptcy hearing Saturday. An advisor to the creditor also railed against the retailer for paying out millions in retention bonuses to it executives and a $17 million interest payment to the same lenders financing providing the $450 million loan − both shortly before filing. 

It is common practice for companies facing bankruptcy to pay out retention bonuses and large advisory fees in order to ensure the company has the best representation as it navigates bankruptcy. 

A representative for J.C. Penney declined to comment.

Judge David Jones, who must approve all spending, used the hearing to remind the executives, advisors and creditors of just what was at stake. The company's thousands of jobs, the judge noted, depend on the company's ability to re-emerge.

"There are 85,000 people that are the most important 85,000 people to me at the moment," Jones said.