Inflation Could Bring Retail Bankruptcies Roaring Back After Historically Stable Period
Though the pandemic made 2020 one of the bloodiest years in retail's history, the 18 months since have seen a historically stable period with very few bankruptcies. But as dark clouds have gathered over the economy, that stability may be vanishing.
Cosmetics giant Revlon filed for Chapter 11 bankruptcy last week, just the fourth retail company to do so this year, according to S&P Global Intelligence tracking reported by CNBC. That represents the lowest rate of retail bankruptcy S&P has tracked in at least 12 years, though several retailers are showing warning signs of default on their debt, according to a credit report from Fitch Ratings released Thursday.
Movie theater chain Cineworld is at risk of default on a debt load over $4B, while mattress conglomerate Serta Simmons Co. is in a similar spot with its $2B in debt, Fitch reports. Men's Wearhouse, 24 Hour Fitness, Billabong parent company Boardriders and sports apparel seller Outerstuff also appeared on Fitch's list of "market concern loans."
For struggling retailers, the current economic environment presents two distinct problems: the effect of inflation on consumers and the effect of the Federal Reserve's interest rate hikes on the cost of capital.
Though inflation has been rising in both severity and the public consciousness for months, it did not affect consumer retail spending through the first four months of the year. But spending at nongrocery, nonrestaurant stores dropped in May, according to Marcus & Millichap data, and retail and grocery spending declined over that same period even before adjustment for inflation in the Commerce Department's monthly survey, CNBC reports.
As consumer behavior is seemingly shifting, the persistently clogged global supply chain has left a growing number of retailers with excess inventory likely to lose value, per CNBC.
That effect would likely take months to fully reveal itself, which could combine with the deep cash reserves many retail companies have built to push a wave of bankruptcies into next year. But if the holiday shopping season is weakened by inflation, that wave is definitely coming, market experts told CNBC.