Contact Us

For Retailers On The Cusp Of Bankruptcy, Strong Holiday Seasons May Only Delay The Inevitable

As the bloodiest year for store closures in retail history nears its end, the holiday shopping season is just beginning, and with it, a chance for some brands at risk of bankruptcy to pull themselves back from the edge.


Just like individuals often use the end of the year as an occasion to take stock of where they have been and where they are going, corporations and their investors or creditors often make decisions on the future at the turning of the calendar.

In the retail sector, the expectation that the holiday season will produce the year's strongest results only adds to the pressure.

“[The holidays] could be crucial, but it’s more about how it affects the future outlook,” Green Street Advisors lead retail analyst Vince Tibone told Bisnow. “If you show an inflection point in the back half of the year, especially around the holidays, lenders could see that continuing. But if a turnaround doesn’t happen, then the downward trajectory is a big story.”

J.C. Penney, J. Crew and Ascena Retail Group were flagged by Fitch Ratings for being at particularly high risk of defaulting on their loans as of Oct. 30. All of those brands plus a few more, like Pier 1 Imports and Neiman Marcus, were labeled at high risk (at least 10% chance) of bankruptcy within the next year by an Oct. 2 Retail Dive report.

Foot traffic increases at virtually all shopping centers in November and December, but not every type of retailer depends on holiday shopping to the same extent. Apparel sellers, including department stores, are among the retail types most dependent on holiday sales, Morningstar Research Services retail equity analyst David Swartz said.

“For apparel retailers, it’s extremely important; their most profitable and highest-sales part of the year,” Swartz said. “This year, it’s probably even more significant because many of the retailers that I cover … have not had a strong year, with some having negative same-store sales and others having same-store numbers way down from last year. So the holiday season is really important to show investors that their plans are working.”

Lane Bryant Store, North Haven, Connecticut

Inline Apparel Stores

Ascena Retail Group has already been hit hard by this closure-heavy year, as it announced that all Dressbarn locations will close by Dec. 26. The parent company of Ann Taylor, Ann Taylor LOFT and plus-size brands Lane Bryant and Catherines may have the most dire debt situation of any retailer mentioned here. Though it hasn't defaulted on any payments yet, Ascena reportedly stopped returning its creditors' calls over the summer.

Retailers with a specific target demographic have tended to outperform more generic stores, a trend borne out by Lane Bryant and Catherines, which retail traffic data firm Vice President Ethan Chernofsky said are perhaps Ascena's best-performing brands. The conglomerate is reportedly considering spinning off those brands to help pay down its $1.4B debt, which Chernofsky believes would be a mistake.

"It wouldn’t make any sense because it’s exactly where the retail market is trending," Chernofsky said. "It’s a niche, and both Catherines and Lane Bryant are unbelievably valuable assets, because they’re in the right sector at the right time."

Ann Taylor has also been trending in the right direction, according to data, but few expect an explosive holiday season for Ascena's brands. The company is "probably doomed" no matter how it performs, Morningstar's Swartz said.

"That doesn’t mean that they can’t have a good season or a good quarter; it’s just that the long-term trend is negative," Swartz said. "So it’s hard to see what a chain like Ann Taylor or the other Ascena brands could do that would suddenly bring customers back to stores."

A fellow member of Fitch's watch list, J. Crew, is in a similar spot. So many of its locations, just like Ascena stores, are in malls with foot traffic declining for reasons beyond any one store's struggles, Swartz said.

And even though it is seemingly doing well in bankruptcy negotiations to keep stores open, Forever 21 is still vulnerable to a down shopping season at malls, Tibone said.

"There’s no guarantee [Forever 21] comes out of this successfully, and I think the holiday season is important to that," Tibone said. "If it’s particularly weak, liquidation could be on the table or [it could be] a very different bidding process.”


Department Stores 

J.C. Penney CEO Jill Soltau is entering her second holiday season with the company, and the first with a year to prepare. Though the bulk of JCP's debt doesn't come due until 2021, the sheer amount it owes ($4B) means it will likely look to refinance at some point soon — giving this season especially high stakes, Tibone reports.

JCP has high seasonal dependence. In December of each of the past two years, its stores have averaged 60% more foot traffic than the average month from the start of 2017 to October, found. Its summer months this year outperformed the previous two years, which could be an encouraging sign for the holidays, Chernofsky said.

Leading into the season, Soltau has pointed to a proof-of-concept new store — called Penney's and located in its home state of Texas — to demonstrate the new initiatives the company is taking to connect better with its target consumers.

Soltau told analysts on JCP's Q3 earnings call that the company's holiday season will be "the first step of us connecting differently with our consumers," according to Seeking Alpha's transcript of the call

The retailer's Black Friday promotion is aimed to get customers in the door early on Thanksgiving. In addition to discounts of up to 83% on jewelry, shoppers who get in line before J.C. Penney stores open at 2 p.m. on Thanksgiving Day will be given gift cards worth $10, $100 or $500.

Cowen & Co. analyst Oliver Chen expressed concern on the Q3 call that the company's holiday strategy was "highly promotional," potentially dampening the effect of increased sales volume.

Neiman Marcus has yet to announce the specifics of its holiday sales, and as a private company its situation is more opaque than that of J.C. Penney. What observers do know is that the department store chain has significant debt problems and creditors that may be running out of patience.


Neiman Marcus's foot traffic is even more heavily skewed toward December than JCP's, and appears to be heading in the wrong direction. In December 2017, the chain brought in 61% more foot traffic than the baseline between the start of that year and October of this year, according to data, while December 2018 saw only 51.8% more foot traffic as part of "a wider trend of declining visits," Chernofsky said.

The autumn months of 2019 have been a little kinder to Neiman Marcus than in the year before, which Chernofsky said could be cause for some mild optimism.

Pier 1 Imports

After struggling with foot traffic in 2018, Pier 1 has been able to drive more shoppers to its store this year, according to data, but deep and extended discounting to clear out what it sees as extraneous inventory has meant a drop in revenue.

It also leads to concerns about whether traffic will fall off again once normal pricing returns, as well as whether holiday sales will have the same impact, Chernofsky said. Pier 1 may have put itself between a rock and a hard place: Does it drive prices down even further to guarantee a bump in holiday shoppers, or try to stabilize pricing to maximize revenue?

Other external factors could work against retailers betting on a holiday turnaround. Thanksgiving is as late as it can possibly be on the calendar this year, making the period between Black Friday and Christmas less than a month.

As Cowen analyst Chen noted on JCP's earnings call, inclement weather is growing in frequency every year, dampening enthusiasm for venturing outside of the house. Soltau acknowledged that JCP is fighting against the perception of Black Friday and holiday shopping as chaotic and stressful.

A Neiman Marcus store in Boston

Even some retail real estate experts, knowing full well the value of in-person shopping, told Bisnow they will do their holiday shopping online this year. Though retailers will always prefer the higher margins of in-store sales, all companies mentioned here will extend Black Friday deals to online shopping. If the decision for a consumer is buying online either at, say, J.C. Penney's website or Amazon, J.C. Penney has to respect that, Tibone said.

Some indicators give cause for optimism, such as the wild success of Prime Day this summer, even for brick-and-mortar stores. Much of the retail industry saw "major increases" in foot traffic in July and/or August, Chernofsky said, which could indicate a greater focus on promotional periods. That the industry also saw weaker September and October traffic this year compared to 2018 only bolsters that view.

"While the past was centered around ‘days’ like Black Friday, there is a growing trend where longer periods are being prioritized," Chernofsky said. "While this reduces the urgency for a specific day, it might create an opportunity for a more productive season."

Analysts seem to agree that while positive sales numbers won't do much to change a retailer's permanent outlook, it could be construed as an indicator that a recent strategy shift is bearing fruit — Soltau is certainly making that argument for J.C. Penney, at least.

"Once retailers get into trouble, they seldom turn around," Swartz said. "It’s hard to grow a company by downsizing, and that’s pretty much what ends up happening ... They have to prove that they have a plan to deal with the changing retail environment."

When pessimism has infected the sentiment surrounding a brand, extenuating circumstances like poor weather or an abbreviated shopping season will serve as little excuse. A poor holiday performance can be, and often is, the last straw for investors and creditors.

"For Ascena, we’re expecting some form of strategic announcement somewhat soon, and for Pier 1 as well," Tibone said. "The first quarter is when you have the majority of retail bankruptcies, and that’s because they tend to have used the holiday season as a last resort, and if you miss projections or have a lot of extra inventory, then it could be the end."