The retail apocalypse is having a terrifying impact on one corner of Wall Street

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By Hayley Peterson 

  • Department stores are shutting hundreds of locations, many of which are anchor tenants in malls.
  • When the malls lose such huge tenants, they can wind up defaulting on debt that has been bundled with other mall loans into a bond called a CMBS.
  • Investors are betting against the CMBS like they did before the housing crisis, and shares of mall real-estate investment trusts are also falling fast. Losses on the loans are also causing a pullback in new lending, creating a downward spiral.

One of the biggest waves of retail closures in decades is killing off malls across the US and taking some Wall Street investments with it.

Struggling with online competition, huge retailers like Sears, JCPenney, and Macy’s are closing hundreds of stores that typically anchor malls, meaning they occupy the largest spaces at mall entrances and drive most shopper traffic.

When a big store shuts down, it triggers a chain reaction that can end with the shopping mall being unable to collect enough rent to cover its debts, forcing it to default. By one measure, as many as a third of the malls in the US are at risk of facing this situation.

This has become a nightmare for investors who are expecting to collect on those debts. They own bonds — called commercial mortgage-backed securities, or CMBSs — that are backed by the mall properties’ rents.

Echoes of the housing crisis

If this sounds familiar, that’s because it’s similar to one element of the financial crisis. Back then, mortgage-backed securities, which pooled homeowners’ mortgages into a multitrillion-dollar financial market, were part of the problem. They encouraged risky lending, and together with derivatives on the bonds that were ginned up by Wall Street, they left banks and investors with massive losses that threatened the financial system.

Nobody is predicting anything that dire today, but CMBSs, which Morgan Stanley says account for nearly 10% of the $3.6 trillion commercial real-estate mortgage market, work similarly. They pool debt payments from several malls or other commercial properties and then splice them so that investors can buy the segment and take on the kind of risk they want.

What’s happening in the retail market, though, is worse than anyone who invested in the bonds could’ve imagined a few years ago.

“Malls are hard to turn around once they go downhill,” said Steve Jellinek, vice president of CMBS analytical services for Morningstar Credit Ratings. As a result, many CMBS investments are getting wiped out, and “retail lending has really taken a beating,” he said.

About $48 billion in loans backed by mall properties are at risk of default, according to Morningstar.

Jellinek points to Hudson Valley Mall in Kingston, New York, as an example of the domino effect triggered by a mall’s demise. The mall’s decline was profiled by DeadMalls.com, a site dedicated to dying retail, which says this about its recent history:

“The recent recession and downturn of retail sales as a whole has started to take hold of the mall in rapid succession. Many smaller stores have vacated, and both Buffalo Wild Wings and Friendly’s (a staple since the mall opened) have left. The big blows came when both JCPenney and Macy’s shuttered in 2015 and 2016, respectively. Sears and Target remain as the only major anchors, along with Best Buy and Dick’s, but they have not been enough to draw traffic.”

The mall defaulted on its $49.1 million loan in 2015 and was put into receivership last summer, according to the Daily Freeman, a newspaper based in Kingston. In January, it was sold for $9.4 million, a fraction of the property’s $66 million assessment.

Jellinek says this kind of fire sale is common with distressed mall properties.

“A lot of times, these malls decrease in value so fast,” he said. “There is very little the servicer can do to maintain the value once tenants start leaving.”

The CMBS that backed the property took a hit worth $42 million. In this scenario, the lowest class of bondholders will likely end up empty-handed. It could also affect the second and third classes of investors from the bottom.

It’s not just the debt market that’s taking a hit. Real-estate investment trusts that own the malls are suffering, and investors are being advised to avoid them.

For example, in a lengthy research note discussing the real-estate market, Morgan Stanley identified CBL & Associates as a “highest conviction underweight recommendation,” citing “elevated risk from lease modifications and store closures.”

Markets Insider

CBL was managing the Hudson Valley Mall, a job that required it to find new tenants for the empty space. Its shares are down more than 50% over the past two years.

CMBS heyday

Ten years ago, before the recession, retail investments appeared much rosier, and CMBS loans skyrocketed.

“Lenders were falling over themselves to make loans on mall properties,” and their terms were overly optimistic in expecting revenue to improve, Jellinek said. “When the economy went into the dumpster, cash flow fell, and that led to outsized losses.”

Now, Morningstar expects CMBS lending overall to drop about 15%, from $70 billion last year to $60 billion this year.

Not everyone is suffering. As with the residential-mortgage crisis, some investors, like Jason Mudrick of the $1.6 billion Mudrick Capital Management, have been betting on the decline in CMBS by shorting some securities.

“This is a forever trend,” he told Bloomberg, referring the retail industry’s struggles. “When you think about how things are going to look 10 years from now or 20 years from now, our parents will be dead, our kids will be adults — you think more people are going to be shopping online or less? This is the Amazon effect, and it’s here forever.”

Mike Nudelman

Not all malls are under threat. The industry categorizes malls by their location and the quality of their anchors.

Class A malls — those in wealthy areas with high occupancy rates and upscale anchors such as Nordstrom and Neiman Marcus — are doing fine. But class B malls and those in the C and D territories are at risk of default.

The real-estate research firm Green Street Advisors estimates that 30% of all malls fall under the C and D classifications. That means at least a third of shopping malls are at risk of dying off.

“This year will be the year of retail bankruptcies,” Corali Lopez-Castro, a bankruptcy lawyer, told Business Insider after she attended a recent distressed-investing conference in Palm Beach, Florida. “Retailers are running out of cash, and the dominoes are starting to fall.”

Click here for the original article.

New York City’s high-end restaurants are disappearing

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By John Aldan Byrne

New York City’s higher-end restaurant scene is now experiencing what some national dining chains have been going through for the past year or so — closing the kitchen.

Le Cirque, the tony French restaurant on East 58th Street, has just filed for bankruptcy; the Michelin-starred Public, a 14-year-old Nolita restaurant, will close in the next month or so; and Nick & Toni’s Cafe at Lincoln Center — an offshoot of the famed Hamptons eatery — shuttered earlier this year after 23 years.

“The cost of doing business in the city no longer allows us to operate our business,’’ Nick and Toni’s managing partner Mark Smith told the Web site Eater.

In an industry challenged by changing eating habits, rising labor costs and oversupply, the latest declines locally are also another stark sign of how the average American consumer is tapped out, according to analysts.

Patrons are staying home, or are switching over to fast-food joints, which offer cheaper alternatives and special deals, data shows. And that’s not a good omen for the economy.

Across the nation, more than a dozen restaurant chains with thousands of workers in hundreds of locations have collapsed or filed for bankruptcy in the past year.

Bold-faced names include Bob Evans, Ruby Tuesday’s and Logan’s Road House.

“It is a harbinger of a decline in the economy,” David Rosendorf, a restaurant bankruptcy attorney and food blogger, told The Post.

“The restaurant industry is getting hard hit just like the retail sector, where consumers are pulling in their discretionary spending,” added Rosendorf, a partner at KozyakTropin& Throckmorton in Miami. “It’s a leading indicator of a pending recession.”

While analysts are divided on some of the biggest negatives hurting restaurants — from over-saturation to shifting consumer tastes — none dispute that sales have plunged.

Millennials, many working in the low-wage labor economy, are among the clientele staying home more often. Cowen analyst Andrew Charles, joining a chorus that sees an industry shakeout, with closures and consolidations lasting as long as a decade, says consumer spending pressures are an industry headwind.

“Customers are not coming out in the same numbers,” Rosendorf said. “These restaurant businesses are lucky if they are operating on a 5 percent profit margin.”

Those margins take a lot of work. The industry employs about 14 million Americans, and racks up $710 million in annual sales, about 4 percent of US gross domestic product.

But thousands in the business could see pink slips in the months ahead. In the past 12 months, the total number of US restaurants declined by 2 percent, according to the NPD Group.

And in a bleak admission, it only sees customer growth happening in the fast-food sector this year. Nomura analyst Mark Kalinowski has his only buy rating on McDonald’s.

“To manage growing costs, some full-service restaurants are consolidating jobs, using new technology to analyze and streamline the operations of their businesses, while cutting costs and trying not to reduce the quality of food and service,” said Andrew Rigie, executive director of the NYC Hospitality Alliance.

Unfortunately, added Rigie, “there’s no magic recipe for success” in the restaurant industry.

Click here for the original article.

State, former healthcare provider agree to settle suit over prisoners’ untreated hernias

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About 1,800 current and former Florida prison inmates who were denied medical care for hernias will be entitled to divide $1.7 million in damages from a class-action lawsuit under a conditional settlement agreed to by the Department of Corrections and its former prison health-care provider, Corizon, and filed in federal court in Tallahassee last week.

Click here to read the full article.

For Only $130 a Month, You Could Lease an Entire Office Inside a Virtually Empty Staples

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By Lindsay Rittenhouse

Staples (SPLS) is testing a venture that could help it draw interest and traffic to its diminishing office supplies stores.

In September, Staples partnered with Massachusetts operator of co-working space Workbar, to bring offices, reservable conference rooms, private phone rooms and free onsite parking, plus unlimited coffee as the retailer pointed out, to monthly members at a cost of $130. The spaces are only available at three Staples stores located near Boston so far.

A Staples spokeswoman declined to comment on future endeavors.

The membership provides users with two hours of reservable room usage and two days use of 15 other Workbar spaces in Massachusetts. For an additional $100 a month, members receive 10 hours of reservable room usage, an extra $40 gets members mail service and another $40 provides locker space, according to Staples.

Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group, said the move is likely a ploy by Staples to gain foot traffic, as strategically the Workbar spaces are located in the back of the stores, forcing members to walk down the aisles of pens and notebooks before arriving at their destination.

“It’s the same reason milk is placed at the back of supermarkets,” Lopez-Castro said. “You have to walk through the whole supermarket before [reaching the common food item].”

A Workbar room in Staples.

The move comes amid years of slowing sales at Staples. Like many retailers, the company is planning for massive store closures this year.

Last year, Staples shuttered 48 stores in North America and plans to close an additional 70 this year after facing another weak year.

Staples’s revenue slipped 3% to $18.2 billion in 2016, missing Wall Street’s estimates for $20.25 billion, while comparable store sales fell 1%.

“Retailers are getting battered in this marketplace and it calls for creative solutions,” Lopez-Castro said, likening Staples’ venture to athletic apparel retailer Nike (NKE) opening a basketball court in its 55,000-square-foot New York City store and fashion discounter Urban Outfitters (URBN) purchasing pizzerias in cities including Philadelphia and New York.

It’s about “creating an experience,” a “plan B,” in case their retail stores go down the tubes, she said.

Click here for the original article.

cleveland

Sears warranties could be worthless if company files bankruptcy: Money Matters

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By Teresa Dixon Murray

Q: Now that Sears seems to be warning it could file bankruptcy, I’m wondering what could happen to my extended warranties on the appliances I’ve bought from Sears? I bought a new refrigerator, stove and dishwasher last year and also purchased extended warranties. If Sears goes out of business, who would honor those warranties?

S.S., Westlake

A: It is a bit unsettling that so many retailers that have existed for generations are having serious financial problems today. It’s no shock that Sears, which also owns Kmart and has been closing chunks of stores for years, announced it’s closing more stores this year.

But the sucker-punch last week was Sears’ warning that its end could be near. “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” the company said in a statement, adding it hopes to “unlock value” from a range of assets, and that could mitigate the problems.

It needs to cut costs, borrow money and raise money by selling assets. Sears said if this current path continues — its debt has increased from $3 billion to $4 billion — then the company’s future is bleak. It lost $2 billion in the most recent fiscal year and it hasn’t been profitable since 2010. Sears was once the nation’s largest retailer.

While it sold its Craftsman brand of tools in January to Black & Decker, it can’t sell everything because it will need some assets to cover pension plans. But Sears may yet sell its Kenmore appliance brand and Diehard automotive brand.

Miami bankruptcy expert Corali Lopez-Castro said it’s not a good time to be holding a warranty bought through Sears.

“The warranties could be a very big problem,” said Lopez-Castro, an attorney with KozyakTropin& Throckmorton, who specializes in bankruptcy, creditors’ rights and commercial litigation matters.

Sears is pushing back on that.

If Sears does file for bankruptcy, it may sell its appliance division to a third party,  Lopez-Castro said. The key would be whether the third party would honor the warranties.

There’s reason to think the new buyer would indeed honor the warranties as a goodwill gesture and to hold on to customer loyalty, she said. But the buyer wouldn’t necessarily be forced to honor the warranties.

If the third party didn’t want to honor the warranties, those would become unsecured claims that would take a place in line behind suppliers and other creditors.

“We are a leader in the service contracts industry and proudly stand behind our product,” Howard Riefs, director of corporate communications, said in a statement. “Sears, as well as any other company that legally sells service contracts, is required to meet regulatory requirements designed to provide adequate resources to fulfill service contracts into the future. We will fulfill our commitment to our customers and members.”

On a another issue, Sears’ rewards through its Shop Your Way program, Lopez-Castro urged consumers to use their points as soon as possible. “You should redeem them sooner rather than later. You may not be able to later,” she said. “We just don’t know how long the runway is for Sears.”

I’d urge the same warning about gift cards. Use ’em soon. Who knows what happens to Sears gift cards if the company goes under.

How far has Sears fallen? A decade ago, Sears had 3,400 stores in the United States. Now, it has 1,400. In 2006, it had 355,000 employees. Now, it has 140,000. The latest round of store closings nationwide including locations at Richmond Mall in Richmond Heights and Chapel Hill Mall in Akron.

Sears, of course, isn’t the only retailer that’s hurting. Macy’s and J.C. Penney have been closing stores for years. Others announcing closings this year: The Limited, CVS, H.H. Gregg, Abercrombie & Fitch, Radio Shack, Payless Shoes and Office Depot.

Click here for the original article.

Don’t Write That Mall Obit Yet

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By Caletha Crawford

The litany of recent store closures reads like a who’s who of once beloved retailers. Whether to bankruptcy or restructuring, hundreds of doors have been—or are already slated to be—on the chopping block.

What’s a mall owner to do?

There’s been lots of talk about of how malls can transform from retail destinations to more lucrative—and one hopes—secure lifestyle centers, but at the rate doors are shuttering, they’ll have to move at the speed of Superman’s Clark Kent.

For mall owners who have seen the writing on the walls, the pivot is already underway. In the meantime, they’ll deal with the broken leases and legal maneuvering that follow each new harrowing headline.

Dealing with delinquents

While consumers might be surprised to learn their favorite store is “suddenly” going under, malls are rarely caught off guard, said Jasmin Yang, an associate attorney at Los Angeles-based law firm Snell & Wilmer. Often, struggling stores are already on the landlord’s radar, and they get away with it to avoid a mall corridor pocked with darkened doors.

“A lot of times, even before a bankruptcy, they haven’t been paying rent for a long time,” said Yang, who handles bankruptcy-related actions. “[Mall owners] don’t like to have empty store fronts, so they’ll wait to pull the trigger. They’d rather have the mall busy, full and lively, even if [tenants] are two years behind on their rent.”

While the property owner may turn a blind eye in some cases, others prompt a round of “Let’s Make a Deal,” in which the landlord has to decide how much its worth to them to trade off revenue from one store for the good of the entire mall.

“You’ll see malls where a tenant has switched from a base rent to a percentage of sales rent,” said Edward Dittmer, vice president, CMBS, Morningstar Credit Ratings, adding modifications like that would be negotiated for a specific period of time to give the store a little relief.

But olive branches like those are reserved for viable businesses. If that delinquent store ends up throwing in the towel, the mall now has the dreaded empty spot on top of years of missed rent.

That’s why Corali Lopez-Castro, a bankruptcy and commercial litigation attorney for Kozyak Tropin Throckmorton in Coral Gables, Florida, advises her clients to be proactive.

“Always enforce your rights,” she said. “I would start eviction proceedings immediately, and I would try to get a judgment of eviction as possible because once the rights under that lease have been terminated, you cannot get them extended in bankruptcy. The squeaky wheel gets the grease so it’s in their favor.”

In Corali-Lopez’s experience, once a retailer starts a downward spiral, the situation rarely recovers.

One reason not to hold on till the bitter end is that if the store files for bankruptcy, the landlord is lucky to collect “pennies on the dollar” for back rent, according to Yang.

A filing doesn’t necessarily mean the storefronts will close immediately. After a store files, they have the option of assuming (continuing) or rejecting (terminating) a lease. If they decide to assume it, they have to play by the rules from that point forward.

“In bankruptcy, you have to pay rent as you go,” Lopez-Castro said. Otherwise, she said, rent becomes an administrative claim, which has a higher legal priority.

This difference in status between pre-bankruptcy and post-bankruptcy rent claims is one reason why a landlord might push a tenant to decide to assume or reject as quickly as possible.

“Historically people would ask for multiple extensions and have years to decide if they were going to keep or reject a lease,” Lopez-Castro said. “Now, those decisions are made much more quickly.”

Breaking the mold

A property owner may hope the store rejects the lease because it frees them up to pursue other options.

Owners that have “B” malls may feel a bit more handcuffed to their ailing tenant but “A” mall owners are likely to feel liberated due to a long list of would-be suitors.

“If it’s a desirable location, and [the tenant] wants to bargain on the rent, you can reject the lease because you have two or three other tenants that want it,” said Joe Bell, director of corporate communications for Cafaro Company, which operates more than 43 locations.

Bell said Cafaro stays in communication with companies looking for space in its properties so as soon as a vacancy opens up, it already has the right new tenant lined up. “It’s like a game of chess,” he said.

And these days, property owners are making the first move. “They’re not waiting for the Sears to close its store before they start looking at new tenants. If they find a new tenant, maybe they won’t renew Sears’ lease because they think that tenant will bring in more traffic and money for the mall,” Dittmer said, by way of example.

“They’re going after tenants that have an entertainment component and dining seems to be a big thing. Those all add to the appeal because you can go buy a few things, stop for a nice dinner and then you can go home. If you think about your customer as a lifestyle consumer as opposed to a retail consumer, I think that’s the right mindset.”

Dittmer said in-demand businesses are those like Dave & Busters, Legoland Discovery Center and a Sea Life Aquarium—all places where families flock to entertain the kids. And, while they’re there, they’ll often stop to eat or shop.

The holy grail of tenants, according to Dittmer? “If everybody could have a Cheesecake Factory, they’d probably put one in there. Obviously every mall owner would love to have an Apple store because of how high Apple sales are on a per square foot basis.”

But it doesn’t have to be marquee brands like those, Bell said. His company replaced a space once occupied by Sears with a Planet Fitness and a trampoline park. In another large space, Cafaro had luck with a technical training school. Though it might not sound like an ideal fit for the stores in the mall, it paid off. “Suddenly you have a couple hundred students who were on the property every day who needed to go get lunch, wanted to shop, wanted to hang out with their friends, so that provided a new source of customers,” he said.

Of course these days, any tenant could turn out to be a bad bet. If nothing else, the recent retail upheaval has taught landlords to be more savvy.

In addition to staying on top of accounts receivable, Lopez-Castro said landlords need to limit their exposure. “Landlords are now requiring a letter of credit to protect themselves,” she said, allowing property owners to guarantee they’ll get paid even if there’s a bankruptcy.

Yang suggested malls consider shorter durations for their leasing agreements, enabling property owners to be more agile.

Bell advised mall owners to consider all angles before signing a new tenant. Just because a business comes in waving money around, it won’t matter if it flames out tomorrow.

Ultimately, he said, malls are surviving—and even thriving—by focusing on the future.

“We’re keeping a close eye on the experiences and services that our customers want to see, and the next thing coming down the road,” Bell said.

Click here for the original article.

Here’s what will happen to your Sears warranty if the company goes bankrupt

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By Hayley Peterson

Albert Barrera of Odessa, Texas, walked into a Sears store recently with a pressing question for the manager: “If Sears closes, who will service my refrigerator?”

Barrera had bought a Kenmore refrigerator for $529 several months earlier, and along with it, he purchased a three-year service warranty that cost $229 — almost half as much as the refrigerator.

Now he’s worried that Sears could go out of business and that his warranty will be canceled as a result. He says the store manager failed to alleviate his fears.

“He had no answer for me and assured me he had not heard of them shutting down at all, which I highly doubt,” Barrera told Business Insider.

Barrera is in the same boat as countless other customers.

Sears has long been a top seller of home appliances in the US, and with those appliances, the retailer has sold countless warranties.

But within the last decade, Sears’ sales have plunged and now speculation is growing that the company could go bankrupt.

That has left many customers like Barrera wondering: what will happen to my Sears warranty?

According to bankruptcy lawyer Corali Lopez-Castro, there’s a possibility warranties would be dissolved in the event of a Sears bankruptcy.

“The warranties are going to be a huge issue,” Lopez-Castro, a partner at the Florida-based law firm KozyakTropin& Throckmorton, told Business Insider. “There’s a real risk that they will not be honored.”

She said gift cards and rewards points earned through Sears’ Shop Your Way loyalty program could also be erased.

“I would advise customers to redeem their points now,” she said.

If Sears filed for bankruptcy protection, the fate of its warranties and rewards points would be decided in court.

Sears would have a lot of creditors to pay — including its suppliers — before customers and their outstanding warranties and loyalty points would be considered, she said.

Filing for bankruptcy protection allows companies to reorganize by restructuring their debts or selling assets to try and stay in operation.

When the sporting goods retailer Sports Authority filed for bankruptcy last year, the company petitioned a judge to allow it to honor its gift cards and loyalty points throughout the restructuring process.

Eventually, the company went out of business and the value of unused gift cards was lost.

Lopez-Castro believes a similar fate awaits Sears if it files for bankruptcy because the underlying retail business is ailing.

The company’s sales have fallen nearly 40% in the last five years.

“It’s not just about deleveraging their balance sheet,” she said. “You have to actually deal with the operations, which is a much bigger problem.”

Sears raised fears about a possible bankruptcy this week after it said in a filing that there’s “substantial doubt” about its ability to stay in business.

The company’s chief financial officer, Jason Hollar, later tried to reassure investors in a blog post saying the company remains focused on meeting its financial obligations.

“We are a viable business that can meet its financial and other obligations for the foreseeable future,” he said.

Click here for the original article.

Amazon Is Causing Catastrophe by Being the Most Disruptive Force in Retail and Technology Today

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There’s seemingly no end to what Amazon can do.

By Lindsay Rittenhouse

 It’s no secret that Amazon (AMZN) is upending retail, with a new bankruptcy filing or store closure announcement coming nearly every day since the beginning of March from traffic starved bricks-and-mortar retailers.

And the digital beast is showing no signs of letting up.

As KeyBanc Capital Markets pointed out in a Wednesday research note, Amazon is continuing to add new private-label brands. Nine of the 14 brands Amazon now offers are exclusive to Prime members. A Prime membership costs $99 a year.

“Amazon is one of the most disruptive forces in retail and technology today,” KeyBanc analyst Edward Yruma said in the note. “We think it will continue to take market share and also benefit as total share accorded to e-commerce continues to grow.”

Amazon’s fashion lines that are exclusive to Prime members include Amazon Essentials, its men’s and women’s basic apparel; Buttoned Down, its men’s dress shirts and Ella Moon, its line of women’s bohemian-style casual clothes. Its fashion lines available to all include Franklin & Freeman, which offers men’s dress shoes; mae, its line of women’s intimate apparel and Society New York, its line of women’s dresses and handbags, according to KeyBanc.

Yruma told TheStreet that the retailers likely to be the most negatively impacted by Amazon’s fashion lines are not Kohl’s (KSS) or J.C. Penney (JCP) but rather Macy’s (M) and specialty stores. Macy’s is already feeling the pressure, along with 13 other specialty and department store retailers planning for massive store closures.

In the KeyBanc note, Yruma specifically highlighted mae, which sells women’s bralettes and panties ranging in price from $16 to $34.50, as a threat to L Brands  (LB) , the parent company of Victoria’s Secret.

But, as TheStreet reported, selling lingerie may prove to be difficult to do online as sizing becomes a major issue.

“Yes, the initial fitting is ideal at a store,” Yruma told TheStreet. However, he called Amazon’s line of intimates “replenishment” items, which means once women know the fit they need, they may opt to quickly order a bra, for example, online on the second or third purchase.

“The one issue Amazon is grappling with is that fashion is an emotional purchase,” Yruma said.

Right now, Victoria’s Secret “has done a masterful job” linking its lingerie to its brand, he said. But, as Amazon continues to expand its private-label offerings, he expects it to gain recognition, as well.

In January, it was reported that Amazon is preparing to launch an athletic apparel line to compete with the likes of Under Armour (UA) , Nike (NKE) and LululemonAthletica (LULU) , as well.

If Amazon doesn’t slow down soon, retail will be left completely in the dust.

Corali Lopez-Castro, partner at Kozyak Tropin & Throckmorton’s bankruptcy and commercial litigation practice group, said in a interview that she expects retail bankruptcy filings in 2017 to continue at a pace of more than one a month.

Just in the past few weeks, Wall Street saw bankruptcy filings from sporting goods retailer Gander Mountain, RadioShack successor General Wireless Operations, everyday value price department store operator Gordmans Stores (GMAN)  and appliances, electronics and furniture retailer HHGregg (HGG) . Last Wednesday, children’s apparel retailer Gymboree cautioned that it was low on cash and may not survive.

“It’s a catastrophe,” Lopez-Castro said. “It’s hitting every single segment.”

Click here for the original article.

The Gazette

Fashion brands go out of style faster

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Lower mall foot traffic, online hurt bricks-and-mortar

American Apparel bit the dust. So did Nasty Gal. BCBG Max Azria filed for bankruptcy as did teen retailer Wet Seal.

The fashion industry long has been a fickle beast, with trends rising and dying sometimes in the space of weeks. But changing consumer habits — including the emergence of e-commerce and the decline of traffic at many malls — is further shortening the life cycle for many fashion brands, analysts said.

“Thirty years ago, you didn’t have to adapt as fast,” said Ron Friedman, a retail expert at accounting and advisory business Marcum. “The retail environment is completely going through a revolution. Your normal brick-and-mortars are restructuring. Brands are going out of style.”

Faced with seismic changes, bankruptcies in the retail sector have been on the rise. In 2012, three retail companies with liabilities of $50 million or more filed for bankruptcy, according to a study by consulting firm AlixPartners.

Eight retail bankruptcies occurred in 2014, a number that was reached just six months into 2015, the last year analyzed in the study — although that still pales in comparison to 20 bankruptcies in 2008 during the height of the recession.

To be sure, once-hot brands faded away with nary a whimper before the digital age — Robert Hall in the 1970s, Rogers Peet in the 1980s and Merry-Go-Round in the 1990s.

But the web has been a double-edged sword for fashion brands, both a way to reach a worldwide audience for their wares, while also serving as a giant emporium where shoppers can click to a rival site in seconds.

“There’s a perfect storm now,” said Corali Lopez-Castro, a partner at KozyakTropin and Throckmorton who has handled retail bankruptcies. “I don’t know if many retailers can adjust.”

Some retailers have stumbled, including a number of southern California brands. It’s a region that already has been hard-hit by a decline in garment manufacturing — and as home for many casual brands, is especially susceptible to the rise of fast fashion.

BCBG concedes its failure to harness the web contributed to its downfall. The Los Angeles company said e-commerce sales made up only “a small proportion” of its overall business, according to bankruptcy documents.

The rise of fast-fashion rivals also has shortened the attention span of consumers. Before H&M and Zara came on the scene, retailers that had a lackluster season could course-correct a few months down the line — knowing shoppers probably would come back to browse while strolling their local mall.

But now shoppers can hop online or go to fast-fashion stores that introduce fresh fashions on a weekly basis.

“If you are a fashion apparel retailer, you have to have a steady flow of newness,” said Craig Johnson, president of Customer Growth Partners. “You can’t just regurgitate what was hot last year.”

At the same time, consumers are spending a diminishing chunk of their income on clothing, opting to shell out for electronics or experiences instead. Less than 4 percent of every dollar is now spent on buying apparel, Johnson said, compared with 8 percent in the mid-1990s and 20 percent a century ago.

Since 2005, 55 percent of retailers that have filed for bankruptcy have ultimately liquidated their business, compared with 5 percent of bankruptcies in other industries, the AlixPartners survey said.

This year is expected to be another big year for bankruptcies.

“You’re going to see one every single month in 2017,” Lopez-Castro said. “Once you lose a customer, it’s very hard to get that customer back.”

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Sears Has Finally Admitted That It’s Almost Dead

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By Brian Sozzi

 Kudos to Sears Holdings Corp. (SHLD) for finally admitting what everyone already knew: it’s almost dead.

As TheStreet broke the news on Twitter Tuesday evening, Sears indicated in its newly filed annual report that “substantial doubt exists related to the company’s ability to continue as a going concern.” For those clickbait-loving headline writers out there with no financial services training: what Sears essentially said is that yes, it’s unsure if it could stay in business. Well, duh.

Sears’ cash position has melted from a high point of $1.7 billion for the 2009 calendar year to a mere $286 million to close out 2016. Revenue hasn’t grown since the credit boom lifted all ships in retail in 2006. The company hasn’t generated cash flow from its operations since 2006. “With negative news like this, it’s never good for confidence on the company,” Moody’s VP Christina Boni told TheStreet. Earlier this year, Moody’s downgraded its credit rating on Sears to Caa2 from Caa1. The downgrade reflected the accelerating negative sales performance of Sears’ business and risk of possible default.

There are a probably zillion other horrible sounding stats floating around in the Bloomberg terminal, but they all point to the same conclusion that the company is a dead man walking. The seriousness of Sears’ disclosure must not be downplayed. For if Sears raises more cash from high yield debt issuance (always a favorite move from retailers on the verge of dying), the market will still go back to the statement and reason Sears is still doomed. If Sears sellsmore assets such as land or the Kenmore brand, the market still won’t believe it can continue as a going concern.

In effect, Sears has admitted that its current asset base is worth less than its ridiculous comments made in recent years (you should see the zombie properties out there for sale in rural America). Moreover, it has admitted that no matter what it does, such as deliver on the $1 billion in recent cost cuts it has promised, the business will still likely die.

Believe it nor not, there are remaining delusional Sears fans out there that believe the company is sitting on amazing land holdings that are worth billions of dollars. Take this email I received on Tuesday from an analyst that works for a firm that holds Sears shares.

“I often read your articles with amusement because I think they are so far off. But after reading the last one on Target, had to at least respond. You are totally off and Target (TGT) setting up shop there is AWESOME news for the box at Penn Plaza and value, if only you looked at this on asset value and stopped looking at this from the traditional lens of a failed retailer which it surely is.”

I hear you, my man. Listen, I have covered the death of Sears going on 10 years now. The asset values have never lived up to their hype. Meanwhile, the operations have performed worse than anyone’s already low expectations. Bottom line: On March 21, 2017 the once-iconic Sears declared itself dead.

“The blood bath continues,” Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group, told TheStreet.

“Is this new? No,” Lopez-Castro said. “The fact that they put it into writing is scary.”

When asked when she expects we will see a bankruptcy filing from Sears, she said she’s not sure because it will avoid it at all costs.

“Depends, I would want to know what their vendors are insisting upon,” Lopez-Castro said. “When you go into bankruptcy, you lose control. And no company wants to lose control.”

For the record, Lopez-Castro doesn’t believe Sears can get out of its current dire situation without filing for insolvency. If, or when, the retailer does, she said it will likely tap Kirkland & Ellis for debtor counsel.

Shares of Sears finished the session lower by 12.3% to $7.98.

Read These or It’s Your Loss

A great day for drinking could be canceled: A South Philadelphia Cinco de Mayo festival has been canceled thanks to high tensions around Trump’s stance on immigration, The Christian Science Monitor reports. One should expect more of these cancellations to pop up in coming weeks. Sucks for beer makers such as Boston Beer Company (SAM) and liquor purveyor Diageo (DEO) .

Here’s your sign the tech bubble is overdue to pop: The salaries for those in the tech industry are getting out of hand, a factor that could keep profits below market expectations this year for startups and some less than top-tier publicly traded Nasdaq Composite names. Oddly, $250,000 entry-level coder jobs aren’t enough to cover the rent in the red-hot real estate market that is San Francisco, which is home to many tech companies. Zapier, a workflow automation company, said that it’s offering new hires in the Bay Area $10,000 to help them “delocate”, or move out of the paycheck-zapping Bay Area, reports The Christian Science Monitor.

Here’s how to play rising confidence in Asia: Business sentiment at Asia’s top companies advanced to its highest in nearly two years in the first quarter of 2017, according to a new survey from Thomson Reuters/INSEAD. TheStreet reveals 12 companies that could benefit from improving economic conditions in China.

Bye-bye Howard Schultz: Wednesday marks the final shareholder meeting (I am betting that at some point he will return, again) for Action Alerts PLUS charity portfolio holding Starbucks’ (SBUX) Howard Schultz as CEO. Obviously, Schultz has had one hell of a career. TheStreet runs down Schultz’ top accomplishments through the years.

Nike (NKE) shares get whacked on solid quarter: Shares of Nike are plunging on Wednesday following a slight quarterly sales miss and a plunge in gross profit margins. But, as TheStreet reports, Nike had one of the most upbeat conference calls in recent memory (at least the past year). With the company picking up the pace of innovation, the pullback may represent a good buying opportunity.

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