Retail Defaults Set To Peak But Debt Maturities Signal Bad News Ahead – ValueWalk Premium
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Retail Defaults Set To Peak But Debt Maturities Signal Bad News Ahead

UPDATED 11:41AM EST March 14th by Rupert

2017 was the worst year for retail defaults on record. There were 26 major retail bankruptcies throughout the year, surpassing the previous total of 20 bankruptcies posted in 2008.

2018 has gotten off to a similar start. By the first week of March, three major retailers had filed for Chapter 11 bankruptcy including Bon-Ton Stores, which does nearly $3 billion in sales, The Walking Company, Kiko USA and A'gaci.

Yet more retail defaults should not come as a surprise to retail sector watchers. In a survey conducted in November 2017, 40% of retail executive said they expect bankruptcy filings to increase in 2018 according to consultancy firm BDO.

Cushman & Wakefield supports this view. The firm projects 12,000 retail stores could close in 2018, up from 9,000 last year as at least 25 major retailers collapse. Rating agency S&P Global has issued a similarly concerning forecast cautioning that retail defaults "could match or exceed" those in 2017.

As Retail Dive reports, the S&P research highlights several danger points facing the industry, including approaching debt maturities ($5.6 billion in 2018, $13 billion in 2019 and $18 billion in 2020) the corresponding highly leveraged balance sheets and a shift in consumer spending.

Analysts at Moody's note that public and private retail debt maturities total $14.9 billion from 2018 through 2020 with maturities starting to spike in 2019. While some companies will be able to refinance as "credit markets have remained open to refinancings" those with more challenged credit profiles will struggle especially in an environment when monetary policy is tightening.

Still, according to Moody's figures, it's not all bad. Recently the ranks of issuers rated Caa1 and lower have shrunk from 26 issuers to 20 "roughly where the list stood a year ago" according to the credit rating agency. Granted, two of the issuers have fallen off the list due to bankruptcy but overall the picture is improving for retailers, which "have more recently been showing some signs of improvement."

That being said, Moody's does expect the retail sector default rate to remain elevated for the rest of the year, although the agency expects it to peak in March at 12.43%:

"Our forecast translates to at least six retail & apparel issuers defaulting over the next 12 months, with most of these occurring in the first half of the year. The good news is that the industry default rate is peaking at 12.43% this March. But we caution that the still high forecast for the remainder of 2018 points to more pain before this lower ratings rung in retail stabilizes. Recent defaulters include Tops Markets, which filed for Chapter 11 on February 21, which followed Bon-Ton's filing on February 4. Charlotte Russe and Charming Charlie both defaulted in December, and Claire's has hired restructuring advisors. The Toys “R” Us bankruptcy in September only added to pressures by accentuating potential pressures between vendors and the more stressed retailers."


Updated by The Quantquistador on January 28th 10PM EST


Overall, department stores suffered a tough year in 2017 with continued rapid growth in e-commerce and online shopping habits. However, a key benchmark for the health of retail comes from department store sales performance through the holiday season (November/December). While the figures haven’t been jaw-dropping, considering the overall US market strength on the year,  moderate gains achieved year on year are a pleasant, arguably unexpected, surprise. Pleasant surprise - yes, attention grabbing, not so much.

While recent research from Moody’s may convey a positive sentiment from the results it is hardly reassuring when we look more closely at the numbers. The operating income forecast from the investor services team has improved based on a number of trends that we’ll talk about below. The department store sales subsector is now forecast to report a 6% decline in operating income for the fiscal 2017 year, compared to a previous forecast of a 9% decline. 1 This might be a move in the right direction but it is hardly anything to write home about when we consider that economic growth is forecast at 2-2.3% in 2018 and investors are hoping to bank double digit returns this year in even moderately risky asset classes. 2

Department stores sales – Turning a Corner?

2015 and 2016 brought dismal holiday season sales figures for US department stores, but 2017, buoyed by gains across a number of economic and market conditions has provided a turn up for the books – literally with reported figures demonstrating both revenues and margins performed well into 2017 year end. On the most impressive end of the spectrum, Kohl’s Corporation posted a 6.9% comparable store sales increase for the November/December period.

Efficiency - Key to Survival

US economic and consumer confidence has been firming up, contributing to improved holiday season sales – despite the fact that these stores went into the holiday season with leaner inventories. Efficiency has, and will continue, to be of paramount importance to keep pace with online sector growth and global competition. The shopping environment we live in today is a buyer’s market – with informational advantages held right in the palm of the hand of the consumer via smart phone shopping and comparison searching.


Sector Consolidation

It is a delicate and tricky balance between spending towards developing growth and maintaining margins at levels strong enough to survive. Only those that can successful navigate business resources under these tighter conditions will survive. Therefore, expect to see maintained rates of consolidation in the department store market – with a similar number of physical store closures in 2018 as compared to 2017. Already this year, less than 3 weeks in, and Sears Holdings Corp. has announced a further 103 store closures.1

Investment – Harnessing Resources

Although there will be high numbers of closures, it is unlikely that department stores closures will accelerate in 2018. In line with this improvement in holiday season sales, a number of stores are strategically pivoting their approach in-store in order to capture more online sales themselves.
Physical stores are increasing becoming a part of the overall brand experience, that may eventually lead to final purchase online. Key to success will be increased and higher quality engagement with customers. Investment in this area may turn out to be money well spent as loyalty programs have been proving successful in motivating repeated and loyal transactions from customers in 2017.

1Moody’s Investor Service, 22nd January 2018, Department Stores
2 Federal Reserve,


This series on the Amazon Apocalypse was last updated by "Quant" on 1/21/18 at 6:45PM EST

2017 was not a great year for retail stocks on the whole. With brick-and- mortar retailers facing stiff competition from online stores, 2017 was a record year for closures. Although retail managed to develop some strength from November into year end, don’t expect a straightforward upward return trajectory from retail stocks this year either.

Although the outlook for equities is positive overall – discerning stock picking will make all the difference in 2018. A favourable tax environment (lower rates) combined with continued tailwinds from the end of 2017 signal continued positive momentum through 2018 – at least for the first six months.

Into the second half of 2018 there are more economic sensitivities at play – of which rising interest rates stands out as the most prominent. Wage inflation, one expected outcome from forecasted economic growth for this year, will also impact margins in US retail stocks.

Growth over Value?
Armed with the expectation of a mixed-bag of performance for US retail stocks in 2018 you are probably left wondering where to capture opportunities in this segment. Recent research from UBS highlights that the market overall is showing favour to growth themes over value.

1 Backed by economic arguments, the UBS research forecasts consumption growth of 0.48pp in 2018 followed by 0.47pp in 2019.

Overall retail sales growth, excluding automobiles has delivered annual average growth of 3% since 2013. So a potential consumption led 50bps uplift is certainly nothing to be sniffed at.

More importantly, when 50bps is added to the average hardline company comparison assumption in the same research. It would suggest a further 100 bps of yield in incremental earnings- per- share (EPS).
Headline Risk – Downside Skew
When allocating to the segment keep in mind that headline risk is distinctly skewed to the downside -  Meaning negative news will impact pricing downwards than positive news does upwards. This is a continued trend from the past few years and showed no sign of abating in 2017.

As a clear example, we observed a fast, downward market response in retail stocks when Amazon bought Whole Foods in 2017. On the other hand, when positive news of tax reforms came to light in the same year, the upwards response in retail was slow and, by comparison, suppressed. 1
US retail - Tax Reform Stimulus
Demand will grow in US retail with the implementation of upcoming tax reforms. Specifically, lower tax withholding rates will leave the average household with more money to spend. The new rates come into effect from this January and we can expect the average household to be holding an increased amount of disposable income from as early as next month.

This will boost consumption spending whilst also adding to volatility. US Retail will also benefit from the supply side - with a corporate tax break from 35% to 22%. That is announced in December of the last year2. Which is designed to enhance domestic profitability and hoped to lead to job creation.

Overall, these dynamics point to both improved demand and supply-side factors. Which is combined with upwards momentum for retail stocks into the start of 2018. Keep a close eye on upcoming reports to see whether the Amazon Apocalypse is subsiding. Q4 2017 earnings reports and end-of-year holiday sales figures are set to be released over the next few weeks and may influence the tone for the remainder of 2018.
1 UBS, Global Research 4 January 2018, U.S. Retail 2018 Outlook: Making Retail Great Again?
2 Harvard Business Review,


When looking at the retail panoply, Cowen and Company analyst John Kernan and his team look at the recently enacted tax reform and wonder if it will push the needle to the point middle income wage earners help second and third-tier retail malls. With the sector narrative coming from Wall Street and the media echoing “ the Amazon apocalypse,” will tax and fiscal policy come to the rescue?

What Amazon Apocalypse? Retail sales up the most since the 2008 financial crisis


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