Over at Bloomberg, there’s an interesting article on what’s driving the retail apocalypse. If you haven’t heard, brick-and-mortar stores across the US are struggling to stay open. J. Crew and Ralph Lauren have seen a dramatic decline in profits; Radio Shack, The Limited, and Toys “R” Us are among the nineteen retail bankruptcies this year; Urban Outfitters say they’re overextended; and malls all over the country are becoming ghost towns. It’s a strange phenomenon given that the economy is growing and consumer confidence is at a decade-long high – signs that retail should be booming, not shrinking.
Bloomberg has an interesting take on the issue that goes beyond the usual culprits involving the internet and Millennials. According to them, this is about debt. An excerpt:
The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.
The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.
Making matters more difficult is the explosive amount of risky debt owed by retail coming due over the next five years. Several companies are like teen-jewelry chain Claire’s Stores Inc., a 2007 leveraged buyout owned by private-equity firm Apollo Global Management LLC, which has $2 billion in borrowings starting to mature in 2019 and still has 1,600 stores in North America.
Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data.
Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.
Worth noting that J. Crew owes a whopping $2.1 billion, which many worry will break the retailer once the debt comes due in a few years. David Dayen also had a piece yesterday in The New Republic, arguing that policymakers need to do something before eight million Americans find themselves without a job. Retailers aren’t able to turn things around by themselves. When Toys “R” Us filed for bankruptcy this year, the company’s profitability was actually increasing.