enced only modest income growth. The table in Figure 1
(p. 28), based on data from the Federal Reserve Bank of St.
Louis and the Bureau of Labor Statistics, shows that per
capita disposable income has been largely flat. The two
sharp peaks are the result of the 2008 tax refund, and at
the end of 2012, a spike in sales of capital assets to avoid
the tax increase that went into effect in 2013. Despite
modest economic growth over the past few years, the
compound annual growth rate over the last 10 years has
been approximately 1.1%, a level far below the post-World
War II average of nearly 3%.
In addition, consumers have faced increased costs for
housing, medical care, child care and education, (Figure
2, p. 28).
The combination of stagnant disposable income and
increased costs has made consumers cautious about
spending. Retailers have reported that the outlook is soft
this year. Just 49% of U.S. retail chains said sales at established locations rose in Q2/16 compared to a year earlier,
according to an analysis of 110 companies by research firm
Retail Metrics. That marks the lowest percentage for any
quarter since 2009, when the U.S. was recovering from the
2008 global financial crisis. Sales growth has been stuck in
a 1% to 2% range, according to Retail Metrics, which is in
line with the weak growth in consumer income.
Rise of Internet Retailing
The continued growth in e-commerce, as shown in Figure
3 (left), has also contributed to retail store weakness.
Online retail sales nearly doubled from 2005 to 2014, and
while most retailers have adopted some form of internet
sales platform, analysts say that e-commerce growth has
come at the expense of brick-and-mortar stores. The rise
is expected to continue as sales from mobile phones and
tablets further accelerate the trend away from store sales.
The popularity of online shopping has also contributed
to the decline of shopping malls, which is exacerbated by
the flagging fortunes of the department stores that were
the malls’ traditional anchors. According to a report by
retail analyst Green Street Advisors, Macy’s, Nordstrom,
JCPenney, Sears and other department stores have seen
in-store sales per square foot decline 24% since 2006.
In response, many department stores have announced
plans to close stores in 2017: JCPenney will turn off the
lights at seven locations, Macy’s will close 100 stores > >
Stagnant consumer incomes, explosive growth in online shopping, decreasing popularity of shop- ping malls and changes in consumption patterns
are just a few of the reasons why the retail industry is
struggling. While no single factor can take the blame
for the turbulence in the industry, the combination has
generated stiff headwinds for some retailers and, as a
result, bankruptcy cases are steadily on the rise.
Since 2015, more than 12 retailers have filed for
Chapter 11, including American Apparel (t wice), Eastern
Mountain Sports, Fairway, Pacific Sunwear, Quiksilver,
RadioShack, Sports Authority, Sports Chalet and Wet
Seal. Few of these companies are expected to survive
and reorganize; most have been or will be liquidated.
And despite a generally improving economy, some
observers expect more retail businesses to fail. A recent
report published by Fitch identified seven more retailers
at high risk of default, including Sears, Claire’s, Nine
West, True Religion Apparel, 99 Cents Only, Nebraska
Book Company and Rue21.
Lenders need to understand the market pressures
that retailers face and how to evaluate their own exposure to this increasingly volatile sector. When retailers
seek bankruptcy protection, the results are often bleak.
While the Fitch report showed that most first lien
lenders did not suffer significant losses in bankruptcy,
second lien lenders often did, while unsecured claimants often received little or no distribution. The Fitch
report evidence is consistent with other empirical data;
few retailers survive bankruptcy intact. While some
retailers are sold as operating businesses through bankruptcy sales under §363, retail bankruptcy cases often
lead to liquidations.
Stagnant Consumer Incomes
For most of the past decade, consumers have experi-
Retail Bankruptcy Cases:
A Volatile Sector Faces More Turbulence
BY STEPHEN B. SELBST
It’s no secret that brick-and-mortar retailers are struggling to stay in business. Stephen Selbst examines the
factors that have created the current retail crisis. He explains why Chapter 11 does not effectively give retailers
an opportunity to restructure and suggests avenues that lenders can take to protect themselves from exposure.
Lenders need to understand the market pressures that
retailers face and how to evaluate their own exposure
to this increasingly volatile sector. When retailers seek
bankruptcy protection, the results are often bleak.
S TEPHEN B. SELBS T
Herrick Feinstein LLP