After months of slowing restructuring activity, the retail sector may face a wave of bankruptcies.

Experts expect an increase in distressed retailers this year. Shops face high inventory levels and the potential for a recession due to decreased demand.

Revlon is a cosmetics company dating back to 1990. Revlon was the first household-facing brand to file Chapter 11 bankruptcy protection in several months.

Which retailer will it be next?

Perry Mandarino is cohead of investment banking at B. Riley Securities and head for corporate restructuring. He said that retail is changing.

Between 2021 and 2022, the industry saw a sharp drop in the number of restructurings as companies (including those on bankruptcy watchlists), received fiscal stimulus relief. Crew and Neiman Marcus filed bankruptcy.

According to S&P Global Market Intelligence Revlon, this filing is one of four in retail bankruptcy filings. This is the lowest number that the firm has ever registered in the last 12 years.

Although it’s not clear when this number will increase, restructuring experts say they are prepared for more problems in this sector as the holiday season approaches.

Fitch Ratings determined that Serta Simmons and Anastasia Beverly Hills cosmetics, Rodan & Fields and Rodan & Fields were the most at-risk retail and consumer companies.

Sally Henry, a Texas Tech Law School professor and ex-partner at Skadden, Arps, Slate, Meagher & Flom LLP, said that there is “potentially a perfect thunderstorm brewing.” “I wouldn’t be surprised to see a rise in retail bankruptcies.”

Over the years, advisors involved in retail bankruptcy proceedings believe that there shouldn’t been any disruption to this industry.

Riveron’s managing director and retail practice lead Spencer Ware stated that there would be more restructuring in 2020.

A shift in consumer behavior can make it more unpredictable. While wealthy consumers spend more luxury goods but earn less, they are still more affluent.

Steve Zelin is a partner at PJT Partners and the global head of restructuring, special circumstance, and group. He stated, “We are at a stage where we can forecast the next step much harder.” There are many variables.

Recent retail sales data shows that consumers are suffering the most severe declines. Month-over-month, there were declines at electronics and appliances shops, furniture and home furnishings shops and chains of health-care-care providers.

Marshal Cohen, chief retail industry advisor at NPD Group (a market research firm), stated that consumers are not only shopping less but also purchasing less.

NPD Group released a May survey showing that consumers purchased 6% less products at the retail store in the first three quarters 2022 than in the first quarter 2021.

It is difficult to keep up the increasing rates

Retailers are now looking to tap the debt market to speed up their plans to increase rates. Last Wednesday, the Federal Reserve raised benchmark interest rates by three quarters inch. This was its largest hike since 1994.

Riveron’s Ware stated that businesses were trying to keep pace with future rate increases.

Ware stated that he has noticed a decline in refinancing activity over the past 12 months, with more deals being cancelled and pulled.

Revlon avoided bankruptcy in 2020 by convincing bondholders it was necessary for them to extend maturing debt. Revlon went bankrupt two years later because of heavy debts that prevented it from fulfilling all orders.

According to David Berliner, chief of BDO’s business restructuring and turnaround processes, retailers with high levels of debt are most at-risk.

He said that back-to school shopping season could cause more distress. People might need to tighten up their belts.

UBS did a survey in the earlier months and found that 39% Americans plan to spend more on back-school this year than they did the previous year . This is down from the 2021 figure

Berliner stated that consumers are becoming more frugal with their money. It is too soon to know when this will occur.

Berliner stated that he monitors consumer debt levels which are at an all-time high.

He said that consumers are willing and able to pay for mortgages or credit cards.

Berliner stated that retailers may be forced to file for bankruptcy sooner if consumer spending slows. Berliner stated that companies would share the pain with consumers if they could afford to pay their debts at an acceptable pace, and that this would decrease the number of bankruptcy petitions.

Berliner stated that small retailers, especially mom and pop shops with less resources, will feel the most adverse effects from difficult times.

Check inventory levels

These could lead to bigger problems, so bankruptcy advisors should be aware of rising inventory levels. Kohl’s, Abercrombie & Fitch and Gap recently stated that they had too many product because shipments arrived late.

Target announced earlier in the month that they would cancel and mark down certain orders to eliminate unneeded merchandise. Joseph Malfitano of Malfitano Partners confirmed that.

Malfitano said that retailers’ profit margins could shrink while inventories are repaid. This is a common practice in the industry.

Malfitano stated that some retailers could cancel orders in order to avoid inventory bubbles. This will affect their margins.

He stated, “You’ll face more problems in 2023.”

Ian Fredericks of Hilco Global’s Retail Business stated that retail bankruptcies won’t increase until 2023.

He said that retailers do not face financial difficulties because they have liquidity. He said that retailers have liquidity, which includes cash on their balances as well as an undrawn revolver.

Holiday season is an important time in the retail calendar. It’s also a critical time for businesses to make a profit.

Fredericks stated that he doesn’t see any holiday spending season.

Mandarino is B. Riley Securities’ Mandarino. This suggests that an additional result of an economic slowdown could be an increase in M&A activity within the retail sector.

Smaller retailers may be more financially secure than larger ones. This could mean that they are willing to buy smaller brands at lower prices. Mandarino stated that they would employ this strategy to increase revenue, even if it meant that sales had to be cut.

He said that apparel, department stores and home goods will be under the most pressure over the next few months.

In recent quarters, Bed Bath & Beyond’s banner has performed poorly. An activist asked the retailer to sell its Buybuy Baby Chain, which many consider a more important part of the business.

Mandarino stated, “It is a buyers market.” “Growth won’t come organically if consumers are spending less or there’s a recession.”