The Traits That Will Pull Retailers Out of Chapter 11

Real Estate

During the pandemic, news of large retailers filing for bankruptcy protection seems like it’s a weekly occurrence. 

Some of these companies have a better chance to emerge from bankruptcy than others, according to Megan Murray, a founding shareholder of Underwood Murray. She has nearly twenty years of reorganization and workout experience.

“From a financial perspective, a company that has already been able to shed some of its more burdensome debt or recapitalized in some way has a better chance,” Murray says. “Part of Stein Mart’s [the Florida-based retailer that petitioned for Chapter 11] issue was that it just had leases and didn’t have real estate holdings.”

On the other hand, Murray says JC Penny is “doing some interesting things” by selling its real estate. “I think that they’re getting a little creative with their real estate and trying to be more of a real estate company now than a retailer,” she says.

Companies like J Crew have found success by rejecting a lot of their leases. “If you don’t have that high lease expense and you’ve already shed that once through Chapter 11, you might be more able to weather this storm,” Murray says.

Above all, companies need to have a plan before going into bankruptcy. For instance, Murray thinks the Ascena Retail Group, the operator of clothing chains Ann Taylor and Lane Bryant, which filed for Chapter 11 bankruptcy in July, has charted a viable way forward.

“I think that the Ascena Retail Group seems to have a plan at least,” Murray says. “They’ve got different brands too. Companies that have different brands can capitalize on getting rid of some and repositioning others. That might give them a better chance at reorganizing.”

Going beyond handicapping the winners and losers in bankruptcy, Murray likes certain types of companies more than others during COVID. She thinks stores that provide home goods and home improvements, such as Wayfair and Home Depot, and online and in-person pet stores have a better chance of survival. “People are spending more time at home with their pets,” Murray says. “Chewy is going to be just fine.”

Having a retail infrastructure that can help weather the COVID shutdowns and social distancing can help companies regardless of whether they’re in bankruptcy.

“I think you have to have some kind of online presence to supplement the lack of foot traffic,” Murray says. “Having some online presence is going to help keep the flow [of revenue] coming in.”

But having a robust online retail platform doesn’t guarantee success. “One of Stein Mart’s problems is that they didn’t have a strong distribution platform,” Murray says. “But, interestingly, Pier One, which didn’t make it, had a stronger retail platform.”

Murray thinks entrance into the physical store also plays a role in success. “Having an exterior entrance point also helps,” she says. “If you’ve got to go through a food court to enter a store, I think that store may struggle.”

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