Business

Retail sales are up — but closure and bankruptcies plague giants

Scratch the surface of recent retail sales gains, and you’ll find thousands of shuttered stores and billions in distressed debt underneath.

It seems like a contradiction: Retail sales rose a healthy 5.6 percent in January over the year-ago period, but the industry is convulsing with store closures, bankruptcies and liquidations by major chains — topped off by levels of distressed debt not seen since the Great Recession.

What’s going on? Overall, top-line results mask brick-and-mortar stores’ desperate battle against Amazon, which has radically reshaped American shopping habits with its Prime membership club, which offers rapid shipping of millions of products for a flat annual fee.

To compete, traditional chains are slashing prices while struggling to become omnichannel sellers with products in-store, online or whatever mixture consumers prefer. This battle has been heating up for years, but traditional retail is on the ropes now after online sellers scored a huge holiday-season victory.

“E-commerce acceleration is behind this dichotomy,” said Garrick Brown, vice president of retail research, Americas, at Cushman & Wakefield, adding, “Consumers came through for the holidays, but they really came through for [Amazon Chief Executive] Jeff Bezos.”

More shuttered stores and distress lie ahead. Cushman’s Brown forecasts as many as 5,000 store closures by major chains this year — a 25 percent spike from 2016.

Last month, ratings agency Moody’s Investors Service sounded alarm bells with a report stating that nearly 14 percent of the 19 retail and apparel companies it tracks have debts rated junk or Caa/Ca — the biggest percentage of debt so deeply into junk terrain since 2009. Pressure is rising, with nearly one-third of the $3.7 billion in public debt outstanding held by these chains coming due by the end of 2018.

“It’s going to be a very … challenging year for retail,” said Charles O’Shea, lead author of the Moody’s report.

There are bright spots within the sector — including off-price retailers such as Burlington Stores, which last week reported a 27 percent fourth-quarter earnings increase, while low interest rates will benefit retailers seeking to refinance rapidly maturing debt.

As retail limps into 2017, however, many stores are still recovering from a holiday season marked by deep price cuts that began as early as Nov. 1. These discounts, and omnichannel efforts, didn’t grow the pie, however — they just shifted the timing or channel of revenue. A chart from NPD Group shows zigzagging lines throughout the nine-week season, with an overall sales decline of 1 percent.

“They wanted an earlier holiday and they got it, but earlier doesn’t mean bigger,” said Marshal Cohen, chief industry analyst, retail, at the NPD Group.

Consumers will continue embracing online shopping with its rapid shipping and ultralow prices. The trends shoppers love, however, are squeezing the black ink right out of retail.

“You can always sell a product if you price it a certain way, but the question is, are you making enough money to make it worthwhile? Increasingly, the answer is clearly no,” said Joshua Shapiro, chief US economist at MFR, a financial consulting firm.