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Retail Apocalypse

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Less than two months after reopening, Regal Theaters will shut down all 536 of its locations on Thursday (Oct. 8).

The company said the closures reflect “an increasingly challenging theatrical landscape” due to the coronavirus pandemic.  Regal says the closures are temporary, but the company has not set a date to reopen.

The shutdown reflects broader problems in the retail marketplace that have been exacerbated by COVID-19 and stabs another knife in the narrative of a quick economic recovery.

The Regal shutdown will result in layoffs for 40,000 employees.

Regal is a subsidiary of UK-based Cineworld Group and ranks as the second-largest theater chain in the US after AMC.

Hollywood has exacerbated the problems for movie theaters. Studios have delayed dozens of big releases over the past six months.

The prolonged closures have had a detrimental impact on the release slate for the rest of the year, and, in turn, our ability to supply our customers with the lineup of blockbusters they’ve come to expect from us,” Cineworld CEO Mooky Greidinger said in a statement. “As such, it is simply impossible to continue operations in our primary markets.”

The retail sector – particularly brick and mortar companies – was struggling before the coronavirus pandemic. The government shutdowns in response to COVID-19 has sent it into a freefall.

Retail companies are going bankrupt at a record pace. Financial advisor BDO released an overview of US retail bankruptcies and store closures through the first half of 2020. It concludes that the pandemic has exacerbated the problems already plaguing the sector.

Government-mandated store closures, social distancing measures, supply chain issues and upticks in e-commerce sales have only intensified existing pain points felt by brick-and-mortar retailers, accelerating the pace of bankruptcies going into the second half of the year.”

Through the first six months of 2020, 18 retailers filed for Chapter 11 bankruptcy, with an additional 11 filing in July through mid-August. The pace of bankruptcies rivals 2010 in the wake of the Great Recession.

2020 is on track to set the record for the highest number of retail bankruptcies and store closings in a single year. Based on the trends set through mid-August, our expectation is that more retailers will struggle to navigate the effects of the pandemic—particularly those that are highly levered and mall-based.”

The bankruptcies have been concentrated in apparel and footwear, home furnishings, food, and department stores. Here are some of the prominent companies that have filed for bankruptcy so far this year.

  • Pier 1
  • J. Crew
  • Neiman Marcus
  • Stage Stores
  • J.C. Penney
  • Tuesday Morning
  • GNC
  • Lucky Brand
  • RTW Retailwinds (New York & Co.)
  • Brooks Brothers
  • Ascena (Ann Taylor, LOFT, Lane Bryant, Justice, Catherines)
  • Le Tote (Lord & Taylor)
  • Tailored Brands (Men’s Wearhouse, Jos. A. Bank, Moores Clothing, K&G)
  • Stein Mart

In addition to the bankruptcies, more than a dozen retailers including Macy’s, Bed Bath & Beyond and Gap have announced they will shutter 50 or more stores, totaling a combined 4,200-plus stores.

One could argue that the retail apocalypse isn’t solely a function of the coronavirus. The sector was in trouble before the pandemic due to heavy debt loads, changing consumer habits and a shift to online shopping. Nevertheless, the government shutdowns have sped up the process.

And when you boil it all down, the reason for the rash of store closures doesn’t matter very much to the tens-of-thousands of people who will lose their jobs.

If the retail collapse continues – and there is every reason to believe that it will – it will put yet another drag on the economy as it tries to recover from the impacts of the coronavirus shutdowns. And it makes it even more difficult to maintain the myth of the V-shaped recovery.

THE BIGGER PICTURE 

Looking back at the evolution of the problems in the retail sector tells an even bigger story. It illuminates the pernicious effects of Federal Reserve monetary policy.

In 2017, Toys R Us went under. The story behind the Toys R Us bankruptcy gives us a glimpse at a fundamental problem underlying the US economy long before the pandemic – easy money created by Federal Reserve monetary policy. The ability to borrow a lot of money at low interest rates fueled borrowing and speculation. Malinvestment distorted the economy and inflated bubbles.

In a nutshell, the Fed managed inflated and maintain a giant retail bubble.

Crushing debt pulled Toys R Us under. According to Bloomberg report, the toy-seller piled up more than $5 billion in debt and was reportedly paying more than $400 million a year on debt service alone.

An article published by Forbes explains what happened.

In 2005 KKR and Bain Capital (which included former Presidential candidate Mitt Romney) bought Toys R Us for about $6.6 billion, plus assuming just under $1 billion of debt, for a total valuation of $7.5 billion.  But the private equity guys didn’t buy the company with equity.  They only put in $1.3 billion, and used the company’s assets to raise $5.3 billion in additional debt, making total debt a whopping $6.2 billion.  Total debt was now a remarkable 82.7% of total capital!  At the time of the deal interest rates on that debt were around 7.25%, creating a cash outflow of $450 million/year just to pay interest on the loans. At the time Toys R Us was barely making a profit of 2% – so the debt was double company net profits.”

The Fed dropped interest rates in 2002 in response to the dot-com collapse. Rates were creeping back up in ’05, but they were still at low levels. The Fed wanted people to borrow and spend to “stimulate the economy.” They did. The equity guys would have found it much more difficult to swing this kind of deal in a normal interest rate environment. This vividly illustrates how the central bankers feed the business cycle and the unfortunate side-effects of their policies.

All of that debt is now coming due. In an in-depth report published in the fall of 2017,  Bloomberg reported that $1.9 billion in high-yield retail borrowing would come due in 2018. And from 2019 to 2025, the debt coming due will balloon to an annual average of almost $5 billion.

Unsurprisingly, retail defaults reached an all-time high in the first quarter of 2018.

Changing consumer habits and pandemic have certainly posed challenges to the retail sector. And you could even argue that brick-and-mortar is slowing going the way of the buggy-whip. But the fact is overleveraged companies find it much more difficult to adapt or to even weather temporary shocks to the economy such as a pandemic.

In response to the most recent economic meltdown, the Fed has doubled-down on the very policies that blew up the retail bubble to begin with. Who knows what bubbles the central bank will pump up as it continues with QE infinity. But there is little doubt that the long-term negative impacts on the economy will be every bit as bad – and likely worse given the scope of this monetary policy – as the bubble-producing monetary spigot that blew up the dot-com, housing and stock market bubbles.

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Photo by Mike Mozart via Flickr.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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