stores and just sell online. The total
store closings in the United States this
year could reach 1,500, and thousands
of employees will lose their jobs.
And certain retail segments have been
hit especially hard, such as sporting
goods chains. The Sports Authority
filed for bankruptcy in March 2016 and
closed more than 400 stores. Golfsmith
filed for bankruptcy last September,
closed two-thirds of its stores, and sold
the others. Eastern Outfitters filed for
bankruptcy in February. Sports Chalet,
a chain in California, last year closed
its 47 stores. Gander Mountain, a St.
Paul, Minnesota-based chain, filed for
Chapter 11 and will shut 32 of 162 stores.
Many stores that will go dark are
in malls, where the closing of a
department store can trigger a chain
reaction of trouble for the remaining
lessees and ultimately devastate a
mall. According to Retail Metrics,
department store earnings growth
has been lower than all retail since
early 2012. Cushman & Wakefield
reports that between 2010 and 2013
mall visits in the U.S. decreased
from 35 million to 17 million a year.
The top-rated A and B malls should
survive, but the 30 percent ranked at
the lower C and D levels will suffer.
According to the International Council
of Shopping Centres, the United States
has more than five times the amount
of retail square footage per person
than the United Kingdom, France, or
Japan. This stems, in part, from too
much growth in the 1990s. Forbes has
reported that “since 1995, the number
of shopping centers in the U.S. has
grown by more than 23 percent and
the total gross leasable area by almost
30 percent, while the population has
grown by less than 14 percent.”
The exception to all of this retail
devastation is Apple. Apple brings
more than 1 million people into its
stores each day and sells more goods
at retail stores than any other store
anywhere. And an Apple store in a
mall will increase sales 10 percent
for the other stores located there.
The irony for retailers is that the
United States is in a long yet weak
expansion. The nation’s unemployment
rate was 4. 4 percent in April. Annual
inflation might hit the Federal
Reserve’s goal of 2 percent this year.
Retail sales were actually up in early
2017 due to online purchases.
But that’s also a big part of the problem
for brick-and-mortar stores. More
than two-thirds of consumers in the
United States will buy online in 2017.
Of those, 65 million Americans will
buy at Amazon.com, which had
$20 billion in revenue for apparel sales
last year. And Amazon has also been
hurting brick-and-mortar stores both
by offering shoppers a credit card
with a cash-back incentive and by
adding new private-label brands.
Another concern for retailers is that
in December and March the Federal
Reserve raised interest rates—and it
plans more increases later this year.
Tightened liquidity will inflict more
pain on brick-and-mortar retailers.
Troubled retailers will try to compete
by cutting prices or creating a viable
online presence. Stores that end up
squeezed and that can’t fix their balance
sheets or product lines will consider
filing for bankruptcy as a last resort.
In the retail world, however, bankruptcy
no longer is used successfully to
reorganize businesses. The 2005
amendments to the U.S. Bankruptcy
Code force debtors to deal with leases
at too fast a pace to afford ample time
for reorganization. Debtors must
decide to assume or reject leases
within 120 days of a bankruptcy filing.
This has proven too short a time
period to permit reorganization in
Chapter 11. And asset-based lenders
often will not lend to a company
in bankruptcy beyond 180 days.
Retailers that have tried recently to
reorganize in Chapter 11 have failed. In
2015, RadioShack filed for bankruptcy,
restructured, but filed again this year.
The company, now owned by General
Wireless Operations, will liquidate all of
its stores. Wet Seal filed for bankruptcy
two years ago, emerged, but is back in
a proceeding and will liquidate as well.
American Apparel filed for bankruptcy
in October 2015, emerged, and filed
again last November. As a result,
debtors use bankruptcy to sell assets
in Section 363 sales, reject leases, and
conduct going-out-of-business sales.
Retailers, therefore, cannot count
on bankruptcy as a last resort to
help them survive. By the time retail
chains file, the chances they can stay
in business are remote. So what can
brick-and-mortar chains do to avoid
bankruptcy? They need to watch debt
levels, manage inventory and overhead,
control the pace of store expansion,
develop shopping experiences that
offer more than just products (think
Apple), and balance store locations
and online options that will appeal
to consumers of various ages and
tastes. These suggestions will not
help certain chains that will be part
of the 2017 retail debacle. Yet over the
longer term, U.S. retailers must adjust
to a changing world where just having
large stores in malls and shopping
centers with merchandise on racks
won’t be sufficient to compete. J
Daniel A. Lowenthal, chair of Patterson Belknap’s
Business Reorganization and Creditors’ Rights
practice, has earned recognition as a skilled advocate
for clients in bankruptcy, creditors’ rights, and
corporate restructuring matters for work on behalf
of creditors’ committees, trade creditors, indenture
trustees, and bankruptcy trustees and examiners. He
also has achieved numerous favorable results for
clients in trial and appellate courts and in commercial
arbitration. Lowenthal holds a law degree from George
Washington University, with honors, and a bachelor’s
degree from Duke University, magna cum laude.