By Vicki M. Young
with contributions from Evan Clark
 on April 19, 2018
Bon-Ton stores will soon go dark.

What retailer will be the next to go? And what’s a vendor to do for growth?

As The Bon-Ton Stores Inc. gets ready to liquidate operations and enter the retail graveyard, speculation is already swirling as to which company could be the next to file for bankruptcy court protection.

It’s a question that’s important for retailers looking to capture market share as they keep tabs on their competition down the mall and for vendors scouting for alternative opportunities for growth as yet another customer closes.

Credit ratings agencies over the last two years have kept their watch lists of those that are deemed most pressured, many of which have high debt loads due to leveraged buyouts. Neiman Marcus Group is on the list, but it appears stable and able to continue to make its interest payments. Sears Holdings Corp. has been on their lists for some time now, but likely has sufficient assets that it can monetize to limp at least through another holiday season despite sales that continue to crumble.

Others on credit watchdogs’ lists, such as teen accessories chain Claire’s and footwear brand Nine West Holdings, have already filed their voluntary Chapter 11 petitions.

According to credit ratings agency Fitch Ratings, the $3.2 billion year-to-date retail defaults at the end of March, led by Claire’s Stores Inc.’s bankruptcy last month, topped the $2 billion mark reached for all of 2017.

And it could go higher. Fitch said it expects 2018 volume to hit $4.5 billion, with David’s Bridal as the “most imminent default candidate” because of an interest payment that was due last Sunday.

Competing credit ratings agency Moody’s Investors Service said: “Retail defaults reached their highest level ever in the first quarter of 2018, and accounted for one-third of all corporate defaults in the quarter, reflecting the fallout of changing consumer behavior and advancing e-commerce for traditional brick-and-mortar retail.”

Moody’s said February and March each saw four retailer defaults, representing the most in a single month since five retailers defaulted in December 1998. In addition to Claire’s on the default front, Moody’s also cited Sears Holdings, “which completed a distressed exchange to push out debt maturities and reduce its interest burden.” The retail sector includes a wide range of categories such as broadline, mass and specialty chains, as well as supermarkets and restaurants and other general merchandise stores.

Most defaults during the first quarter were concentrated in North America, with 22 in the U.S. and one in Canada. Europe followed with three, according to information from Moody’s. The ratings agency expects the default rate to be highest in the media sector, which includes advertising, printing and publishing, over the next 12 months. The default rate is projected at 4.3 percent in the U.S. and 1.7 percent in Europe. The retail sector is forecast to have the second-highest default rate, at 3.5 percent in the U.S. and 1.6 percent in Europe.

The top retailers on Fitch’s watch list include David’s Bridal Inc., which has $270 million in bond debt, and Neiman Marcus Group, at $1.71 billion. And there’s Sears Holdings, at $717.1 million, which just completed a $383.9 million distressed debt exchange. Also on the list is Guitar Center, at nearly $1.58 billion. Guitar Center also just completed a $325 million distressed debt exchange. S&P Global Ratings, another big credit ratings firm, lowered the corporate credit rating of Guitar Center to “selective default” because the pay-in-kind feature and maturity extension are viewed as being “less than the original promise” on the notes to debt holders.

The retailers on Fitch’s second-tier watch list — these issuers are considered to have more financial flexibility, greater liquidity options and potentially more tenable capital structures — include Hot Topic Inc., at $355 million in bond debt; Petco Animal Supplies Inc., $630 million; Revlon Consumer Products Corp., $950 million, and PetSmart Inc., $3.9 billion.

Just because a retailer is on the watch list doesn’t mean it will necessarily file for bankruptcy court protection. And just because a company does file also doesn’t mean liquidation is the end result. One example is Gymboree, which filed last year, closed some stores and has since exited bankruptcy court proceedings.

Others like Bon-Ton, aren’t so lucky. While it also has felt the impact of lower foot traffic levels at its stores as more consumers prefer shopping online, it also had other issues that compounded the macroeconomic backdrop. An insufficient capital structure to fund operations is one, while a lackluster online platform is another. According to Yashwant Chunduru, a distressed debt analyst at Reorg Research, the stores were also regionally concentrated in the Midwest. “It was competing against J.C. Penney and Kohl’s, [both of which] have countrywide exposure, more scale and more levers to pull,” the analyst said.

The retailer has more than 22,700 employees and about 250 stores in operation across 23 states. The stores operate under the nameplates Bon-Ton, Bergner’s Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers.

In addition to the job losses when the stores shutter, it also means one less retail group for vendors to sell to.

Chip Bergh, chief executive officer of Levi Strauss & Co., said Bon-Ton was not a huge customer, but also was “not insignificant.” Given that the department store’s troubles were well-known, at least vendors had time to prepare.

“We did a good job at managing the credit,” Bergh said. “Financially, we’re not taking a bath.”

But Bergh also expects more stores to close. “I don’t think the shakeout is complete yet,” he told WWD, describing the Bon-Ton bankruptcy and liquidation as another sign that the industry needs to continue to evolve.

During a company conference call when the company reported fourth-quarter earnings results last month, Oscar Feldenkreis, ceo of Perry Ellis International Inc., said he expects more store closures as retailers exit underperforming doors. “I think that our focus right now…is focusing in on growing the A and B doors and as well as concentrating on digitalization, because that’s where you’re picking up the opportunities [from] the store closures,” he said. The company has been investing on technology and its digital assets to improve its online e-commerce platforms for its brands.