Just when you thought it was over, it gets worse.
Brazil’s top fashion retailers are careening into bankruptcy and closing thousands of stores as a stinging recession and plunging consumption hit their bottom line. Added to that is the country’s ongoing political turmoil, which has seen President Dilma Rousseff suspended while impeachment proceedings continue and her successor, Michel Temer, being investigated on charges that he exceeded campaign spending limits.
All of this upheaval is taking place as there are some faint signs of hope in Brazil’s economy. Inflation expectations are lower, the cost of labor has declined and foreign direct investment is on the upswing as potential investors look for bargains or to grow market share.
The country also remains a major focus for the luxury and fashion worlds. Louis Vuitton will hold its resort show in Rio de Janeiro on May 28, while the activewear world is turning its attention to the Summer Olympic Games in Rio beginning Aug. 5. There is skepticism the Games will boost the Brazilian economy, however, partially as a result of their so-far poor organization as well as the overarching threat from the Zika virus that is likely to deter overseas visitors.
In the meantime, the damage from the economy’s meltdown has been severe. Already, 404 retailers — many of which sell apparel — filed for court protection last year, closing 95,000 stores, analysts said, adding that clothing merchants shuttered roughly 15,000 shops.
Gap Stores’ franchiser and apparel retail group GEP is the big elephant in the room. The company filed for judiciary recovery recently after debts outstripped sales. GEP operates 10 Gap stores and 97 shops of the Luigi Bertolli chain. It also operates 18 and 16 shops respectively for its Emme and Cori banners.
Dedalto, which runs a large department store network in Espírito Santo State, has also filed for bankruptcy, succumbing to the economic and political crisis engulfing Brazil, billed as the worst in over a century. Despite the signs of some improvement, GDP is still set to shrink another 3.5 percent this year after declining 3.8 percent in 2015.
Others are rushing to close stores. In January, Wal-Mart shuttered 60 units, or about 10 percent of its network, while C&A intends to close 40 to 50 shops, some of which opened less than nine months ago, analysts at BTG Pactual said in their latest report. The apparel-focused chain Marissa shut 15 shops, nine just before New Year’s, while French Casino Group-owned Via Varejo also shut 50 stores.
“Stores are closing down and it looks like this is just the beginning,” BTG Pactual analysts Fabio Monteiro and Thiago Andrade said in their report. “How many retailers are doing well? You can count them with one hand…Unfortunately, the worst has yet to come.”
The analysts said overall retail sales fell 4.3 percent in real terms last year while earnings and earnings before interest, taxes, depreciation and amortization dropped 48 percent and 7 percent, respectively.
For apparel chains, EBITDA margins have fallen sharply or contracted from highs of 15 to 25 percent before a decade-long boom in Latin America’s largest economy began fading in 2013.
One São Paulo-based analyst said much of the pain could be over, at least in terms of closings, adding that “major adjustments over the past few months” have lifted retailers’ fortunes, though a worsening recession could trigger another round of closings.
Edmundo Lima, executive director of Brazilian fashion retail association Abvtex, agreed the picture looks gloomy for 2016, saying that, “2015 was bad for companies but 2016 is looking much worse because of the economic crisis we are living. He added that retailers could see further contractions this year while the informal market is rising to worrisome levels.
That said, he noted some midmarket chains are showing resilience, with some reporting sales increases.
“These retailers are investing to offer a more superior product, improve store operations and reduce logistics and operating costs,” Lima said. “They are also investing in simplifying their operations and in better inventory and merchandise controls.”
As the real continues to shrink against the dollar, retailers are rushing to substitute imports to make clothing at home, according to Lima. They are also negotiating lower raw material prices — notably for local staple cotton — and haggling to lower shopping-mall rents.
Retailers are doing “whatever they can” to avoid closing stores or laying off workers beyond the 15,000 jobs cut last year, Lima said, though he would not discount future job losses as consumption flags.
Abvtex represents 22 large apparel retailers in Brazil including Renner, Zara and Forever 21, which analysts say are struggling to turn a profit as they grapple with the slumping currency, high import taxes and inefficient and expensive logistics.
Observers said Renner and Lojas Americanas are managing to buck the trend as a result of strong management, operating efficiencies and integrated supply chains.
Itau BBA analyst Ruben Couto said not all is gloom and doom. He expects retail sales will contract 1 to 3 percent this year, versus 4 to 5 percent in 2015, due to the recent restructuring and because “we are starting from a very negative sales basis.”
He said chains are succeeding at boosting their bottom lines “by looking inside and cutting unnecessary expenditures like investing and marketing more online instead of on TV and outdoor” advertising.
But another analyst disagreed, adding that the weakening real and political turmoil will pressure retailers until 2018.
“Even if the government changes and there is more optimism over the economy, inflation is high and unemployment is increasing, so the recovery will be gradual and take at least two years,” the analyst, who requested anonymity, predicted.