Bankruptcies Loom for Retail Industry

Economists forecast that an economic recession will occur in early 2023 because of the ongoing supply chain challenge, increased inflation, and excess liquidity in the market. While predicting a downturn in the economy is speculative there are indicators that certain industries are at a higher risk for bankruptcies in 2023—including retail, automotive, aerospace, and healthcare. This article will focus on retail.

Some indicators that economists point to as foreshadowing financial distress for the retail industry in 2023 are a surplus of inventory, a decrease in consumer retail spending due to inflation, and the reduction of staff.

First, many retailers have a surplus of inventory on hand due to overordering during the peak of the supply chain shortage and orders with seasonal (now “out of season”) items being delivered late. This surplus has forced retailers to sell the items at a steep discount to make room for new inventory. In 2022, we saw large retailers like Target, Walmart, and Macy’s offer more discounts and deeper promotions to clear their shelves. Although a happy surprise for consumers, these discounts have eroded the profit margins for retailers and added strain to their liquidity positions.

Second, compared to economists’ initial outlooks for Q3 and Q4 in 2022, spending in the retail sector is trending downward. Although spending in the retail industry has declined less than anticipated because the decrease in fuel prices has freed up excess cash for consumers, economists are still seeing a downward trend in retail sales. Economists blame the decreased spending on inflation and the consumers’ inability to keep up with the rapidly rising prices.

Third, due to the surplus of inventory and decreased consumer spending, many retailers are considering cutting staff to reduce costs. Retailers such as Best Buy, Gap, Peloton, and Nordstrom are reducing staff amidst sluggish sales. An increase in layoffs is typically a result of financial distress of a company and the consequential rise in the U.S. unemployment rates may indicate an impending recession.

The combination of these three factors has led economists to predict distress for retailers in 2023. While the “R” word may bring fear to the forefront, companies can do themselves a favor by staying vigilant with A/R, remaining apprised of the money coming in and out of the door, knowing when they are in over their head, and needing to seek outside guidance.

Clark Hill has an industry-focused Retail Team with bankruptcy professionals included to serve retail clients as they prepare for and address the forecasted increased bankruptcy filings.

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