Warren Buffet famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Never may that be more true than for retailers now, according to some analysts.
Mark Cohen, former longtime CEO of Sear Canada and current Columbia University professor of retail studies cautioned, “I think we will see a flurry of bankruptcies likely in the first quarter of 2023 if this holiday season is anything less than completely robust. I don’t think it will be, by the way.”
At the start of the Corvid pandemic, retail bankruptcies picked up in pace. However as the pandemic subsided, consumers flooded into stores to make up for lost time, stocking up on apparel and other items, and as a result, the bankruptcies stopped.
According to a recent report from business consultancy BDO global, in the second half of 2021, only three retailers filed for bankruptcies, whereas in the same period in 2020, 20 retailers filed for bankruptcy. The report also noted that there were no new bankruptcies filed between September of 2021, and mid-February of 2022.
But now as the economy slows and inflation leaves consumers increasingly strapped after purchasing the necessities, that is set to change.
Cohen said, “There is no question as business becomes tougher to manage, weak players fall by the wayside. They are particularly vulnerable to inflationary pricing and inflationary costs.”
As the economy slows bad news is becoming more common in the retail sector, and analysts are questioning how even the strongest in the sector plan to navigate a coming recession, that most think will arrive sometime in 2023.
Target kicked off the flood of bad news in early June, when it announced it was going to liquidate massive amounts of slow moving inventory, at enormous discounts, and would be more cautious on near-term profit guidance as a result.
From there, second quarter financial warnings came one after another from retailers like RH, Bed Bath & Beyond, and Kohl’s.
Cohen noted Bed Bath& Beyond particularly is, “in a world of hurt.”
And the warnings just kept coming. Nike announced it was taking a more measured approach with its full-year financial outlook. As shoppers cut back on discretionary items like scented candles and hand sanitizer, Bath & Bodyworks put out a second quarter earnings warning. Meanwhile after another brutal quarter, Gap just fired its CEO.
Highlighting the struggle, retail legend and former CEO of Gap and J. Crew Mickey Drexler said in an interview, “I have never — maybe I don’t remember — seen as much discounting with as much merchandise with high percents off.”
Now running high-end apparel maker Alex Mill, Drexler added, “Our business is quite small but growing rapidly. So we are doing pretty well. But I think we are all being affected by the tough economy, inflation, and so on and so forth.”
