By Aisha Al-Muslim
Retail bankruptcies, liquidations and store closings in the U.S. reached records in the first half of 2020 as the Covid-19 pandemic accelerated industry changes, particularly the shift to online shopping, according to a report on the downturn's severity.
This year's collapse in American retail is on pace to rival 2010, when 48 retailers filed for bankruptcy in the wake of the 2007-09 recession, according to the report by professional-services firm BDO USA LLP. Including filings through mid-August, BDO said 29 retailers have sought bankruptcy protection in 2020, surpassing the 22 such filings recorded last year.
Temporary government-mandated store closures and social-distancing measures have intensified challenges that bricks-and-mortar retailers had faced before the pandemic, according to BDO. Consumers stuck at home are buying more online than ever, with rising internet sales expected to partially offset losses from physical stores, the report said.
That trend has put more pressure on bricks-and-mortar locations, compounded by excessive debt, store saturation, high unemployment and changing shopper behaviors. In particular, demand has cratered for business attire and outfits for social occasions -- weddings, graduations and other milestones.
"This is almost certainly the worst year in recent history for retail," said Kyle Sturgeon, a managing partner at Atlanta-based turnaround advisory firm Meru LLC.
In the first six months, 18 retailers filed for chapter 11 protection, mostly concentrated in apparel and footwear, home furnishings, grocery and department stores, BDO said. They include department-store operators Neiman Marcus Group Ltd., J.C. Penney Co. and Stage Stores Inc., home-goods retailers Pier 1 Imports Inc. and Tuesday Morning Corp. and vitamin seller GNC Holdings Inc.
"The trend is still a lot of liquidations and asset sales, and some of them are still trying to reorganize and emerge," said David Berliner, a partner in the firm's business restructuring and turnaround services practice.
From July through mid-August, 11 more retailers filed, including apparel retailers Lucky Brand Dungarees LLC, Brooks Brothers Inc., Ann Taylor parent Ascena Retail Group Inc., Stein Mart Inc. and Tailored Brands Inc., the parent of Men's Wearhouse and Jos. A. Bank.
"I don't think it's going to stop anytime soon," said Andy Graiser, co-president of commercial real-estate advisory firm A&G Real Estate Partners, who advises Tailored Brands, Ascena, Neiman Marcus and Stein Mart, among others.
Before the pandemic, department-store chains such as Lord & Taylor, J.C. Penney and Neiman Marcus were already struggling as shoppers bought more online, defected to startups and shifted their preferences to small specialty stores.
Men's Wearhouse and Jos. A. Bank parent Tailored Brands, which filed for bankruptcy in August, partly blamed its struggles on missteps such as underinvesting in casual clothes and e-commerce. J.Crew also signaled that it was unable to overcome the shifts to fast fashion and online shopping.
Discount home-goods retailer Tuesday Morning, which filed for bankruptcy in May, was hurt by its lack of e-commerce presence as more shopping shifted online.
Upscale retailer Neiman Marcus filed for chapter 11 in May. "We had a business that was on track prior to Covid-19," Chief Executive Geoffroy van Raemdonck said at the time. "Everything was going well in our transformation, but we had massive interest payments. Covid threw everything off track. This is an opportunity to reset our financial structure."
High rates of bricks-and-mortar store closures are expected to continue, BDO said. From January through mid-August, retailers had announced they would close more than 10,000 stores in the U.S., including locations of solvent companies such as Macy's Inc., Bed Bath & Beyond Inc. and Gap Inc.
That has already topped last year's record 9,500 store closures. Many of the closings through mid-August 2020 were due to retail bankruptcies, which accounted for nearly 6,000 closures.
Retailers have said so far this year that they plan to close over 130 million square feet of store space in the U.S. Of that total, more than half belongs to five retailers: Penney, Macy's, Stein Mart, Bed Bath & Beyond and Pier 1 Imports, according to real-estate data firm CoStar Group Inc.
Retailers are likely to decide to close as many as 25,000 U.S. stores in 2020, according to global market-research firm Coresight Research.
Many of the stores going dark are anchors and other tenants in shopping malls. Real-estate research firm Green Street Advisors LLC has forecast that more than half of all mall-based department stores in the U.S. will close by the end of 2021.
Landlords including mall owners Simon Property Group Inc. and Brookfield Property Partners LP have been stepping up, buying troubled tenants like J.C. Penney out of chapter 11, their third acquisition in four years of a bankrupt tenant.
More retailers are expected to seek bankruptcy protection in the second half of the year, though the pace could slow in the fourth quarter as some hold off until early next year in hopes of a profitable holiday season.
"If the holidays don't go as planned, there's going to be some real cash flow and income hits to these retailers," said Mr. Berliner, who has advised on the bankruptcies of Tuesday Morning and Lord & Taylor. "For some of these, still distressed retailers with a lot of debt, may be their last straw."
Some companies that have waited too long to file for bankruptcy might simply liquidate if they keep burning cash and don't have enough money to fund a restructuring through the courts.
"That's not the norm and I think we're gonna see a lot more of those," said Mr. Graiser, pointing to Stein Mart and off-price retailer Century 21 Department Stores LLC, which filed for bankruptcy in August and September, respectively, and are liquidating their assets.
Shaky companies that make it through the holiday season might survive only to encounter landlords that had agreed to rent deferrals but now want payment in full. The added pressure might force more retailers to close stores and file for bankruptcy, Mr. Graiser said.
"That's a huge bubble that is going to burst for a lot of retailers with the inability to pay that back," he added.
Write to Aisha Al-Muslim at aisha.al-muslim@wsj.com
