Retail in the Red 1H 2023

Retail industry performance for 2023 has, so far, been a mixed bag defined by cautious consumers. Retail sales remained steady throughout the summer, but sales are not outpacing year-over-year inflation.

The sub-sectors that are performing well include discount retailers, groceries, gasoline, and pharmacies, which indicates that consumers are mainly spending on essentials. Inflation, high-interest rates, high consumer debt, depleted savings and the resumption of student loan repayments in the fall may soon cause consumers to further limit their spending.

BDO’s Fall 2023 Retail in the Red Report examines retail bankruptcy filing data, retail store openings and closings, retail sales data, consumer spending and other micro and macro- economic data to tell the story of the retail industry thus far in 2023. Further, the report opines on what may lie ahead in Q4.

Consumer Spending and Retail Performance

While retail sales have risen for five consecutive months, when adjusted for inflation, sales for the first part of the year have been relatively weak. The chart to the right is a sample of the 2nd Quarter YOY revenue and comp store sales percent change for a sample of the top 40 retailers in the United States. Retailers that reported a sales increase in the second quarter mainly sell essential or discount goods, while those that reported a decline primarily sell discretionary products.

Notably, the supercenter that reported a sales decline tends to focus on products such as apparel and home décor and targets consumers who value the in-store experience as much as low prices, while the supercenter that reported a sales increase typically targets consumers who prioritize low prices.

In addition to the earnings of the country’s top retailers, retail sales data from the U.S. Census Bureau indicates sales were up 0.6% in August, which was better than expected. However, the consumer price index also rose 0.6% in August, so sales did not outpace inflation.

Retail Bankruptcy Update

With changes in consumer spending, some retailers are choosing to restructure or close stores. Retail bankruptcies have picked up in the first half of the year, following a lull in 2022. Pivoting from a 13-year low in retail bankruptcies, there have been 11 major filings through April, two in May, one in August and three through September 15, for a total of 17 bankruptcies.

Retail Bankruptcies According to BDO's Retail in the Red*

*Data for 2023 does not include the 4 bankruptcies that have happened between June 30th and September 15th to compare data across equivalent time periods.

All of the retailers that filed for bankruptcy in the first half of 2023 primarily sold discretionary products, with the possible exception of a chain of pet supply stores. These retailers have suffered as consumers focus their spending on essential goods due to limited budgets. In some cases, these retailers filed for bankruptcy because they could not sufficiently improve their ecommerce model enough to support operations and customer expectations.

Retailers That Filed for Bankruptcy Through June 2023

Information sourced from SEC Filings, Bankruptcy Court Filings, Company Press Releases, and Debtwire Stores numbers are closest approximations

In a somewhat distressing trend, the number of retailers restructuring in bankruptcy, as a percentage of total bankruptcies for that year decreased, while the percentage of liquidations and asset sales has increased. Three retailers reorganized in 2019, ten in 2020, five in 2021 and one each in 2022 (Revlon) and 2023 (Party City). As a percentage of total retail bankruptcy filings by year, retailers reorganizing have decreased from 42% in 2021, down to 20% in 2022 and only 8% for the first half of 2023.

Outcome of Retail Bankruptcy Filings in BDO Retail in the Red Reports (as a percentage of total bankruptcies for that year)

Outcome of Retail Bankruptcy Filings in BDO Retail in the Red Reports

*Outcome of one bankruptcy is in progress and thus not yet

In addition, the first half of 2023 saw a proportionally large number of retailers enter bankruptcy with the intent of consummating a going concern sale only to find themselves unable to find buyers willing to make a viable offer, thereby forcing these retailers to liquidate their assets. For example:

• Bed Bath & Beyond and Buy Buy Baby sold their intellectual property after closing all stores.
• Tuesday Morning hoped to close unprofitable stores and restructure but ultimately sold all assets to a liquidator.
• Christmas Tree Shops intended to stay in business after closing approximately 10 stores, but couldn’t find a buyer, and liquidated all stores.

Changing consumer habits exacerbated by inflation, high interest rates, and increased competition from online retailers may be why these bankrupt companies struggled to find going concern buyers and ended up liquidating their businesses. Private equity or strategic buyers may not be interested in buying big-box, mainly brick-and- mortar businesses that lack a strong ecommerce model. The feeling is that these businesses cannot compete with the retail giants that have mastered ecommerce and omnichannel retail.

Store Openings and Closings Update

• Y-T-D actuals used as available.
• Equitable distribution assumed if not otherwise specified with multi-year announcements.
• Information sourced from SEC Filings and Press Releases
• Numbers Rounded
• Data as of August 2023

Nevertheless, in a recent report from Coresight Research, foot traffic in top-tier malls was up by 12% in 2022 compared to 2019 and, on average, top-tier malls were more than 95% leased last year. High-end property developers have reported high demand for retail space in recent quarters. This perhaps shows further bifurcation of the retail industry. Discounters and dollar stores are doing well, as are high-end retailers.

Although we continued to see more store openings (about 3,300) than closings (about 2,600) through August of 2023, many retailers are gradually shrinking the square footage of their store footprint, netting less overall space. For example, while the pharmacy category is performing well in terms of sales, some pharmacies are closing stores. Smaller format stores are replacing large format stores and retailers are leveraging in-store partnerships, where the host store’s operating square footage is reduced to make way for the in-store partner.

The vast majority of store openings continue to be by dollar, discount and grocery stores as Americans hunt for deals and off-label products to better balance their budgets. Additionally, these categories tend to see a greater portion of their sales coming from brick-and-mortar stores over ecommerce, as these categories lend themselves to impulse and bulk purchases.

Macroeconomic Update: The Good and The Bad

Contradictory data points indicate a lack of economic clarity.

There continues to be conflicting macroeconomic indicators as to the overall health of the economy.

The Transformation of Physical Retail Stores Across America

As noted above, most of the recent major store openings are happening outside of malls, in free-standing locations, or in shopping centers. National retailers who previously exclusively operated in malls are now closing some mall-based stores and opening smaller, off-mall stores.

In 2020, Coresight estimated that 25% of America’s roughly 1,000 malls would close over the next three to five years.

More recently, the total number of U.S. malls has declined to approximately 700, as reported in the Wall Street Journal. Store closures are expected to continue in malls, with department stores and specialty retailers anticipated to close the most stores. To combat these trends, malls are seeking to attract customers by improving the customer experience and curb appeal. This is taking the form of new tenants and experiential additions to the mall, such as pickleball courts, bowling alleys, grocery stores, doctors' offices and entertainment venues. Successful malls will be those that adapt and evolve, and have a variety of retail offerings, high-end options, and entertainment activities, to drive foot traffic.

Retail Industry Outlook for 2023

The current macroeconomic situation appears uncertain. Since jobs are plentiful and unemployment is low, consumers have so far been able to continue spending, albeit much more selectively. With savings dwindling, high credit card borrowings, and the resumption of student debt payments, we expect retailers will have to fight for sales this holiday season. There will likely be some retailers that lose this battle, leading to some more retail bankruptcy filings in the second half of 2023, but similarly to 2022, we expect there to be fewer filings compared to the first half of the year. We also expect to see some retailers continue to close stores in the face of high operating costs and waning consumer demand. We predict store openings will still trump closings, but by a narrower margin throughout the remainder of the year.

As retailers navigate the rest of the year amid the current economic conditions, creating a strong omnichannel strategy and understanding how to price their products will be critical:

¹ 360 Bed Bath & Beyond and 120 buybuy BABY stores. Includes 416 stores already set to close prior to bankruptcy filing.

² Across the United States, Canada, UK. They franchised an additional 8 stores in Mexico.

³ The company sells products through a multi-channel platform across nine catalog titles, e-commerce websites and third party marketplaces.

⁴ Operated 11 Morphe retail stores in Canada, Europe, and Australia as of petition date. All 32 retail locations in the U.S. were closed as of January 2023.