Zombie retailers—companies that are living on the edge of bankruptcy—such as Sears Holding Corp. (SHLD), Payless Shoesource Inc. and J.Crew Group, Inc. are undermining the margins of healthier companies such as Macy's Inc. (M) by keeping significant amounts of uncompetitive, brick-and-mortar capacity alive while more traditional retailers struggle with their online competitors, according to The Wall Street Journal.
The fraction of retailers whose debt Moody's Investors Service has rated as either speculative or worse—currently standing at 13.5% of the retailers it rates—has surged since the end of 2011, when it stood at 5.6%, and is currently nearing the figure of 16% reached during the financial crisis, the Journal reported.
A Republican proposal to tax imports could make the situation worse, according to CNBC. Stephen Sadove, who is on the board of the National Retail Federation, described this potential policy as "the biggest threat" that retailers have seen in years during a CNBC interview. The retail industry could also suffer should the United States pull out of the North American Free Trade Agreement (NAFTA). (For related reading, see also: NAFTA's Winners And Losers.)
Retailers on Life Support
Amid these treacherous conditions, some companies have been harnessing creative financing techniques, for example taking part in distressed-debt exchanges, the Journal reported. Investors, who take a haircut by agreeing to these exchanges, have simply refused to throw in the towel in some cases. Many of them are holding onto hope that the retail industry is suffering not as a result of secular decline, but because of more temporary factors.
By enabling troubled retailers, investors are contributing to the oversupply of brick-and-mortar locations that have been hurting the margins of stronger retailers such as Sears, according to the Journal.
Is This Only the Beginning?
While a large number of more traditional retail stores have been impacted by electronic commerce (e-commerce), the widespread impact that e-commerce has had thus far may only be the beginning, Tenpao Lee, interim dean and professor of economics at Niagara University, told Investopedia in an interview. He noted that while Amazon.com, Inc.'s (AMZN) sales represent a small fraction of Wal-Mart Stores Inc.'s (WMT) sales, Amazon could easily enjoy robust sales growth going forward.
Past that, Lee offered some broader trends. While 20% of retail sales are currently online and 80% take place through brick-and-mortar stores, this ratio could soon change to 40-60.
As for which large retailers suffer the most as online retail transactions proliferate, he specifically singled out Ralph Lauren Corp. (RL) and Michael Kors Holdings Ltd. (KORS). Lee emphasized that these luxury retailers can only reduce their price so much in the face of competition if they want to stay true to their brand. He said that in the current global economy, businesses are having a harder time distinguishing themselves. (For more, see also: Luxury Brand Retailers Face Strong Headwinds.)