Retail Sector Likely to See More Defaults: S&P Global Ratings

Traditional retail companies are likely to face even more defaults this year over last year, according to a recent report from S&P Global Ratings reported on by MarketWatch.

Last year, the industry saw 11 defaults among major retailers, but companies are still saddled with high debt loads after more than a decade of a boom in leveraged buyouts, the firm said.

“We are now beyond the tipping point we noted in February 2017 for defaults and expect adverse secular trends to continue for issuers in the retail subsectors that have been especially challenging — department stores, specialty apparel, and regional grocery,” analysts led by Robert Schulz wrote in the report. (See also: Why Kohl’s is Back From the Brink.)

This year, an estimated $5.6 billion in debt is coming due in the retail sector. S&P Global analysts say that is a manageable amount, but many companies are likely to start restructuring to prepare for the years ahead. In 2019, about $13 billion in debt is coming due and in 2020, $18 billion.

Brick-and-mortar retailers that depend on a flow of foot traffic to boost sales are struggling as shoppers are increasingly buying online on e-commerce websites like Amazon (AMZN). Some have adapted strategies to better connect with consumers, such as establishing in-store experiences, and others have improved their own online channels. But others just can’t keep up with the shift.

So far this year, the retail sector has seen three defaults including from teen apparel retailer Charlotte Russe, department store chain Bon Ton Stores and supermarket chain Tops Holding LLC.

And already, S&P Global, like many ratings firms, has slapped several retail stocks with downgrades. So far, it has downgraded 11 retailers and has a negative outlook on 34% of the retail companies it follows. In 2017, S&P Global downgraded 75 companies in retail.

In the report S&P said that businesses like GNC (GNC) and Pet Smart that are suffocating under debt from leveraged acquisitions will have a very tough year. Other retailers it believes will have a difficult 2018 include Sears Holdings (SHLD), Claire’s Stores and Guitar Center Inc.

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