As Consumers Pull Back Postpandemic, Troubled Retailers Lose a Lifeline

Troubled retailers that stayed alive thanks to heady consumer spending during the pandemic are now showing signs of distress, filing for bankruptcy at the highest rate since 2020 and closing hundreds of stores.

A dozen large retailers with shrinking revenue or high debt have filed for bankruptcy so far this year, as many as in all of 2021 and more than double the total for 2022, making this the most active year since the onset of the pandemic, according to BDO, which keeps track of retail bankruptcies for its semiannual reports.

Discount home-goods chain Christmas Tree Shops, its former parent Bed Bath & Beyond and wedding-gown supplier David’s Bridal have filed for chapter 11 over the past several weeks, hurt by wage and price pressures and changing consumer preferences.

More bankruptcy filings or rescue deals are expected among retailers on weak financial footing, especially companies that rely on discretionary spending.

Kitchenware maker Instant Brands and household-storage company Tupperware Brands are among those working with restructuring advisers to fix their balance sheets.

Rescue deals are hard to come by. Bed Bath & Beyond and David’s Bridal have said they would liquidate their assets and go out of business if they can’t find buyers during the chapter 11 process. Discount retailer Tuesday Morning, which filed for chapter 11 in February, was forced to shut down its stores after failing to attract sufficient interest in its business.

Retail earnings have broadly fallen amid a change in attitude among consumers who had to cut back spending on discretionary items to cover the rising costs for essential items such as food, gas and housing. A glut of inventory also forced companies to resort to big markdowns.

Strong consumer spending and readily available financing during the pandemic years helped struggling retailers to stay afloat, but high inflation and the tightening lending market are now pushing them into bankruptcy, said Ivan Friedman, president and chief executive of retail consulting firm RCS Real Estate Advisors.

“These companies that are filing now for chapter 11 should have filed a year ago, except business got better for a little while. But that didn’t save them," Friedman said.

Larger retailers have been affected too. Sales at Target suffered in the most recent quarter as shoppers stopped splurging as frequently on trendy clothes, home goods and other nonessential items. Home Depotwarned this week that its annual sales will decline for the first time since 2009 as demand for home improvements levels off.

Bricks-and-mortar chains have gone bankrupt in large numbers for much of the past decade because of the growth of e-commerce, accelerating in 2020 when the pandemic shut down nonessential shopping for months and pushed a rash of retailers into chapter 11.

The steady march of bankruptcies abated in 2021 and 2022 as shoppers snapped up new furniture, electronics or exercise bikes using government stimulus checks and cheap credit. Financial markets were also accommodating, allowing some retailers to grab credit lifelines to fund their transformation efforts.

But stubbornly high inflation eventually led consumers to cut back starting late last year. Since November, retail spending on goods declined in four out of the six months, according to Commerce Department data.

Party-goods supplier Party City Holdco—saddled with over $1.4 billion of debt and facing weaker demand because of the pandemic and then high inflation—was one of the first retailers to seek bankruptcy protection when it filed for chapter 11 in January.

“[Retailers] were able to raise prices in 2022. But as the year continued, you began to see some pushback by consumers," said David Berliner, who leads the business restructuring and turnaround practice at BDO. “Their costs are higher, but they can’t raise prices any more because their consumers just aren’t going to buy it."

In court filings, Party City blamed its bankruptcy in part on rising costs for raw materials, inventory and other services that “increased pressure on the company without a corresponding meaningful ability to raise prices to levels that effectively combat inflation."

Although the country has largely moved on from the pandemic, Party City said its lingering effects have changed its shoppers’ purchasing behavior. They prefer to host smaller gatherings and are purchasing fewer party products as a result, the company said.

David’s Bridal said in court papers that demand for traditional wedding gowns and formal attire declined since the pandemic because of the “overall casualization in wedding events."

Many retailers “can’t cut costs quickly enough to deal with the changing landscape of lower demand," said Tero Jänne, co-head of capital transformation and debt restructuring group at investment bank Solomon Partners. “They have inelastic cost structures because of wage inflation and because of input costs, and it makes it very difficult for them to survive."

Until recently, ample liquidity in the market allowed some companies to stay afloat for longer. Bed Bath & Beyond, for example, was already stagnating when it brought in a new CEO in 2019 and was able to tap financing by borrowing private debt and selling more shares until earlier this year when its stock price dropped too low to raise more funds.

Now, raising capital has gotten more difficult for junk-rated companies, with retailers being no exception.

“There’s no more easy money," said Joseph Baldiga, an attorney who leads the bankruptcy and reorganization group at Massachusetts-based law firm Mirick, O’Connell, DeMallie & Lougee.