The past 12 months or so have brought plenty of twists, turns and challenges for the retail world. In rough order the market has experienced booming sales and profits, supply chain bottlenecks and record inflation, followed by quickly collapsing consumer demand and sales.

What we have not seen much of since 2020 are retail bankruptcies and widespread distress. 

Will that change in the new environment? Discretionary spending is constrained, interest rates are rising and margins are still under pressure from inflated operational costs.

For all of retail, the one-year default probability for publicly traded companies stood at 3.9% as of Aug. 15, according to data from S&P Global Market Intelligence provided to Retail Dive. The measure is largely a check on market signals, based primarily on share price volatility as well as total liabilities, and country and industry-related risks. 

August’s aggregate default probability is down from 4.3% in May and June, when the metric peaked for retail. But it is still more than double the 1.9% default probability in December and nearly double the 2.1% probability in January, according to S&P data.

Chart: Ben Unglesbee/Retail Dive • Source: S&P Global Market Intelligence

 

Another measure, CreditRiskMonitor’s Frisk scores — which use trading volatility, financial metrics and internal data from the company’s platform to calculate the probability of a company filing for bankruptcy within a year — show an increase in potential defaults as well since 2021.

Currently eight retail companies have a Frisk score of 1, indicating a 9.99% to 50% chance of filing, and another nine have a score of 2, indicating a 4% to 9.99% chance, according to data from CreditRiskMonitor. Last October, just three retailers in all had scores of 1 or 2. 

What Creditriskmonitor categorizes as high risk, or red zone companies —which includes a range of FRISK scores with a one-year bankruptcy risk running from 0.87% to 50% — has steadily increased this year. The number of retail companies in that range has increased from 72 in January to 105 in May to 121 in September, a number that is roughly equal to that the highest reading from the COVID-19 era in March 2020, according to Creditriskmonitor data shared with Retail Dive. 

Almost without doubt there is more risk in the market today than last year, mainly because last year was so good for the retail industry. Pulse Ratings CEO Dennis Cantalupo said that government stimulus and rebounding demand “made retailers look healthier than they actually were,” with many in the industry posting stellar numbers.

“It looked like everyone was executing well, and everyone was [saying], ‘We’re doing a great job managing our inventory and we’re not marking down,’” Cantalupo said. “Last year you didn’t mark down any goods because there was more demand than supply. Well, this year things reversed a little bit, so you’re right back to marking down goods again. So no one learned anything.”

Cantalupo added that he does see more risk today than last year, pointing to recent downgrades at Pulse on retailers including Tuesday Morning, Party City and Bed Bath & Beyond.

At the same time, Cantalupo suggested that the number of retailers at risk might be lower than just before the pandemic started. “Soon as the pandemic hit, all those companies on the fringe got pushed over,” he said. “It accelerated bankruptcies by about two years.” 

Moreover, many in the industry responded to the disruption of COVID-19 by tightening up their finances, balance sheets and operations. “A lot of these companies during the pandemic took a close look at themselves and figured out, ‘Alright, what do we need to do to get through the rainy days or these events that could potentially unravel things,’” Cantalupo said. “They looked internally and got healthier.”



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