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Strong Holiday Sales Won’t Save Struggling Retailers – Adweek

Despite an uptick in retail sales during the 2019 holiday shopping season, don’t expect the financial pressure on troubled retailers to subside in 2020, according to retail analysts at credit rating agency Moody’s Investors Service.

“Between Black Friday and Christmas, it has been a large ongoing sale,” said Raya Sokolyanska, a vice president and retail analyst at Moody’s. It’s that promotional environment, reflective of the current state of retail, that is cutting into margins and reducing profits.

Indeed, Bain Capital-backed Toms Shoes is the latest brand to hand ownership to its creditors, though in its case via an out-of-court debt restructuring rather than a bankruptcy filing.

Toms Shoes was one of several retailers assigned a distressed rating by Moody’s headed into January, a group that notably includes Pier 1 Imports and Neiman Marcus. Other companies rated Caa1 and below include 99 Cents Only Stores, Academy Sports + Outdoors, Guitar Center, Ascena Retail Group, Bluestem Brands, J. Crew, JCPenney and Rite Aid.

There are also food and grocery banners in need of turnarounds, such as Save-A-Lot parent Moran Foods, Fairway Group, BevMo (formerly Beverages & More) and Fresh Market, according to Moody’s.

Whether these endangered retailers will survive is going to depend in part on how they perform during January, said Charles O’Shea, vice president and retail analyst at Moody’s. That’s because shoppers are expected to return billions of dollars of merchandise this month. On Thursday, for example, consumers are projected to return 1.9 million packages, according to Statista.

But while January poses a challenge, it also provides retailers with an opportunity, O’Shea said. When customers visit stores to return their packages, it gives retailers another “bite of the apple.”

“Returns are critically important. Once you get someone in your store, that’s a huge win,” he said. As a result, retailers need to find a way to convert that store traffic into additional sales and convince customers to eventually come back. “The only way to beat the big guys is with service,” he added, citing Best Buy as a successful example.

Furthermore, January’s importance as part of the holiday shopping season is only going to increase, according to O’Shea, particularly when combined with the ramp up in sales of electronics and other products heading into the Super Bowl.

Cash-strapped brands are also caught in the competitive crossfire between Amazon, Walmart, Target, Costco and T.J. Maxx, among others, he noted.

The retail world is largely bifurcated, divided into strong and weak performers, explained Christina Boni, a vice president and retail analyst at Moody’s. “Retailers that don’t have the balance sheet, it doesn’t leave them with a lot of room to compete,” she said.

The key to all of retail is that companies need to continue to invest to meet customers’ changing demands, Boni said. “Customers don’t shop is silos,” she said, and want a seamless experience when they make a purchase, whether that means ordering online or returning an item to a physical store location. That requires investment in the supply chain and technology, which requires a healthy balance sheet.

And that, in turn, leaves little room for error.

O’Shea pointed to the example of luxury retailer Barneys, which was essentially forced to file for bankruptcy protection because its rent costs increased. Levered retailers are also facing lenders and debt investors who are increasingly unfriendly and opportunistic. For this and other reasons, O’Shea does not expect bankruptcies, restructurings and store closings to abate in the coming year.

“Those doing well will continue to do well, and ones that are struggling will continue to struggle,” Boni added.

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