The rise of e-commerce and online sales in many cases is rendering portions of retailers' real estate portfolios unnecessary, which may contribute to an influx of retail bankruptcy filings as companies look to break out of their leases.
As retailers increase online sales, the need for a larger store footprint decreases, which can leave retailers over-stored.
"It is increasing year over year, and more and more customers are feeling comfortable buying through e-commerce. We need fewer stores and we need those stores to be important, but we don't need a store on every corner anymore," says Jane Hali, vice president of Planet Retail Investment Research, part of London-based trend forecasting company WGSN.
"E-commerce growth is radically changing the retail environment; as a result, you just have too many stores in many cases," says Conway Mackenzie's Matt Covington.
For some brands, selling online can cannibalize in-store sales. For retailers who are already in distress, this just adds the burden of unproductive real estate to an otherwise troubled situation.
Bankruptcy protection offers these groups a way to restructure their debt, but also their real estate holdings (Chapter 11 allows companies to reject leases). Retailers may be able to renegotiate leases for a small number of stores, but that is not a feasible option when it comes to restructuring a larger real estate portfolio.
Several retailers have filed for bankruptcy protection to restructure debt, and they also are shedding real estate assets.
One of those retailers, Coldwater Creek, which filed for Chapter 11 bankruptcy protection on April 11, ended up selling store leases through an auction and raising about $1.7 million to help pay back creditors. The company's motion to reject leases was filed April 11 with the bankruptcy court.
Coldwater, which sold women's apparel, operated 334 retail stores, 31 factory outlet stores and seven day-spa locations in the U.S. when it filed for bankruptcy. The company peaked in 2006, reaching revenue of $1.1 billion. It increased store count from 198 in 2005 to more than 330 in 2007, when the economic downturn started causing the retailer problems, according to court documents. Before filing for bankruptcy protection, Coldwater hired Perella Weinberg Partners LP to run a sale process, which turned up no interested buyers, according to court documents. As the company's sales continued to decline, it filed for bankruptcy protection to liquidate.
Women's clothing and accessories retailer Dots LLC filed for bankruptcy on January 20.The company said in court documents that before it filed, it decided 36 of their approximately 400 stores were consistently "operating at a loss and thus eroding the value of their estates." Dots filed a first-day motion to reject leases. The retailer's current owner, New Dots LLC, is slowly working to reopen store locations after they were all closed during the bankruptcy case.
Children's retailer Naartjie Custom Kids Inc. also filed for bankruptcy protection with the intent to restructure and close retail locations. The retailer, which was founded in Cape Town, South Africa, sells brightly-colored children's clothes. Naartjie filed for bankruptcy protection on Sept. 12.
Between 2008 and 2010 Naartjie expanded its retail store footprint by at least 10 stores per year. "Despite an expanding retail presence across the U.S., Naartjie's financial performance began to worsen as a result of deteriorating economic conditions, increased discounting by competitors and weakening performance of specific stores and geographical locations," the company says in court documents.
Naartjie's plan is to close all of its retail stores in the U.S., but keep the stores in South Africa and its e-commerce business up and running. The company started going-out-of-business sales at its U.S. retail outlets in October.
Other struggling retailers that experts say could follow similar bankruptcy, real-estate jettisoning paths include American Apparel and RadioShack, which are both in the midst of very public out-of-court restructuring processes. RadioShack Corp. (NYSE: RSH) said in September that it might have to file for bankruptcy protection because it was running out of cash. But it announced in October that it had restructured part of its debt and landed a $120 million investment.
Though bankruptcy provides the opportunity for over-stored retailers to cut their real estate burden, store footprint reduction hasn't been and will not be the main reason retailers file for Chapter 11.
"It's expedient but it's damaging," says Andrea Weiss, founder of the O Alliance retail consulting firm. "You wouldn't make it your purpose for doing it; you'd be distressed on other levels," Weiss says. "Could it become such that it tipped the fulcrum? It could, if we were to continue to see these double-digit declines in traffic with no abatement at all."
For more on struggling companies, see Mergers & Acquisitions Distressed Company Watch List.