A credit professional would have to be somewhat asleep at the switch to have missed the often negative news coverage in business publications and mainstream media about the struggles of Best Buy and JCPenny (JCP). The problems faced by the two companies and others like them, albeit to a lesser extent, warrant inclusion of department stores and “big box” retailers as industries to watch. As such, creditors are going to need to be mindful of warning signs coming from companies therein.
JCP’s business model, which featured a failed gamble on a campaign that ended faux discounting and coupons in favor of “real” pricing, and Best Buy’s struggle to overcome powerhouse online retailers like Amazon, and brick-and-mortar competitors like Walmart for market share are the source for their struggles. But an even bigger storm for retailers of this size and profile, as suggested by Bruce Nathan, Esq. of Lowenstein Sandler LLP, potentially looms in the not-too-distant future: rate hikes. Let’s face it, rock-bottom interest rates, and the economic malaise inspiring them, won’t last forever. “If your business model is troubled and you have a lot of debt, that’s going to be one big issue,” said Nathan. “When interest rates go up, the debt has to be refinanced. But a lot of these retail businesses are also badly overleveraged.”
And potential financial problems with such stores could have a domino effect as many of them serve as anchor stores designed to drive more foot traffic to other retailers in malls and shopping centers. Nathan noted that such a domino effect could also impact a commercial real estate sector that has already seen its share of hardships over the last half-decade. “You need to look for the warnings to be able to mitigate your risk,” said Nathan. “You want to be able to anticipate a bankruptcy well before the filing. And there’s so much more information out there now that wasn’t 20 years ago.”
- Brian Shappell, CBA, NACM staff writer
Catch Nathan in Bankruptcy Rumblings: Identifying and Mitigating Risk of a Financially Troubled Customer Headed toward Bankruptcy at Credit Congress on May 22. For more information on the event or to register, visit http://creditcongress.nacm.org/.