Home Business If Back-To-School Sales Fizzle, Retailer Bankruptcy May Not Be Far Behind

If Back-To-School Sales Fizzle, Retailer Bankruptcy May Not Be Far Behind

The New York Post reported recently that teen retailer Claire’s Stores needs a big sales lift from back-to-school or the business will likely go bankrupt. Claire’s Stores, which has more than 3,000 retail outlets, announced that its overwhelming debt of $2.4 billion combined with a same store sales decline of 5% for the 10 weeks ending July 10 points to a possible bankruptcy filing.

For many retailers, the back-to-school selling season has become the second most significant sales volume push, second only to the end of year holiday sales season. The predictions of a number of significant retailers and industry experts points to a dismal 2016 back-to-school sales season which will in turn lead to additional retail bankruptcies.

In the last nine months, the retail environment has been plagued with an unusually large number of high-profile retail bankruptcies, led by Sports Authority which not only was unable to successfully reorganize and stay in business, but also was unable to sell virtually any of its existing stores as going concern locations. This along with other retail failures in the industry, including teen retailer Aeropostal, creates the need for landlords, suppliers, taxing authorities, employees and even consumers to understand the need for protection from substantial or even catastrophic losses.

The back-to-school sales situation points to several unique factors which have created a confluence of negative impact on the financial health of retailers. During the most recent financial crisis, when interest rates dropped to close to zero, many retailers (large and small) took the opportunity to refinance existing debt at a lower rate, and in many instances, increasing the outstanding indebtedness.

These loans carry an interest and principal reduction burden which erodes profits to the extent they exist. Furthermore, many of these loans are expected to mature within the next 12 to 18 months, putting additional pressure on the retailers and their lenders.

Additionally, in the Sports Authority bankruptcy proceeding, the secured lenders challenged the right of the consignment vendors to reclaim their goods or the proceeds from the sale of their consigned goods.

As was dramatically pointed out by the insolvency filing and closure of over 250 Target stores in Canada, the absence of the flow of needed inventory is devastating to the ongoing financial viability of retailers.

Suppliers and other trade creditors providing goods, services or financial accommodations to retailers need to now take the steps in order to protect themselves in the event of bankruptcy proceedings and closures.

Vendors to retailers also should become acutely familiar with the provisions of the Bankruptcy Code and the Florida Uniform Commercial Code which provide for reclamation rights for vendors in the event of a bankruptcy or insolvency of the customer.

There is a very short window of opportunity available to these vendors to obtain either the return of their goods or a priority claim position when such failures occur. However, if the window of opportunity passes without appropriate action being taken, the vendors’ rights are lost.

All of the above demonstrates the need for everyone involved with the retail industry to be on the alert so as to be able to protect their interests and minimize losses.

Charles Tatelbaum is a director and the creditors’ rights/ bankruptcy practice group chair for the Fort Lauderdale law firm of Tripp Scott. He has been practicing bankruptcy law for 52 years, has handled some of the most complex bankruptcy cases in the U.S. and Europe, and is a former instructor in business law and bankruptcy law topics at the Francis King Carey Law School at the University of Maryland.