Sears, Claire’s at high risk of retail failures, Fitch says

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Sears Holdings Corp., Claire’s Stores Inc. and Nine West Holdings Inc. are among seven chains at high risk of defaulting within a year as shoppers shift to online merchants and spend more on experiences, according to a Fitch Ratings study of retail bankruptcies.

The companies were named in a 114-page report Wednesday that found retailers wind up liquidated almost three times more often than other companies in bankruptcy because customer defections are making turnarounds harder to execute.

Other chains at risk include True Religion Apparel Inc., 99 Cents Only Stores LLC, Nebraska Book Co. and Rue21 Inc., Fitch said.

Adam Kleinman, a spokesman for Nebraska Book, said Fitch’s report didn’t take into account a debt exchange completed on Sept. 19. The company is not at high risk of defaulting and has “ample runway to execute its business strategy,” he said. Representatives for the other companies declined to comment or didn’t immediately respond to messages.

Sears Holdings operates more than 60 stores in Indiana carrying the Sears name, including 14 department stores, more than 25 Sears Hometown Stores, five Sears Hardware stores and more than a dozen Sears Auto Centers. There are two Sears department stores in the Indianapolis area (Castleton and Greenwood), plus four Hometown stores, three Hardware stores, two Auto Centers and one Appliance Outlet store.

Claire's has six Indianapolis-area stores and Rue21 has nine area locations. True Religion has a store at the Fashion Mall at Keystone Crossing.

The credit-grading firm studied 30 recent retail bankruptcies that involved $10.5 billion of debt. Fifty percent didn’t survive the process, compared with 17 percent across other industries, Fitch said. Grocery chains were an exception, with five of six emerging as operating businesses because they had strong locations, Fitch said.

Shopping mall visits are “not as popular as something to do for a pastime, particularly among teens,” analyst Sharon Bonelli, one of the report’s co-authors, said in an interview. “They’d rather be on their phones and spending their disposable income on things like their electronics or restaurants, coffee shops.”

Most of the defaulters were companies that didn’t have a unique model, selling branded goods that shoppers could get elsewhere, Bonelli said.

In this kind of scenario, a retailer loses its “reason to exist” and its chance to regain favor with customers, and thus loses its value as a going concern to a potential savior, the report said.

The average case took 11 months to settle, based on the time from petition date to plan confirmation, although in some cases the process dragged on for years, Fitch said. It took apparel chain Gottschalks Inc. 26 months, the longest of the 30 companies studied, according to Fitch.

First-lien lenders were often repaid in full with cash after retailers filed for bankruptcy protection thanks to over-collateralized asset-backed loans, according to the report. Unsecured lenders averaged recoveries of less than 25 percent.

Bennett Goodman, co-founder of Blackstone Group LP’s credit arm GSO Capital Partners, told investors Tuesday that bankruptcies of all kinds are getting longer and more litigious and they are hurting recoveries.

“More value was destroyed the longer these companies remained in bankruptcy,” Goodman said at the Private Debt Investor New York Forum. It’s especially true “if we’re talking about the second-lien or unsecured market,” he said, where “recoveries are going to be a lot lower than the historical past. And that’s primarily because there’s just more senior debt ahead of them.”

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