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Retail bankruptcies may become the new normal

Rating agencies announced that the retail sector has replaced the nations' energy industry as the sector most likely to face the risk of business bankruptcy this year. Internet competition, changing consumer behavior, digital investment costs, excess retail locations, decreasing foot traffic from shoppers, lower discretionary spending and decreasing revenue are among the problems plaguing retail now and in the future.

Fitch Ratings placed many retailers on its bonds of concern lists. Fitch anticipates that the default rate for retail to increase to from one percent in 2016 to nine percent in 2017.And, while sales improved in January, the obstacles facing this sector are continuing to increase, and sales are not anticipated to grow.

For example, the calendar is problematic because Easter is an important holiday for shopping, but it is pushed back this year. This means that retailers still must purchase goods,but face a lag time until they are sold, which hurts their cash flow.

One analyst said that a retailer can absorb one unprofitable year, but may be overwhelmed by several unsuccessful years. This year, Eastern Outfitters and The Limited filed for Chapter 11 protection. Last year, Wet Seal, American Apparel, Aeropostale, Inc., and Sports Authority filed for Chapter 11 or complete liquidation.

Macy's, Sear's, the Gap and Guess also recently announced store closures. Macy and Sears are often anchor stores that used to draw shoppers to malls and shopping centers, and specialty stores, such as the Gap, rely on their ability to draw shopping traffic. These reversals have a ripple effect, whichincludes mall operators, restaurants, and mall food courts, shopping centers and other groups that depend on the success of the mall and shopping centers.

Retail is facing issues that may prove to be overwhelming, if companies do not have the liquidity to compete to the changing environment, particularly the move to online sales. These chains not only have to invest in e-commerce, but also address declining foot traffic and excess brick-and-mortar store capacity.

Retailers and other businesses may need legal assistance to reorganize and take other measures to survive in a difficult business environment. A lawyer can assist with business debt negotiations and creditors.

Source: MarketWatch, "From a risk-of-bankruptcy standpoint, the retail business is the new oil and gas," Tonya Garcia, Feb. 19, 2017

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