Bankruptcies will continue to rock retail in 2018. Watch these trends

As 2017 comes to a close, the retail industry has been tainted by yet another bankruptcy filing — along with also 2018 is actually unlikely to bring relief.

Texas-based fashion accessories chain Charming Charlie filed Monday for Chapter 11 bankruptcy protection, having recently announced the idea might be moving forward with slimming down its store base.

today, the retailer has secured millions of dollars in loans, which once approved by the court will aid Charming Charlie in keeping the majority of its locations open along with also its website operating during bankruptcy proceedings This particular holiday season.

The wish is actually Charming Charlie will emerge through the restructuring using a smaller store footprint along with also a strategy of which goes “back to basics,” the company explained.

Charming Charlie marks one of many names struggling to grow sales as consumers increasingly turn to the internet along with also well-known off-cost chains to ring up purchases. Chief Executive Officer Lana Krauter said in a statement Monday the company has been plagued by a “rapidly changing retail environment.”

This particular year alone, more than 20 retailers including Toys R Us, Hhgregg, Gymboree along with also RadioShack have filed for bankruptcy protection. Looking to 2018, there are many candidates of which could follow within the footsteps of their embattled predecessors.

Moody’s has been tracking a growing number of distressed apparel along with also specialty retailers in 2017, anticipating more bankruptcy filings to come next year.

“I think the early part of next year will be pretty bad … I think the idea will be tough,” Moody’s lead retail analyst Charlie O’Shea told CNBC. “Think about the idea: if you’re a highly leveraged brick-along with also-mortar retailer, how do you compete” with Walmart along with also Amazon’s outright cost war, he added.

Among Moody’s rated retail along with also apparel issuers with debt ratings of ‘Caa’ or lower (which represents anywhere through “substantial risk” to the potential for total default on a bond) are kid’s accessories chain Claire’s Stores, apparel retailers J Crew along with also Charlotte Russe, department store chain Bon-Ton Stores along with also grocer Bi-Lo.

A considerable threat to many retailers’ (such as Charming Charlie along with also Claire’s) businesses today is actually not owning a product or service of which consumers couldn’t find elsewhere. For example, U.S. mall anchor Sears Holdings, which also ranks poorly on Moody’s list, has lost sales as shoppers opt to pick up appliances, furniture along with also some other hard goods through alternative outlets.

Moody’s analyst Christina Boni told CNBC she’s keeping close watch on a slew of Sears’ maturities in fiscal 2018. Meantime, the retailer’s asset base is actually declining as its turnaround efforts appear “elusive,” she wrote in a recent note to clients.

Taking into consideration the threat of foot traffic dwindling at many of America’s malls, risks begin to mushroom for brands such as J Crew, Nine West, Charlotte Russe along with also Vince.

Christopher Jarvinen, a partner at Berger Singerman in Florida, told CNBC he advises watching real estate investment trusts along with also mall owners Simon Property Group, General Growth Partners, along with also Macerich, to see how they respond to the noise.

“The mall product is actually dead,” along with also the future is actually more temporary tenants along with also mixed-use developments, he said. Jarvinen, who has represented numerous retailers including Traffic Shoes along with also Simply Fashion Stores through Chapter 11 bankruptcies, said REITs could also help more retailers come out of filings next year in a stronger position, to avoid having a “dark” store.

Simon along with also GGP, for example, won an auction to purchase teen apparel retailer Aeropostale after the idea filed for Chapter 11 bankruptcy protection last year, hoping to avoid having to fill more than 0 vacant stores. The two companies have since managed to salvage the Aeropostale nameplate.

Moody’s so-called watch list has ballooned to 27 names through 22 companies This particular summer, as a load of retail debt is actually coming due in 2018. A recent addition to the list was General Nutrition Centers, or GNC, which is actually also a well-known U.S. mall tenant. One of GNC’s rivals within the space, Vitamin World, just filed for bankruptcy in September, saying the company hopes to get out of costly lease agreements tied to some of its locations.

“Next year I think you’re going to see smaller-format stores, people reassessing their mall strategies, especially as anchors struggle in a lot of malls,” O’Shea said. “The retailers of which are winning … are within the best financial position along with also develop the best flexibility” with their locations along with also sales channels.

Fitch Ratings, which keeps track of companies with glaring “loans of concern,” is actually calling for a higher retail default rate in 2018 — above 10 percent — as more defaults involve sponsored transactions, or private-equity related activity.

“Two or three years back … we saw private-equity funds get into the retail sector along with also over-leverage the retailers they were buying,” Jarvinen told CNBC. “today, we see the cash flows not being able to service of which debt.”

One thing to look for in 2018 is actually more retailers actually firing back at PE firms for “fraudulent transfers” of which hurt their businesses within the long run, Jarvinen added. Additionally, more along with also more family-owned retailers, of which there are plenty across the U.S., are being pushed into filing for bankruptcy at the last minute due to lack of resources along with also ability to plan, he said.

Fitch has also noticed retailers recently emerging through bankruptcy at lower market values compared with historical averages.

In general, retail stocks have struggled. Over the past 12 months, the S&P 500 Retail ETF (XRT) is actually down more than 6 percent, even with recent gains driven by expectations for strong holiday retail sales.

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