Retail Distress is Making a Comeback

Denim jackets. Crop tops. Retail bankruptcies? While it seems that many fashion styles are revived every 20 years or so, just often enough for a new generation to discover them for the first time, distress in the retail sector is staging a comeback after a two-year reprieve. Lest we forget, many large retail chains were struggling before COVID, not necessarily at an existential level but certainly from a profitability perspective, as omnichannel retailing radically altered the calculus of running a consumer-facing business.

COVID-19 disrupted that narrative for a while and created a new mix of winners and losers among retailers, depending on what they sold and how they sold it. As consumer shopping patterns and preferences return to normal after a most unusual three-year period that upended the ways we shop, these old-school challenges are back in fashion again. We’re not limiting this discussion to apparel and include any product sold to consumers primarily in a store-based setting. In fact, the growing list of retail names getting recent media attention as bankruptcy candidates runs the gamut of product categories and store types.

Store-based and omnichannel retailers caught a break in the aftermath of COVID-19, as shoppers returned to stores in large numbers still loaded with most of their COVID-fueled cash hoard intact following a lengthy hiatus from in-store shopping. For the first time since the advent of online shopping, total store-based sales growth (YoY) outpaced online sales growth for five consecutive quarters from 2Q21 through 2Q22 (Figure 1). During this time, retail bankruptcies plummeted from pre-COVID norms and profitability briefly improved across the sector, a much-needed break for struggling chains. Inflation benefitted many retail chains that were able to pass on these higher costs, and then some, to customers. Some industry watchers hoped that consumers had rediscovered their love of in-store shopping after being limited to mostly online transacting during the pandemic. Eh, not really — it was more of a dalliance than a rekindled romance. The script has since flipped once again, as total store-based sales growth (YoY) has weakened consistently over the last six quarters and now is marginally positive while online sales growth hovers in the high single-digits (Figure 1) compared to the low double-digits prior to COVID. The purported comeback of store-based shopping lasted about as long as the 3D movie craze, while ROI has trended lower across most retail segments since a COVID-induced peak in early 2022.

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