Retail businesses teetering on the precipice

In the dynamic world of retail, several companies have been grappling with challenges in recent times. Here's a roundup of some notable developments affecting Pier 1, Party City, and other retailers.

Starting with Pier 1, the home goods retailer saw a significant setback when Standard & Poor's (S&P) downgraded its credit rating to B- in May 2018. This downgrade came amid deteriorating sales in the spring of the same year. The company's most recent financial report showed a net loss of over $100 million. To address these issues, Pier 1 has hired financial advisors to help manage its balance sheet.

Party City, another retailer, faced a double whammy this year. Not only did the company break a 10-quarter streak of negative comparable store sales in the third quarter, but it also had to contend with a helium shortage that likely affected its sales. The shortage, combined with a 21% decline in sales per store for October, led to a challenging period for the company.

Francesca's, a specialty retailer, managed to narrow its operating and net losses in the third quarter, breaking its streak of negative comparables. However, the company's inventory levels for the quarter were higher compared to the same period the previous year. To steer the company forward, Francesca's has hired an executive search firm to find a permanent CEO, more than 10 months after the former chief's resignation was announced.

In a similar vein, L Brands and Big Lots face the challenge of managing inventory levels while maintaining enough 'open to buy' for new items. This dynamic is not unique to these companies, as retailers in various sectors grapple with similar issues.

Michaels, a crafts store retailer, has been underperforming its rivals, losing both market share and profits while trying to manage tariffs. S&P downgraded Michaels' credit rating from BB- to B+ due to intense competition in the category and the retailer's third-quarter performance.

Office Depot, a retailer in the office supply space, has been facing sales pressure and has been trying to manage declines in both sales and profits. The company has been leaning on its offered services to revive growth in its retail business.

It's important to note that retailers rated B3 by Moody's, such as Pep Boys-Manny Moe & Jack Inc., ITV plc, Sirius XM Radio Inc., and Radio One Inc., tend to have weak liquidity and may lack the financial resources to invest in e-commerce capabilities. This is a challenge faced by many retailers, including Duluth Trading, Stage Stores, Francesca's, Christopher & Banks, Wayfair, iMedia Brands, Hudson's Bay, Tuesday Morning, Build-A-Bear, Camping World, The Container Store, and Conn's, which all have a 2.1%-4% chance of bankruptcy, according to CreditRiskMonitor's FRISK scores.

Retailers such as The Children's Place, Express, Guess, and L Brands have faced setbacks in sales or profits this year and have a FRISK score of 4. This score indicates a 1.4% to 2.1% chance of filing for bankruptcy.

In the case of Pier 1, S&P rated the company as deep in junk territory with a CCC- grade, less than a year after the initial downgrade. Party City's share prices imploded after the earnings announcement, dropping nearly 70% in a matter of days.

These developments underscore the challenges facing the retail sector, with numerous companies grappling to adapt to changing consumer preferences, manage inventory levels, and navigate the complexities of e-commerce.