After better-than-expected holiday season, a 'reckoning time' for retailers

Consumers have unwrapped their holiday gifts. Now, it's retailers' turn to see what the holiday season brought them.

Companies and their lenders are tallying sales, calculating returns, and considering prospects for the year ahead. It's "the reckoning time," said Frank Layo, managing director at consulting firm Kurt Salmon, part of Accenture Strategy.

It didn't end well last year: The Limited, Wet Seal, Marbles Holdings, BCBG, H.H. Gregg, RadioShack, and Gander Mountain all filed for Chapter 11 bankruptcy protection by the end of March. Retailers announced 6,955 store closings in 2017, outpacing closings at the height of the 2007-09 recession, according to Fung Global Retail & Technology.

In the shakeout, some retailers that were slow to adapt to the rise of e-commerce seem to have begun cutting excess physical space and adding services to adapt to demands for a seamless blend of online and in-store shopping.

But other retailers — especially those saddled with hefty debts — are still struggling to make the transition. Early reports suggest that the industry caught a break in the holiday season that just ended, but with many retailers not expected to report fourth-quarter results for a few more weeks, it's not clear whether those most in need of a strong end to the year shared in the holiday wealth. Some chains, including Sears and Macy's, announced new rounds of postholiday store closings last week, creating more vacancies for malls to fill.

"There are winners and losers, and there's a chasm growing in the middle," Layo said.

Few are under more scrutiny than Sears Holdings. The parent of Sears and Kmart hasn't shared details on its holiday performance. But last week it said it would close 103 stores by April, on top of 63 stores it previously said would close after the holidays.

Sears' struggles aren't new. Both Fitch Ratings and S&P Global Market Intelligence put the retailer on short lists of chains at risk of defaulting on debts. In Sears' case, they amount to $752 million due in 2018, on top of money Sears will need to pay for operations while it works to turn its business around.

Recently, Sears announced it paid down $325 million on a loan originally due midway through 2018 and pushed the deadline on $400 million in remaining debt into 2019. It also plans to use real estate-backed credit to cover an upcoming pension contribution.

The company said those moves would give it extra financial flexibility, but analysts are skeptical they would change Sears' prospects.

"They've kicked the can a bit, but it doesn't change the story," said David Silverman, a Fitch senior director covering the retail industry.

Sears has also tapped the resources of CEO Edward Lampert. He and affiliates of his hedge fund, ESL Investments, last year lent the company $600 million, backed by mortgages on Sears' properties. Store closings and asset sales can help cut costs and bring in cash, but also give the company less to work with, said Christina Boni, vice president and senior analyst at Moody's Investor Service.

Also on Fitch and S&P Global Market Intelligence's short lists of retailers at risk is Bon-Ton, parent of chains including Carson's and Bergner's. The department store operator doesn't have significant debts due as imminently as Sears. But talk of wary vendors and working with advisers to "establish a sustainable capital structure to support the business" raised concerns, Fitch's Silverman said.

Sales at stores open at least a year were up 3.1 percent in the first four weeks of November, but the company has announced plans to close at least 40 stores this year.

In 2016, Macy's said it planned to gradually close 100 stores, and added seven more last week. Sales at stores open at least a year were up 1 percent in November and December, Macy's said.

Moving earlier, when it was on firmer financial footing, gave Macy's more room to maneuver, said Neil Stern, senior partner at consulting firm McMillanDoolittle.

Macy's has "a long way to go, but among the competitive set they're in, they're the healthiest and have more wherewithal to do something," he said.

So far, J.C. Penney is the only other major retailer to share details on sales over the holidays, reporting a 3.4 percent increase in November and December at stores open at least a year.

The entire department store category has been under pressure, Layo said. "If [department stores] can show good performance, they can show that they're not gone yet and still have a value proposition."

The challenges aren't limited to big department stores. Stores inside the mall are facing pressure, too.

Also on Fitch's list of retailers at risk of default: mall-based chains Claire's, Charlotte Russe, and Charming Charlie. The latter, a Houston-based jewelry and accessories chain, filed for bankruptcy protection in mid-December and sought the court's permission to close at least 97 stores.

Claire's has been hit by declines in mall traffic, especially because the jewelry and accessories it sells tend to be impulse purchases, Silverman said. During a call with investors, Claire's CEO Ronald Marshall said the retailer is trying to expand sales outside the mall and will have products in roughly 4,000 CVS stores by the end of 2018.

Claire's reported a 1.1 percent increase in sales at stores open at least a year in the third quarter of 2017. But it also has $1.4 billion coming due in 2019, according to Fitch.

Another retailer didn't quite make it to the postholiday reckoning: Toys R Us, which sought Chapter 11 bankruptcy protection in September after vendors reportedly began demanding faster payment.

The bankruptcy process should give the company some time to maneuver, Stern said. But it also took a toll on consumers' confidence in the chain headed into the holiday season, on top of disruptions to the company's supply chain, Toys R Us chairman and CEO Dave Brandon said during a call with investors in December.

Winding up on one of the industry's "watch lists" isn't necessarily fatal. Last year, industry watchers had ominous forecasts for Best Buy, but its outlook has since become brighter, Stern said, with investments in services like its in-home adviser program.

And while bankruptcies in the retail sector are more likely to end in liquidation than in other sectors, some retailers are able to remain open for business, including children's apparel-maker Gymboree and Payless Shoes, both of which closed hundreds of stores but emerged from bankruptcy last year.

In 2016, Aeropostale, a teen retail chain purchased out of bankruptcy by a partnership between Authentic Brands Group and mall operators GGP and Simon Property Group, may have benefited from the mall operators' self-interest, Stern said.

Mall operators need chains to fill their stores, and vendors who don't want to rely on Amazon or direct-to-consumer sales need specialty chains to sell their products.

"There's a growing recognition that if they want to keep these channels, they're going to have to be a little more flexible," Stern said.