Major national retailers are foundering as the coronavirus pandemic accelerates the industry’s long decline, with Monday’s bankruptcy filing from J. Crew delivering a stark reminder that the face of retail could be permanently altered.
The mall staple known for preppy basics became the first national store brand to seek Chapter 11 protection since the covid-19 crisis began, but others are nearly certain to follow. Neiman Marcus and J.C. Penney are low on cash and widely reported to be considering similar action.
The industry has been on a downward trajectory for years as retailers binged on debt and struggled for relevancy while online giants like Amazon and big-box mainstays like Walmart siphoned sales.
Now many retailers are losing their grip, with much of the economy shuttered by coronavirus lockdowns. And even as some states move to reopen, many Americans are hesitant to go back into brick-and-mortar establishments. As many as 25,000 stores could permanently close this year, according to liquidation firm Gordon Brothers, as businesses grapple with weeks-long closures and diminished demand for clothing, shoes and other nonessential items.
Roughly one-half of the country’s mall-based department stores could close by the end of 2021, according to real estate services firm Green Street Advisors.
Analysts say those closures are likely to set off another round of reckoning for smaller retailers, including specialty apparel shops, that rely on large anchor stores for much of their spillover foot traffic. Many also have clauses in their leases allowing them to pull out of shopping malls as big-name anchors disappear, creating cascading problems for mall operators. Mall vacancies are at an all-time high of 9.7 percent, as of March 30, according to Moody’s Analytics REIS.
“There is no question that all types of retailers are going to have to close hundreds of stores that don’t have any kind of future on the other side of this pandemic,” said Mark Cohen, director of retail studies at Columbia Business School. “Malls have faced an enormous amount of breakage over the last few years: Closing anchors, disappearing chains, specialty stores like Forever 21 and Gymboree filing for bankruptcy. This trend is only going to accelerate during this crisis, and it’s going to accelerate explosively.”
A new wave of store closures, analysts said, will further widen the divide between the nation’s most successful malls — often in city centers, with glitzy makeovers and high-profile anchors — and the second- and third-tier shopping centers that have been clinging to life for years. There are roughly 1,100 shopping malls in the United States, and analysts say the vast majority are struggling to hold on to tenants and engage consumers.
Analysts say the sector’s troubles will rise in the coming months as retailers file for bankruptcy and rethink their portfolios. Thousands of low-performing stores could close, hollowing out struggling malls, with rippling effects on landlords, suppliers and workers. Hundreds of thousands of retail workers have lost their livelihoods in recent years, with the industry cutting 77,000 jobs — more than any other sector — in 2019 alone. That trend is likely to continue. Already, retailers have furloughed more than 1 million workers during the pandemic, and analysts say there are signs that many of those positions will disappear entirely.
“When you have a whole raft of bankruptcies like we’re about to see, it will leave an awful lot of gaps that for many malls will be impossible to fill,” said Neil Saunders, managing director of GlobalData Retail.
Certain parts of the country — including suburban areas, as well as pockets of the Midwest, New York and New Jersey — are likely to be hit harder because they have a glut of second- and third-tier shopping malls, he said. “But generally this is a national problem that will affect everybody.”
Even well-positioned malls are likely to feel pain long after the pandemic subsides. More than 30 million Americans have been laid off in recent weeks, a level of job losses not seen since the Great Depression. Retail sales fell a record 8.7 percent last month as consumers cut back on clothing, shoes and home furnishings — all of which abound at the mall.
The country’s most successful malls have spent millions in recent years to reinvent themselves as “lifestyle centers,” with gyms, restaurants, spas and other attractions to compete with online sellers like Amazon. But analysts say it will be months, perhaps even years, before Americans feel comfortable congregating in crowded, enclosed spaces. (Jeff Bezos, the founder and chief executive of Amazon, owns The Washington Post.)
“Malls are being pummeled by a confluence of factors,” said James Gellert, chief executive of the financial analysis firm RapidRatings. “Tenants that were already weak are facing significant financial trauma. Then you have macroeconomic stresses: Reduction in employment, lowered consumer spending, supply chain disruptions.”
J. Crew joins at least half a dozen national retailers that have filed for bankruptcy this year, including Pier 1 Imports, Modell’s Sporting Goods and True Religion. Others have taken action to hold on to cash. Some, like the Gap, have stopped paying rent. A number of others have cut executive pay, furloughed employees and canceled orders for spring inventory.
J. Crew, which posted a list of frequently asked questions about its bankruptcy, expects to continue operating during reorganization and says customers should not expect any immediate changes. Lenders have agreed to convert $1.65 billion of debt into equity, according to the bankruptcy filing. Much of that figure stems from its 2011 leveraged buyout by the private-equity firms TPG Capital and Leonard Green & Partners.
“This agreement with our lenders represents a critical milestone in the ongoing process to transform our business with the goal of driving long-term, sustainable growth for J. Crew and further enhancing Madewell’s growth momentum,” chief executive Jan Singer said in a statement, referencing its smaller, but more successful, brand.
In its bankruptcy filing, J. Crew’s parent company, Chinos Holdings, said it owes between $1 billion and $10 billion to more than 25,000 creditors. It estimated assets of $1 billion to $10 billion.
J. Crew had planned to spin off Madewell into a stand-alone company. In a September filing, the company said it expected to raise as much as $970 million by taking it public. But it scrapped the idea in March following a “strong” fourth quarter — its first profit after seven straight quarters of losses. Bloomberg reported that J. Crew and its creditors couldn’t agree on final terms.
The fizzling of the initial public offering, combined with the financial strain of the pandemic, made bankruptcy all but inevitable, analysts said. The company had $2.5 billion in revenue last year, down from $2.6 billion five years ago. J. Crew’s sales fell 4 percent, to $1.7 billion, while Madewell’s sales rose 15 percent, to $602 million.
“J. Crew has been on the bubble for years,” said Paula Rosenblum, managing partner at Retail Systems Research in Miami. “The best thing about Chapter 11 is you get to get rid of stores that you don’t need or want anymore. It’s the only way to break a lease."
The mall-based chain got its start in 1947 as Popular Merchandise, a catalogue-based purveyor of affordable women’s apparel. It established J. Crew in 1983 and opened its first store, in Manhattan, in 1989. J. Crew locations in San Francisco, the Boston suburbs and Dallas quickly followed, and by the early 1990s, the company was bringing in about $200 million a year in revenue.
“J. Crew displays the understated cool of a winner,” Texas Monthly said in a 1992 profile of the company. “Seemingly, lots and lots of people want to live the J. Crew life, which means that they want to buy classic American wear — ‘broken-in chinos,’ ‘vintage workshirts,’ or the ‘J. Crew barn jacket,’ in company parlance — at reasonable prices.”
The brand was an American mainstay for years. Its bright colors and classic silhouettes won over a legion of celebrity fans, including Michelle Obama and Reese Witherspoon.
But things began going south shortly after the company’s 2011 sale. Analysts say clothing quality began to deteriorate, and loyalists complained that the offerings had become dull. There was more competition, too, as direct-to-consumer brands such as M.M. LaFleur and Bonobos gained ground. By 2014, sales were on a downward slope, with the company reporting a $607.8 million loss in the third quarter. The ratings agency Moody’s downgraded J. Crew, cited “weak execution in a challenging apparel retail environment.”
The company’s problems continued to mount. Jenna Lyons, the creative director widely credited with bringing whimsy to the brand, left in 2017. In early 2019, longtime chief executive Mickey Drexler stepped down as well. Singer, a former Victoria’s Secret executive, was tapped to lead J. Crew in January.
“J. Crew’s products have really suffered,” Saunders said. “There have been mounting problems with basic design and aesthetics. They’re selling the same T-shirts and ballet slippers as everybody else, but at higher price points.”
J. Crew has tried to stay competitive through heavy discounting, chipping away at the company’s profit margins. Its website was recently offering an extra 40 percent off sale items, and as much as 60 percent off “dressy-ish” clothing for men, women and children.
“Blue skies ahead,” it said.