Now more than ever, shopping center owners are taking a proactive approach to ensure the stability of their income stream by signing tenants that are likely to stay in business long-term. Recent bankruptcies of national tenants like Sports Authority, Payless ShoeSource, Mattress Firm, and David’s Bridal have many owners wondering, “are my tenants here to stay?” Moody’s Investors Service has analyzed the financial outlook of many national retailers and indicated which ones may be at risk of filing for bankruptcy.
Here are five that made the list:
1. The Fresh Market The Fresh Market operates 161 stores across the United States. As demand for organic foods has increased, traditional grocers such as Walmart and Kroger have begun increasing their offering of organic products, directly cutting into The Fresh Market’s market share. In addition to increased competition, the company’s high leverage, relatively small scale, and geographical concentration has given it a negative financial outlook. Future improvement is unlikely according to Moody’s.
With more than 1,600 pet stores across the country, PetSmart is the largest pet retailer in the United States. Emerging competition is on the
horizon as Walmart, Amazon, Target, and others create online plat-forms to distribute pet products. To compete with these online platforms, PetSmart purchased Chewy.com, an online pet retailer, for $3.4 billion in one of the largest e-commerce acquisitions to date. Following the deal, PetSmart has been struggling to pay down roughly $8 billion in debt. This purchase suggests that PetSmart could be moving towards online platforms and away from brick-and-mortar.
3. Guitar Center
In November of 2018, Guitar Center’s CEO stated that the company had been “going sideways” for several years. Guitar Center is remodeling all its stores in an effort to revive sales. After refinancing hundreds of millions of dollars in debt last year, the company’s total debt surpassed $615M. S&P indicated that Guitar Center was vulnerable to a bankruptcy filing when guitar sales slipped from $1.5 million to $1 million in 2017. The drop in sales is attributed to a growing trend of musicians moving away from traditional instruments.
4. Pier 1 imports
Moody’s downgraded its outlook on the company to negative in December, saying Pier 1’s recovery would be “dampened by execution issues” and profit pressure from growing competition. Tariffs on Chinese home-furnishing imports remain a threat to the company’s bottom line. Pier 1 is working on turning things around by appointing a new CEO, but analysts are skeptical. The negative financial outlook reflects the company’s operational problems and increased leverage.
Sporting-goods retailer Academy has more than 240 locations in the southeast United States. This number is small compared to their competition, Walmart and Dick’s Sporting Goods. Moody’s dropped Academy’s financial outlook to negative, citing its high leverage, aggressive financial policies, geographic concentration, low liquidity, and meager positive cash flow. A lack of an online presence has also been a concern for investors, as less than 5% of their sales come from online sources.
While it’s impossible to say for sure whether any of these companies will close stores, they all have negative financial outlooks that make them look like a risky investment. The risk to landlords is not only the loss of income, but also the limited supply of replacement tenants given the typical large footprints of these stores. This can include build-out costs, leasing commissions, and attorney’s fees. The loss of an anchor tenant can also cause fewer consumers to be attracted to the area and hurt not only the inline tenants, but also tenants at the neighboring shopping centers.
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