New Economic Realities   //   December 26, 2023

Bankruptcy filings soared in 2023 as retail companies ran out of lifelines

When David’s Bridal filed for bankruptcy for the second time in five years this past April, the brand was about $257 million in debt. The goal was to find a buyer, trim operations and keep the brand alive. But none of that would come to fruition if the brand couldn’t do one thing: ensure that every existing order for a dress would be fulfilled.

“We knew if we started jeopardizing our brand’s ability to deliver that dress, that would have irreparable damage,” CEO Jim Marcum said, “And so we stayed true to it.”

David’s Bridal was one of more than 17,000 companies that filed for bankruptcy this year as of Sept. 30, the most recently available federal data. This year saw nearly 30% more companies file than the year prior, encompassing both Chapter 7 cases — where the company essentially folds — and Chapter 11, where the intent is to restructure.

Legacy retailers like Bed Bath & Beyond, Party City and Rite Aid were among the headline-grabbing filers after racking up billions in debt. But niche startups and direct-to-consumer brands also were on the list, like the baby brand Hello Bello, sleepwear brand Lunya and air purifier brand Molekule. Other notable instances include Showfields, a store that curated a marketplace of goods, and coworking hub WeWork. Between high inflation, post-Covid transformations, rising interest rates and investor money drying up, retailers saw numerous headwinds that not every brand could navigate without seeking court protection to restructure its debts.

While this year’s bankruptcy filings don’t come close to the record set the aftermath of the Great Recession in 2010, where around 55,000 companies went under, the recent uptick does suggest a broader trend in how companies are looking to bankruptcy as a way to restructure their finances when they run out of liquidity. Numerous retailers are filing with a plan in place, or a potential bidder lined up.

In the case of David’s Bridal, the company was over $250 million in debt. Though it explored the opportunity for a sale, an asset sale under Chapter 11 became the clearest path to keep the business alive under new ownership. “In the end, we had to make the difficult decision and use the bankruptcy somewhat strategically to assist us when we were going through the sale process,” Marcum said.

But it also meant trying to keep the brand’s reputation strong by continuing to keep stores open, sell online and limit any negative customer experiences that could further damage the brand’s image. Bankruptcy doesn’t quite have the same stigma it once did, but Marcum said it was critical to ensure customers had a good experience if the brand were to survive.

“That reputation around your brand? In the end, there is no substitute for it,” Marcum said.

Debt loads and lending issues

While the exact reasons for filing vary from company to company, one universal through line was that less available capital and tightening markets resulted in fewer lifelines for indebted companies. The Federal Reserve’s series of interest rate hikes — currently at 5.25% to 5.5%, up from 2.25% to 2.5% in March 2022 — meant more difficulty in obtaining finances, while high inflation raised operational costs. On the startup side, global venture activity was down to $247 billion as of September 2023, per Pitchbook, less than half of what it was through the same time last year. But there were also cultural components affecting revenue, as the accelerated shift to online shopping in recent years left some legacy brands struggling to keep up.

The wave of bankruptcy filings also reflected changes in shopping habits and the ways people responded to inflation. A cohort of furniture companies, which fared well in 2020 and 2021 as people redid their homes amid lockdowns, hit a downturn as those sales stalled. Z Gallerie, Mitchell Gold + Bob Williams and Noble House Home furnishings all filed for bankruptcy in 2023.

In the case of David’s Bridal, Marcum said that the coronavirus lockdown policies put a slowdown on the company’s business. “People weren’t meeting at the same scale they had been historically in order to build the relationships that lead to the proposal and the engagement,” he said, adding that wedding planning cycles stretched out form an average of nine to 18 months as venues shut down and shuffled dates. “All of that had a tremendous effect on our business right through 2023.”

Attorney John W. Weiss, chair of the bankruptcy practice at Pashman Stein, said this uptick in filings could continue into 2024 as companies wrestle with something of “a perfect storm” — distress on the revenue side paired with a dampened ability to refinance or extend credit.

“When businesses hit distress in conjunction with capital markets that aren’t as willing to refinance or extend, this situation is causing an increase in bankruptcy filings,” he said.

Some of the companies that filed for bankruptcy this year had racked up billions in debt. Rite Aid reportedly has about $4 billion when it filed this fall. Bed Bath & Beyond had at least $1.7 billion, and Party City had nearly $1 billion. “Years ago, when capital was very available and a company got into a distressed situation, they would engage with their lender, and resolve their debt with existing lenders, or they might go out into the market and find alternative pricing,” Weiss said.

Weiss said that companies that are filing for Chapter 11 are increasingly coming to court with potential buyers or sale plans lined up. While the fundamental process remains the same for companies that want to address debt and any underperforming assets or leases, they’re doing “more pre-planning than ever before.”

In one such case, baby care brand Hello Bello announced it was initiating a Chapter 11 in October as part of a plan to be acquired by Hildred Capital Management, a healthcare private equity firm. Court documents from early December show the purchase price sitting at roughly $65 million. At its peak in 2021, the company called itself the largest direct-to-consumer diaper subscription in the United States with about 130,000 subscribers and about $200 million in annual net sales. Then at its bankruptcy filing, its estimated liabilities were between $100 million and $500 million.

The end result of negotiated filings like this, Weiss said, is often a speedier case.

“The timing of companies remaining in bankruptcy cases has reduced dramatically over the last several years,” he said.

David’s Bridal filed its case in April and it was resolved by July. The brand had explored a sale but was unable to with its debt load. Engaging in Chapter 11 allowed the brand to examine its inventory and close down underperforming stores as part of its eventual sale to one of its investors, Cion Investment Corporation.

New attempts

The aftermath of a Chapter 11 provides an opportunity for reinvention — whether that’s the overall footprint, new online strategies or changes in leadership. Buybuy Baby, for example, saw its store shut down as part of the bankruptcy of parent company Bed Bath and Beyond. But its IP was auctioned off and purchased by Dream On Me, a baby furniture brand that’s already reopened 11 stores. New CEO Pete Daleiden previously told Modern Retail that expansion plans include opening 100 stores, along with driving e-commerce sales. 

Tuesday Morning, the housewares retailer founded in Texas in 1974 that filed for bankruptcy in early 2023, shuttered all of its roughly 200 stores as part of the process. But it’s now back online with an expanded assortment of categories, like baby gear and apparel, and it has already opened its first physical location in Utah. It has an inbound form seeking new franchisers on its website. 

Party City filed for Chapter 11 in January. Its restructuring plan, finalized in October, kept 800 stores open while it closed about 20 “less productive locations.” The deal eliminated $1 billion in debt and allowed the company to renegotiate leases and take other steps to get on a solid financial footing — like $75 million to fund its go-forward operations.

At David’s Bridal, about 100 stores closed as part of the bankruptcy restructuring, leaving around 195 across the country and about 7,000 employees. The company aims to continue its path to become a destination for all things wedding and not just dress shopping, with a new loyalty program and a wedding planning site. Marcum said future stores could experiment with different formats, whether that’s a store-within-a-store, or a showroom concept. The company is also betting that its gowns, priced lower than designer brands, will win over budget-conscious brides.

“There are a lot of touch points the average retailer does not have that differentiates the company,” Marcum said. “For David’s and this emergence — we were fortunate to be in that position, where we provide that value-add offering, and investors truly understood.”