As sales continue to dwindle at many tween and teen retail chains, the sector is at risk for further consolidation and bankruptcy filings, according to Michael McGrail, COO of Tiger Capital Group.
In a recent feature article for ABL Advisor, McGrail wrote that the filings from brands such as Wet Seal, Delia's and Deb Shops are just the beginning of a larger trend. "Out of Fashion: The Trouble with Tweens and Teens" explores the sector's struggles, including a reduction in mall visits by teens due to the rise in e-commerce and the move to shop at discount stores.
But even with strong e-commerce strategies, McGrail says it might not be enough to keep these chains afloat. He gives some guidelines for determining which chains have the best prospects, including those that address their cash-flow constraints early.
"In today's tough retail marketplace, it doesn't take much of a reduction in store profitability to reach a point of no return," McGrail wrote in ABL Advisor.
Finding cash, whether through terminating undesirable real estate or some other way, gives retailers more options. "When companies fall into insolvency, options are more limited with respect to lease mitigations. Without sufficient cash on hand, such chains have no choice but to file for bankruptcy. Moreover, without an infusion of additional loans or capital, they will have no means of surviving the expensive process of bankruptcy," McGrail wrote in the article.
He also encourages turning over inventory three to four times a year. Apparel inventory that sits too long when seasons change will accumulate and recovery values will shrink. Decreasing comparable store sales is yet another indicator that a store is at risk.
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