Tsunami of Retail Bankruptcies Looms

Weak consumer spending and tighter credit markets is creating a widening tsunami of bankruptcies in American retailing.

Not only are mid-size chains shutting down, but larger national businesses are too.

"Companies are contracting and collapsing,” Burt Flickinger, managing director of retail consulting firm Strategic Resource Group, told CBS News.

"Consumers are cash- and credit-constrained. They’re out of purchasing power…You’ll see it in food and drug, discount and department stores, as well as specialty stores and dollar stores. Every major form of retailing.”

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That doesn’t surprise bankruptcy experts like Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis.

Money was so easy for so long that companies that should have failed were kept alive, said Cieri.

Cieri told Bloomberg that bankruptcies will include businesses "with severe operational problems” and too much debt.

The amount of distressed corporate bonds increased to $206 billion in April from $4.4 billion in March 2007. They now yield at least 10 percentage points more than Treasuries, according to Merrill Lynch.

The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, the S&P said.

Flickinger predicts a "record number of bankruptcies over the next 50, 100, and 1,000 days.”

His forecast came just days after Sharper Image Corp. and Lillian Vernon Corp. both filed for bankruptcy, citing declining sales.

The two companies joined other firms that filed for bankruptcy earlier, such as Levitz Furniture, home furnishings retailer Fortunoff, and electronics retailer Tweeter Home Entertainment Group.

In fact, since last fall, eight mostly mid-size chains have filed for bankruptcy protection, and the International Council of Shopping Centers projects 2008 store closings could reach 5,770 stores in the U.S. — the largest number of closings since 2004.

Even retailers that don’t have to file for bankruptcy are doing so just to preserve cash through what many experts have predicted could be a long economic downturn.

According to The New York Times, over the next year Foot Locker said it intends to close 140 stores, Ann Taylor will close 117, and jeweler Zales will shut 100.

But consumer spending isn’t the whole problem.

Retailers typically depend heavily on borrowed money to finance their purchases of merchandise and cover routine expenses like payrolls. Since banks are struggling with a mortgage crisis and their own potential write-offs, they’ve pulled back on extending new loans to retailers.

What’s more, some lenders have second and even third liens on a company’s assets, reports CBS.

Then there’s the domino effect.

Retailers rely on a broad network of suppliers. Bankruptcies leave behind millions of dollars in unpaid bills to shipping companies, furniture manufacturers, mall owners, and advertising agencies.

For example, according to the New York Times, Sharper Image owed nearly $7 million to UPS, and Levitz owed Sealy $1.4 million.

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