The Threat of Rising Corporate Debt
Professor Mark Cohen discusses the threat of rising corporate debt, specifically in retail.
Mark Cohen, Director of Retail Studies
February 24, 2020
More and more retailers are closing stores and going bankrupt. This trend can be attributed to decades of excessive expansion of square footage that have finally caught the industry in a deepening productivity crisis, too many undifferentiated stores (and malls), and creeping expense inflation concurrent with deflationary pressure on retail prices that have created a deadly margin squeeze. Additionally, e-commerce has siphoned off a substantial amount of brick and mortar sales rendering even more of a productivity problem for many, customer acquisition and fulfillment is increasingly expensive, and, e-commerce returns are much higher than returns from brick and mortar stores. Beyond these factors, apparel and accessories volume has stagnated in the face of a marked shift in consumer spending on all things “tech.”
Sears comes to mind as a prime example of retail’s debt crisis. Under Eddie Lampert’s control, Sears was never run as a legitimate enterprise. His modus operandi was and always has been to load the company up with as much debt as necessary to keep it solvent while he systematically stripped its assets for cash largely for his own benefit.
There is no question that low interest rates and QE has created an environment in which enormous sums of money have been easily and inexpensively deployed by private equity firms to acquire and load up retailers’ balance sheets with debt. The melt down already taking place for some highly leveraged retailers will only accelerate if interest rates begin to climb.