Troubled retailers face a Halloween crunch with consumers spending less

(Bloomberg) — A predicted slide in Halloween consumption is the latest blow for heavily-indebted retailers battling mounting overheads and the trend of consumers trading down to cheaper products.

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US spending for the holiday will drop by 5% to $11.6 billion this year, according to the National Retail Federation. Sales of greeting cards and costumes are likely to see the greatest decline, a hit to merchants reliant on seasonal splurges in what’s already been a tough year for the industry.

Households on the lower end of the income scale are broadly struggling as unemployment has edged higher this year and underlying inflation has remained persistently high. Retailer Michaels Cos. said on a recent earnings call that households earning less than $100,000 are retrenching, resulting in lower basket sizes.

“2024 has been a perfect storm for retailers of all stripes,” said Erica Weisgerber, a partner at law firm Debevoise & Plimpton LLP. “Inflation, high operational costs, and reduced consumer spending have been especially challenging for brick-and-mortar retailers, and online retailers have struggled with steep competition from e-commerce giants like Amazon.”

Many of the troubled firms, including Michaels and At Home Group Inc., are owned by private equity managers after buyouts during the pandemic proved ill-timed when interest rates rose and inflation crimped household budgets. Home, clothing and hobby retailers dominate the list of distressed retailers because the size of their debt means they lack the liquidity to compete with better capitalized competitors, according to Moody’s Ratings.

Still, Michaels and At Home are hopeful that they can win a larger slice of the holiday spending. Hellman & Friedman LLC’s At Home saw a strong start to Halloween spending after flat second-quarter net sales of about $443 million, chief financial officer Jerry Murray said on a September earnings call.

Apollo Global Management Inc.’s Michaels also saw a revenue pop tied to Halloween as customers began to buy inventory earlier this year, according to people on last month’s earnings call. That’s a fillip for the firm whose earnings declined by about 20% to $50 million in the second quarter from a year earlier, the people said, asking not to be identified as the information is private.

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Apollo and Hellman & Friedman declined to comment.

The pullback is creating challenges for the wider industry and has contributed to several high-profile bankruptcies this year, including Joann Inc., Big Lots Inc. and Conn’s Inc. It also makes it harder to turn around firms simply by slashing costs.

“Retailers are finding that their low-hanging efficiency efforts do not go far enough,” said Holly Etlin, a partner in AlixPartners’ turnaround practice.

With capital markets shunning troubled firms, more retailers turned to bankruptcy rather than distressed exchanges over the past year as the companies require deeper restructuring that is best done in court, Moody’s Ratings said in a report last month. It’s part of a wider trend that saw quarterly filings for Chapter 11 bankruptcy protection rise to the highest level since 2012 in the three months through June.

Private equity’s widespread failure to hedge against rising borrowing costs also means it’s less able to come to the rescue of troubled firms, which could have knock-on effects for the economy and jobs.

“The private equity players that often have backstopped retailers have been in a new deal lull as multiples collapsed and rates for leveraged deals skyrocketed,” said James Gellert, executive chair at risk analytics provider RapidRatings International Inc.

Week in Review

• China’s onshore high-yield debt market this week suffered its worst day of trading in years as investors pulled money out of bonds and poured it into stocks in response to government stimulus. Meanwhile, domestic developer Country Garden Holdings Co. missed a self-imposed target date for getting key creditor support for terms of its restructuring plan.

• Inflows to private credit funds helped BlackRock Inc. pull in a record $221 billion of total client cash last quarter, bringing the world’s largest money manager to an all-time high of $11.5 trillion of assets.

• A potential bidding war for HPS Investment Partners is set to swell the fortunes of its three founders as rival groups vie for a piece of the red-hot private credit market.

• A group of private credit firms including 26North Partners are closing in on a deal to lend to Vista Equity Partners-backed Alegeus Technologies, after the software firm tried to refinance existing debt with a new leveraged loan.

• Banks led by UBS Group AG sold $1 billion of leveraged loans to help finance Vista Equity Partners’ buyout of software company Jaggaer, the market’s latest acquisition deal to include a second-lien component. In Europe, Blackstone Inc. is investing in a C$1.125 billion ($822 million) second-lien tranche that is helping finance AutoScout24’s purchase of Canadian online car marketplace Trader.

• K2 Insurance Services sold a bigger-than-planned leveraged loan as the firm cuts borrowing costs on buyout-related financing by three percentage points.

• Verizon Communications Inc. lined up $10 billion of short-term bank funding to help finance its purchase of Frontier Communications Parent Inc.

• If cut to junk status, Boeing Co. will be the biggest US corporate borrower to ever be stripped of its investment-grade ratings and join junk bond indexes, flooding the high-yield market with a record volume of new debt to absorb.

• A market for aircraft bonds that all but shut down after Russia’s invasion of Ukraine is showing signs of life again.

• Japan’s Norinchukin Bank got a vote of confidence from bond investors on Wednesday, when spreads on the firm’s first dollar issuance since it revealed massive losses tightened significantly in secondary trading.

• Gritstone Bio Inc., a vaccine developer that once touted its ability to make a next-generation Covid-19 shot, filed for Chapter 11 bankruptcy in Delaware.

• Avante Health Solutions filed for bankruptcy in order to sell its business to an affiliate of private equity firm Staple Street Capital.

On the Move

• John Abate, partner and co-head of trading at Silver Point Capital, is set to retire by the end of the year after more than 15 years at the hedge fund.

• Wells Fargo & Co. is hiring Celine Catherin from Deutsche Bank AG as a managing director and co-head of its leveraged syndicate.

• Joshua Baumgarten, co-managing partner and head of credit at TPG Angelo Gordon, is leaving the firm after its purchase last year by TPG Inc.

• JPMorgan Chase & Co. has hired Mike Shanahan from Goldman Sachs Group Inc. as a managing director in its technology leveraged finance team.

• Corinthia Global Management has recruited three more people from Barings after poaching a 22-strong team from the US asset manager earlier this year. The trio are Louis Godest, Christel Huguet and Jan Lübke.

• JPMorgan Chase & Co. veteran Doug Kravitz joined M3 Partners as a managing director focused on advising company creditors in restructuring scenarios.

• Barclays Plc has promoted Harry Mateer to head of Americas fixed income, currencies and commodities research. Mateer previously led the bank’s Americas credit research team.

—With assistance from Dan Wilchins.

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