The COVID-19 pandemic has resulted in several large retail operations seeking insolvency protection both under the Companies Creditors Arrangement Act (CCAA) in Canada and under its US equivalent, Chapter 11. In Canada, this list includes retail giants Aldo Group and Reitmans Group. In the United States, since the beginning of May, Hertz US, J.C. Penney, Neiman Marcus and Pier 1 Imports have all filed for protection.The Aldo Group with over $ 300 million dollars of debt filed for protection under the CCAA on May 7. With more than 8000 workers and 700 stores, the company has been suffering losses, the latest being a fiscal loss of $ 128 million for the 12 months ending February 2020. Although Aldo’s struggles started quite a while before the pandemic, with issues such as maintaining relevance in the footwear industry, and the need for more investment in technology, the store closures due to COVID-19 were simply the straw that broke the camel’s back. Hopefully, the proposed restructuring will enable the Group to close non-viable stores, reduce staff and start being profitable again.
The Reitmans Group, founded in 1926, with approximately 6800 employees and 576 stores, is a Canadian leader in specialty retail. The Group filed for protection with assets of $ 361 million and debt of $ 109 million, including $ 24 million of debt in their pension plan. In its last fiscal year, the Group showed a net loss of $ 87 million.
The store closures forced by the COVID-19 pandemic have eroded the working capital of these companies, which in many cases were highly leveraged and have substantial debt. In other words, COVID-19 has been the final blow to these companies, which were already facing operating losses, a huge debt load and limited cash-flow—leaving no other alternative than to seek financial restructuring under the CCAA. They will use the restructuring plans to reduce non- viable points of sale and weak product lines, and invest in online sales. In 2018, E-commerce has represented only 30% of Reitman’s sales and about 20% of Aldo’s.
This restructuring will probably lead to a “domino effect” that will affect many suppliers, landlords, employees etc., who may be faced with financial difficulties. Many will not recover all monies owed to them , and many landlords will be left with empty locations and limited potential new tenants.The government programs announced since the beginning of the pandemic have helped many smaller corporations stay above water. However, once the programs are terminated, many will be faced with cruel reality, with two big questions remaining: “Do we still have a business?” and “Can we return to financial viability?”
Montreal stores have been allowed to re-open as of May 25 under certain restrictions, such as having an external door and maintaining social distancing. However, for various reasons, including the fear of contracting the virus, many customers are still choosing to buy online instead of in store. As well, many customers of these stores are high-rise buildings workers that have not yet returned to the office and may continue teleworking for an undetermined period of time.
As the economy restarts and government programs come to an end, we might see many more retailers seeking insolvency protection. Unfortunately, not all of them will be successful in their restructuring plans, but those that do will likely emerge out of the crisis leaner and stronger.Do not hesitate to contact one of our advisors if you have any concerns about the financial impact of COVID-19.
