By Becky Yerak and Soma Biswas
Updated March 20, 2020 8:27 am ET
As bricks-and-mortar retailers shut their doors because of the coronavirus pandemic, those already in bankruptcy are finding out their inventory isn’t worth much to creditors when shoppers are huddled in their homes.
Take, for example, bankrupt Art Van Furniture LLC. The Michigan-based company said on Thursday it was pausing going-out-business sales because of the Covid-19 outbreak.
Dozens of retailers have announced temporary shutdowns of two weeks or longer in response to calls from public officials for people to stay home and avoid crowds. Particularly in enclosed shopping malls, liquidators can’t count on generating meaningful cash from putting inventory on the block, even at cut-rate prices, at stores that are slated for permanent closure.
Liquidation plans at several other bankrupt retailers are also in flux. Modell’s Sporting Goods Inc., the New York sporting goods chain, filed for bankruptcy last week, with a plan to shut down all of its stores. Pier 1 Imports Inc. is looking for bidders to acquire the company but has also been preparing to shut down nearly half of its roughly 940 stores. At least some Pier 1 locations have remained open during the crisis.
Failing to liquidate inventory could have far-reaching consequences for both lenders and retailers, especially weaker ones, the longer the social-distancing recommendations drag on. Bankrupt retailers’ top lenders typically count on bargain seekers rushing to malls and shopping centers for liquidation sales to get money back on their loans.
“You can’t do this in an environment where the stores are closed or people are under an advisory to stay home,” said David Berliner, a restructuring specialist at BDO USA LLP. “You’ll get some bargain hunters who will brave the virus, but the bulk of people, for items like jewelry and apparel that you can do without, I don’t see how you could have a successful liquidation.”
Lenders are now faced with possible losses on merchandise-backed loans that are generally considered safe and therefore might be more reluctant to extend new credit or refinance existing debt with other retailers, according to restructuring advisers and liquidators.
At the same time, creditors considering cutting off credit to struggling merchants will have to consider whether it makes more sense to keep them in business until concerns about the coronavirus wane, industry observers said.
“It may not be worth liquidating now but holding on,” Mr. Berliner said.
Joseph Malfitano, who heads turnaround advisory Malfitano Partners, said a delay in liquidating inventory can be painful, but might be necessary to preserve the value of the goods. He likened it to holding stocks in a 401(k), advising against unloading all stocks when the market is plunging.
Senior lenders will likely need to advance more funds when they otherwise would have cut a company off to preserve the value of the inventory until it can be sold, he said.
Liquidation sales at Art Van were planned to last at least through April, but the company said on its website Thursday that it had suspended sales in all of its stores over concerns about the coronavirus. In-store pickup to allow customers to complete pending purchases will continue through Sunday, conducted under social distancing, hand sanitation and other safety guidelines.
In general, retail sales, including store-closing sales, will see substantial declines during the social-distancing phase of this crisis, said Ken Frieze, chief executive officer of liquidation firm Gordon Brothers Retail Partners LLC.
One option for retailers is to mothball stores and leave the inventory in there until consumers are once again free to leave their homes. Selling merchandise online is, of course, an alternative to in-store going-out-of-business sales.
But even if retailers were able to draw shoppers to store-closing sales, the proceeds generated might be so modest that the effort wouldn’t be worth it. If retail activity remains restricted in the coming weeks and months or restrictions tighten, it might make sense for retailers that are weak and running out of cash to delay filing for bankruptcy, according to Michael McGrail of liquidation firm Tiger Capital Group.
—Aisha Al-Muslim contributed to this article.