Bankruptcy could be in the future for some retail stores
INDIANAPOLIS (WISH) – The future of retail stores is up in the air as major chains like J.Crew and Pier 1 have already filed for bankruptcy.
A professor with the University of Indianapolis says there’s no way online sales can prevent bankruptcy.
Associate finance director Dr. Matt Will says a loss of 10% to 15% in sales will put a store out of business.
Dr. Will says retail is not a highly profitable industry. He says people need to understand what bankruptcy really is. It’s when a company can’t pay back its loans and that’s when the business shuts down.
Dr. Will says if a retail chain wants to reopen, they will need money and banks don’t favor loaning money to a company or group of investors who didn’t pay back their previous loan. He says there’s a misconception that big retail chains make good revenue.
“People always think they must be very rich because they have all theses great stores,” Dr. Will said. “The problem is they have so many discounts, so much rent and employees that they have to pay that these businesses really don’t operate on large profit margins. It’s not untypical to see a 5% or 6% profit margin. A great company maybe has a 10% or 11% profit margin so think about it. If you’re only making 11% on your money and you lose 12% of your sales, you’re going to go out of business. So shutting down a company for six weeks or eight weeks, that can actually put a company out of business if they don’t have a ton of cash in the bank.”
Dr. Will says the local mom-and-pop stores and boutiques are the ones that are going to be hit the hardest because they don’t have a huge cash reserve.
Without it, he says it’s likely they’ll go out of business.
“It’s really going to come down to a decision. If the owners want to liquidate their life savings to put into this company to keep it floating for a number of weeks or months and I don’t know that’s a good decision on their part because they have to look out for their own livelihood as well and their family,” Dr. Will said.
For corporate retailers, Dr. Will says the best decision is to file bankruptcy.
Then they have two options: renegotiate the loan or liquidate and sell everything.
He says it’s a method that can be used to protect the company.
Dr. Will says it’s possible here soon we could go to the mall and see a handful of vacant stores.