June 24, 2022
Revlon, Inc. is the first consumer facing retail business to file for bankruptcy protection in 2022. As supply chain disruptions and delays abound and inflation spikes, it feels almost imminent more retail businesses will shortly file suit. Rising interest rates typically lead to an escalation in bankruptcy filings. Add in, worker shortages and inflation, the option for access to bankruptcy will be critical for struggling businesses. Fortunately, access will be even more broad with the Bankruptcy Threshold Adjustment and Technical Corrections Act recently signed into law by President Biden which permanently sets the debt limit for small businesses that file under the recently enacted Subchapter V at $7.5 million.
The risk of bankruptcy for retail businesses is high, especially for those companies facing rising inventory levels, supply chain disruptions, inflation, and labor shortages. Retailers have too much stuff after shipments arrive late and consumers abruptly change what they are shopping for[1]. Revlon, Inc. also faced a specific pandemic related issue as sales of its iconic product, lipstick, dropped dramatically due to masking during the pandemic. Compounded with its loss of sales, Revlon cites its inability to keep a regular supply of raw materials contributing to its debt. According to the brand’s filing, the company is currently unable to timely fill almost one-third of customer demand for its products, due to an inability to source a “sufficient and regular supply of raw materials.” Shipping components from China to the United States takes Revlon eight weeks to 12 weeks and costs four times 2019 prices, the company reported.[2]
In previous years, relief from fiscal stimulus to businesses and stimulus dollars to consumers provided the retail industry with nearly a two-year reprieve in filings – in fact, including Revlon’s filing, there have been only four other retail bankruptcies so far this year, the lowest tracked number in 12 years.[3] However, with the current high level of inflation, and increase in consumer debt, families are forced to shift their budgets to cover the higher costs of basic necessities which means less discretionary spending (and decreased revenue for certain retailers). According to Reuters.com[4], the latest retail sales data shows consumers are pulling back the most in advance retail and food service spending; furniture and home furnishings retailers, electronics and appliances stores, and health-and personal-care chains all are seeing month over month declines. Moreover, Reuters reports, according to an NPD Group survey issued in late May, more than 8 in 10 U.S. consumers said they planned to make further changes to pull back on their spending in the next three to six months. In the meantime, consumer debt levels are hovering near all-time high, in part due to the rise in borrowing, auto loans, student debt and mortgages[5].
Revlon’s filing could very well be the first of consumer-facing businesses in the consumer discretionary sector to file for bankruptcy this year. Businesses will have less government relief (and no more stimulus money), fewer accommodations and deferments from lenders, combined with supply chain issues, commodity price increases, labor shortages and higher labor costs, and higher raw material will likely culminate in an increased need for many businesses to reevaluate and restructure their organizations. Sectors such as retail and consumer goods adversely affected by higher raw material and labor costs will be particularly vulnerable.
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[1] “The Retail Industry is Facing a Potential Wave of Bankruptcies – Here’s Why”, Lauren Thomas, 6/23/2022, https://www.cnbc.com/2022/06/23/why-retail-industry-is-facing-bankruptcy-wave.html?__source=google%7Ceditorspicks%7C&par=google
[2] “Revlon Files for Chapter 11 Bankruptcy Protection,” TotalRetail, Joe Kennan, 5,16,2022 https://www.mytotalretail.com/article/revlon-files-for-chapter-11-bankruptcy-protection/
[3] “The Retail Industry is Facing a Potential Wave of Bankruptcies – Here’s Why”, Lauren Thomas, 6/23/2022, https://www.cnbc.com/2022/06/23/why-retail-industry-is-facing-bankruptcy-wave.html?__source=google%7Ceditorspicks%7C&par=google
[4] Revlon Files for Bankruptcy, Blames Supply Chain Snags,” Paramasviam, Ponnezhath and Knauth, 5/16/2022, https://www.reuters.com/business/retail-consumer/revlon-files-bankruptcy-protection-2022-06-16/
[5] Id.