Halloween Is Crunch Time for Troubled Retailers

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.

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.

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.

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