Which troubled chains have a better chance of remaining viable? Retailers who address their cash-flow constraints early tend to be better positioned to renegotiate and terminate their undesirable real estate. Cash gives retailers options. When companies fall into insolvency, options are more limited with respect to lease mitigations. Without sufficient cash on hand, such chains have no choice but to file for bankruptcy. Moreover, without an infusion of additional loans or capital, they will have no means of surviving the expensive process of bankruptcy.

Amid this shakeout, asset-based lenders need to continuously look at the inventory of their borrowers in this sector. Allowing appraisals to sit for too long poses quite a risk. While staple products such as jeans or white t-shirts do sell year-round, generally speaking apparel inventory is like the seasons: It should turn four times a year (that might be high for certain concepts, but three-plus turns per year would be considered healthy and a good benchmark). Be on guard, then, for anything less than this. Why? Because as the seasons change, underperforming retailers will accumulate more and more unsold, out-of-fashion inventory, and potential recovery values will shrink in kind.

The tween and teen market is made up of some of the most finicky consumers. They know what they want and are not swayed by their parents’ choices in fashion. They migrate fast and are difficult to lure back once they have moved on. Decreasing comparable store sales is the clearest indication that a migration could be taking place. Comps need to be tracked closely as the first sign of changing trends.

The metrics discussed above may lead to insolvency, but the good news is that appraised values in this vertical have held in most bankruptcy filings during the past year. In most cases, tween and teen retailers carry very lean inventory levels – resulting  in very quick going-out-of-business sales. The perceived value created by strong liquidation/store closing language leads to better sales and, ultimately, to achieving the recovery of appraised values in bankruptcy scenarios.