Fewer Retail Defaults Expected in 2025

Multiple factors are contributing to a forecast of fewer bankruptcies in the retail sector in 2025, according to credit ratings firm Moody’s Investors Service.

Those at risk have already defaulted on their debt, and with rate cuts on the horizon, cheaper and more accessible funding should help retailers that remain levered. Credit analysts at Moody’s expect the federal funds rate to decline by 75 basis points this year, following by an additional 125 basis points in 2025. That’s good news for corporate borrowers who have felt the weight of higher borrowing costs over the past few years.

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Within the discretionary retail categories, home retailers in particular dominated the distressed retailer list. Significant stress in the retail sector resulted in a number of high-profile Chapter 11 bankruptcies between 2023 and 2024. Major bankruptcies last year included Bed Bath & Beyond Inc. and Rite Aid Corp, while Jo-Ann Stores, SHO Holding Corp (doing business as Shoes for Crews), 99 Cents Only Stores, Conn’s, and Big Lots filed this year. The report said decreased spending on discretionary goods led to retailers offering discounts against a backdrop of excess inventory “in concert with high interest costs shutting off access to capital for weak performers.”

As many of the highly distressed retailers have already filed, that pulling forward of defaults leaves fewer retailers with weak capital structures.

In general, overall conditions in the retail sector are expected to “remain stable.” Retailers have been busy reducing inventories and aligning them more closely to match tepid demand. Lower inventory levels have also contributed to improved free cash flow.

While consumer spending has held up for the most part, Moody’s credit analysts expect that to gradually slow. “Cumulative inflation and elevated household debt are straining low-income consumers,” the report noted, adding that a cooling labor market poses the risk that a pullback in discretionary spending will spread to higher-income households.