Retail drugstore chain Rite Aid (NYSE:RAD) is the latest U.S. company to prepare a bankruptcy filing amid a wave of corporate failures this year.
Indeed, multiple media outlets are reporting that Rite Aid, one of the largest pharmacy chains in America, is planning to file for Chapter 11 bankruptcy protection from its creditors and close as many as 500 retail outlets. The company, which has 2,100 stores nationwide, plans to sell the rest of its retail locations or let creditors take control of them.
This bankruptcy plan comes as Rite Aid teeters under $3.3 billion of debt and struggles with declining sales. The company has said that it isn’t generating enough cash to service its current debt obligations.
RAD stock has declined more than 90% over the last 12 months and currently trades for around 57 cents per share, putting it deep down on the penny stock league tables.
Notable Names File for Chapter 11 Bankruptcy
Rite Aid is the latest in a series of U.S. companies — notably retailers — that have filed for Chapter 11 bankruptcy in recent months. Other names that have sought protection from creditors include Bed Bath & Beyond (OTCMKTS:BBBYQ), Party City (OTCMKTS:PRTYQ), Tuesday Morning (OTCMKTS:TUEMQ) and David’s Bridal. Many of these companies overbuilt and overspent during the pandemic, taking on debt only to see their sales slow.
Bankruptcies appear to be accelerating with several smaller companies filing for Chapter 11 in recent days as well, including retailer Noble House, Elmer Buchta Trucking and MV Realty. In August, trucking giant Yellow (OTCMKTS:YELLQ) also filed for bankruptcy, putting 30,000 employees out of work and sending shockwaves through the stock market.
According to statistics from the Administrative Office of the U.S. Courts, the number of business bankruptcies filed in America rose 23% in the 12 months ended June 30 of this year.
Declining Sales and Labor Unrest
These bankruptcy filings come amid a background of declining consumer spending and labor unrest across the country. Unions representing groups as diverse as Hollywood actors and automotive workers are currently walking picket lines throughout the United States. Earlier this year, airline pilots wrung big concessions from major carriers, with pilots at United Airlines (NASDAQ:UAL) securing pay increases of up to 40% over four years. A major labor strike was narrowly averted at United Parcel Service (NYSE:UPS) this summer.
As workers flex their bargaining muscles, companies are struggling with a decline in consumer spending amid high inflation and elevated interest rates used to lower consumer prices. Costco (NASDAQ:COST) is the latest retailer to note that consumers are spending less on big-ticket purchases and discretionary items as they focus on essentials such as groceries. Earlier this week, the Conference Board reported that consumer confidence has fallen to a four-month low amid rising gas prices and interest rates charged on home mortgages.
The decline in consumer confidence was felt most strongly by people who earn $50,000 or more per year, according to the Conference Board. Many economists are still predicting that the U.S. economy will fall into a recession in 2024, a development that could lead to more bankruptcy filings among corporate America.
What’s Next?
Rite Aid is expected to officially file for Chapter 11 bankruptcy in the coming days. That will be bad news for any shareholders who are still holding onto RAD stock. However, Rite Aid is unlikely to be the last well-known company to seek creditor protection this year as consumer spending slows sharply amid a decelerating economy. Expect more companies to go under in the coming months.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
