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Everyone loves a sale, unless that sale is an investment you bought at half-off and then continued to plummet to zero.
That's already happened to a handful of once-promising retail stocks.
And they're just the tip of an iceberg.
Not only are more name-brand retailers melting down and preparing to declare bankruptcy, the Real Estate Investment Trusts (REITs) that own and operate the malls they're in are headed for the half-off sales bin.
But if you feel like a kid in a candy shop surrounded by these "bargains," you've been duped.
Some retailers will declare bankruptcy and be buried once and for all. Some will declare bankruptcy and rise from the ashes. And some will rise from the ashes just to declare bankruptcy again.
The Difference between Chapter 7 and Chapter 11
The first thing to understand is there are different bankruptcy filings companies generally employ.
Filing Chapter 7 is throwing in the towel.
It means the company ceases operations; however, in unusual circumstances a Chapter 7 trustee can continue some operations. But, more often than not, the trustee oversees the liquidation of the company's assets, and proceeds are used to pay off creditors.
In a Chapter 11 filing, the principal debtor (known as debtor in possession) or a trustee, is empowered to reorganize the company.
Under the protection of the bankruptcy court, the debtor in possession or trustee can refinance loans. This gives new lenders first priority on the business's earnings, the ability to reject and cancel contracts, and shelter the company from some types of litigation against the business through the imposition of an automatic stay. With an automatic stay, creditors are stayed from any collection attempts or activities against the debtor in possession.
Retailers filing Chapter 7 are going out of business, usually for good. If you see what you think is that familiar company again, it's usually because a buyer of their name and other assets of the dead company may start-up another company they want associated with a legacy brand.
Most retailers declare bankruptcy because they can't pay the interest or principal on the money they owe.
Reorganizing under Chapter 11 is an opportunity to change-up management, close stores, lay off employees, rework loans, slim down, and try to reflate the brand and sales.
But debt is more often the symptom, and not the cause of the retailer's troubles.
One huge problem retailers have in America is there are so many of them taking up so much retail space.
Not Worth the Ground They Sit On
In terms of square foot per capita, the United States has an estimated 48 square feet of retail space for each person in the country. That's twice as much as the UK, the next largest retail per capita country in the world.
The knock on retailers who own or lease rea…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.