It's been a brutal year for retailers. Ever since the coronavirus pandemic began back in March, dozens of big-name retail chains have filed for bankruptcy. And while bankruptcy isn't always synonymous with store closures, it often produces that very result.
Real estate investors may therefore be reeling from the news that Guitar Center, the largest musical instrument retailer in the country, has filed for Chapter 11. The retailer was hurt badly by forced shutdowns earlier on during the coronavirus pandemic. In an effort to drum up revenue, it began offering virtual music lessons. And while the retailer has since been allowed to reopen its stores, consumers have been cutting back on instrument purchases, leaving Guitar Center struggling for revenue.
Even boredom couldn't boost instrument sales
Guitar Center has had one thing going for it throughout the pandemic -- the fact that people have been bored and cooped up at home, desperate for things to do with their time. Learning an instrument is, in many ways, the perfect way to get through the pandemic. But musical instruments come at a cost, and virtual lessons don't work for everyone. Given the general economic recession at play, some consumers may have been hesitant to plunk down several hundred dollars for an instrument they may or may not enjoy playing.
The impact on real estate investors
Guitar Center operates 269 locations, many of which are located in malls. Though the company hasn't announced plans to permanently close stores, the retailer does need to conserve cash and reduce its debt to get back on track and stay afloat. And while Guitar Center plans to stay in business during the holidays, it may not see the typical surge it's used to, what with the number of Americans who will be cutting back on spending this November and December. Though Guitar Center expects to complete the bankruptcy process fairly quickly, if it continues to struggle, store closures may be inevitable, especially if the retailer sees an uptick in online sales during the holidays and sluggish traffic in its physical locations.
Of course, at this stage of the game, any financially distressed retailer is bad news for real estate investors. Malls, which have been sluggish since before the pandemic, simply cannot afford to lose more tenants, especially given the number of department stores that have closed down or are making plans to do so. Losing Guitar Center would be not only a harsh blow for mall operators but a potentially unexpected one as well.
The future of Guitar Center, like many other retailers, will likely be framed by how well the retailer fares during the holiday spending boom -- a boom that may not be quite as substantial this year. The company did say in its bankruptcy filing that it's received up to $165 million in new equity investments and that its lenders agreed to slash its debt by nearly $800 million. Given that Guitar Center serves a unique need for consumers, it does have the potential to survive the pandemic. But investors should brace for potential store closures nonetheless.