What would happen to Joann’s drugs if it gets into the Chapter 22 club?

Fabric retailer Joann’s Inc. may be running out of options and time is not on its side.

The yarn and fabric retailer has been on the radar of credit analysts since 2023. It filed its first Chapter 11 filing in March 2024, and exited the bankruptcy process a month later. The retailer worked out a deal with lenders that allowed it to keep 815 stores open without closings.

But now another Chapter 11 filing could come before the end of January. Sales during the holiday season were expected to be weak. Also, if the drug retailer can’t reach an agreement with lenders to ease liquidity pressures, it would struggle to gain the confidence of sellers to ship new stock. And lack of stock or novelty is a nightmare for retailers.

Another Chapter 11 filing would give Joann’s access to the so-called Chapter 22 club, bankruptcy parlance for companies in their second round of bankruptcy proceedings.

Wedding and special occasion retailer David’s Bridal and discount home goods retailer Tuesday Morning are two recent examples from the Chapter 11 club, each with different bottom lines.

David’s filed its first petition in November 2018, and ended that tour two months later. It cut $450 million from its $1.05 billion debt burden, but the concern was that it did not solve its operating problems. Credit experts said they were concerned the quick exit was due to concerns from secured creditors and suppliers that a longer stay would increase the cost factor. The second Chapter 11 was filed in April 2023. David found a buyer in Cion Investment Corp. But any economic downturn could put it at risk of a rare third filing, the dreaded Chapter 33. That would place it in the company that includes Filene’s Basement.

In the case of Tuesday Morning, the retailer filed for its second Chapter 11 in February 2023, less than three years after its first round of bankruptcy in May 2020 and ending in January 2021. While the original plan was to restructure operations and close low-traffic stores. Tuesday Morning found a buyer, but that deal collapsed in March, and the retailer ended up converting Chapter 11 to a Chapter 7 liquidation, which closed all stores. Hilco Merchant Resources acquired intellectual property (IP) and other assets for $32 million in a transaction approved by a bankruptcy court. Tuesday Morning now functions as an e-trader.

So what would happen if Joann’s were to file for bankruptcy again?

The retailer could find a buyer before the filing and use the bankruptcy process to complete the sale and close store locations. Retailers have previously used bankruptcies as a tool to exit leases they no longer want. Rent is an expensive part of overhead, and turning down leases for hundreds of stores is one way to clean up the balance sheet. The risk is that another entity could swoop in and acquire the operation at a judicial auction.

If Joann’s were to file without a buyer in hand, the business could be sold at auction. Depending on which assets are sold will determine the future. Someone could come in and acquire the existing operation, possibly with the proviso that only a certain number of stores continue to operate. Or there may be a purchase only for IP and other selected assets. In this scenario, the buyer may choose not to take over any store locations and instead keep the business solely as an online operation.

Those retailers that are in distress due to financial problems are easier to resolve, provided the balance sheet can be deleveraged. But for those that also have operational deficiencies, they are often the most difficult to repair. If Joann’s also has an operating problem in addition to its financial difficulties, or it can’t find a buyer, it could end up shutting down. That was the case at Party City, which entered Chapter 11 in January 2023, exited nine months later and last month began liquidation operations that will see 700 stores go dark. That option is a last resort given the significant job losses. Joann’s has more than 800 stores in 49 states, and it exited Chapter 11 last year with over 18,000 employees.

A Bloomberg story on Friday said the fabric and craft retailer is running out of cash. Strategic options being explored include another Chapter 11 filing, a sale of the business and a capital increase. But a low revaluation of its holdings, along with lenders’ requests to set aside reserves to cover their losses in the event of a bankruptcy filing, are said to be the factors pushing Joann to consider another tour of bankruptcy proceedings.