Once a retailer, or any other company, files Chapter 11 bankruptcy it loses control of its fate.
It may enter bankruptcy with a plan, but the court or the company lenders and creditors can derail the process, making it impossible for the company to survive.
In most cases, the calculation involves whether the company's creditors view it as more valuable dead than alive. If it has assets that can be liquidated, the creditors may want to sell the company for parts in order to get back some of their money.
Related: Chapter 11 bankruptcy forces popular retailer to close all stores
That's what happened with Christmas Tree Shops, Tuesday Morning and Bed Bath & Beyond. All three lost the trust of their vendors and could not find banks willing to finance continuing operations.
When a company begins to falter, especially a retailer dependent on having merchandise to sell, its vendors can smell blood in the water. Payments come in late (or not at all) and orders get smaller.
When that happens, the company's suppliers begin demanding cash upon delivery or even payment up front. That accelerates the death cycle process as the cash-starved company can't afford to do that and files for Chapter 11 bankruptcy to try to fix its finances and live to fight another day.
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Data predicts a new retail bankruptcy
Rapid Ratings tracks publicly available data to predict which companies are at risk for a bankruptcy filing. Subscribers use the company's data to manage their own risk when it comes to getting paid.
The ratings service calls the business model at Joann Inc. (JOAN) , a popular fabrics and crafts retailer, unsustainable and has urged clients to take urgent steps to mitigate their risk.
Joann has been a low-rated company by Rapid Ratings for quite a while and it has entered some dangerous territory.
"Joann Inc. is situated in our Very High-Risk group, displays weakness in five of our seven performance categories, demonstrates significant underperformance in [return on capital employed], and was downgraded in the most recent period," the ratings company said.
ALSO READ: Popular Craft Store Inches Closer to Filing Bankruptcy and It Could be Disastrous for Crafters
"If current trends persist, it would be logical to expect that Joann Inc. will face very serious default risk this coming year and will struggle with efficiency and competitiveness problems over the medium-term; thus, the outlook is negative,"
Joann faces Chapter 11 bankruptcy
Rapid Ratings is not the only data-driven service predicting a Joann bankruptcy. Debtwire, which according to its website examines "global capital markets with predictive analytics powered by human intelligence and machine learning," also sees the popular retailer headed to a bankruptcy filing.
"Retailers often seek out Chapter 11 bankruptcy protection to restructure their operations. It provides them with some bargaining power with landlords as they reduce their retail footprint and right-size their balance sheet," Sarah Foss, Debtwire’s global head of legal and restructuring, told TheStreet via email.
The news, however, is not all bad for the chain and its loyal customers.
"A restructuring from Joann will likely involve closing a portion of its 850 stores and given the difficulty of leasing that big box retail locations to new tenants, Joann will be in a strong position as it negotiates concessions from its landlords," she added.
Foss cited news reports that a filing could come as early as this week and noted that the company may be handed over to its lenders.
"Joann would need to expedite any trip through Chapter 11 so that it can emerge from bankruptcy before the third and fourth quarters of this year as the company typically generates most of its revenues from Halloween and holiday sales," Foss shared.
The company has not commented on a potential bankruptcy filing, It had tried to sound optimistic in its third-quarter-earnings release.
“During the quarter, we continued to execute against our Focus, Simplify, and Grow cost reduction initiative in which we had previously identified $200 million of targeted annual cost savings across supply chain, product, and [selling, general and administrative] expenses," Chief Financial Officer Scott Sekella said.
"As we implement these cost savings initiatives, we are driving meaningful cash flow improvements that we expect will continue for the remainder of this fiscal year and beyond."
Joann closed the quarter with $1.48 billion in debt and $28.3 million in cash and cash equivalents.
