Credit risk

Christopher & Banks Corporation – tracking credit risk early warning signals

This article is written and published by S&P Global Market Intelligence; an independent division of S&P Global Ratings. S&P Global Ratings does not contribute to or participate in the creation of credit ratings generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from credit ratings issued by S&P Global Ratings.

Summary of bankruptcy:

  • Christopher & Banks Corporation (OTCPK: CBKC.Q) is a Minnesota-based retail store operator which, as of September 11, 2020, operated 452 stores.
  • On January 13, 2021, the company filed for Chapter 11 bankruptcy, listing its assets of $401 million and liabilities of $59 million.
  • Due to COVID-19, lack of social commitments and government restrictions, customers stopped buying clothes, which severely affected Christopher Banks.
  • On April 13, 2021, Christopher & Banks Corporation’s voluntary petition for Chapter 11 reorganization was converted to Chapter 7.

Activity Descrition:

Christopher & Banks Corporation, founded in 1956 and based in Minnesota, was a specialty retailer of private label women’s clothing and accessories in the United States. The company designed and sold women’s clothing and accessories to a mature clientele.

As of September 11, 2020, the company operated 452 stores in 44 states. It also operated christopherandbanks.com, an e-commerce website for its Christopher & Banks and CJ Banks brands. The company was previously known as Braun’s Fashions Corporation and changed its name to Christopher & Banks Corporation in July 2000.

Fundamental Probability of Default Analysis

Fundamentals of the Probability of Default (PD) Model is a statistical model that produces a PD, which is trained using default indicators and incorporates both financial and business risk. Available through our Credit Analytics desktop solution, API and data feeds, PD Model Fundamentals (PDFN) includes a pre-scored universe of over nine million public and private companies extracted from the S&P Global Market Intelligence database, representing 99% of the global market capitalization.

The PDFN score showed a struggling outlook for Christopher & Banks even before the pandemic at over 30% (implied credit score of “ccc-”) compared to the country/industry median of 3% (see Figure 1).[1] This is largely because Christopher & Banks became unprofitable a few years before the pandemic and the crisis exacerbated its already weakened position.

Figure 1: PDFN score escalation (fiscal year 2015-fiscal year 2020)

Source: S&P Global Market Intelligence, as of August 23, 2022. For illustrative purposes only

The PDFN score quickly jumped from 0.8% to 8.3% in 2016 due to a disappointing 2015. Christopher & Banks recorded a net loss of $49.1 million versus a net profit of $47.1 million) for the previous year.

Figure 2: Income and net income

Source: S&P Global Market Intelligence, as of August 23, 2022. For illustrative purposes only

Declining sales, driven by a competitive apparel retail environment, and operational inefficiencies coupled with higher costs have turned a highly profitable business into a loss-making machine.

Christopher & Banks has shown weaker financials every year, with declining sales and consistent losses with an average loss of $31 million per year, implying higher business risk and higher PD, represented by the increasing PDFN score.

As the COVID-19 pandemic swept the world in early 2020, many street retail businesses found themselves vulnerable. Forced to close its stores, Christopher & Banks’ revenues plummeted.

After the company announced its results for the first quarter of 2020, the PDFN score jumped significantly from 33.62% to 63.43% (implied credit score of “cc”).

Figure 3: Fundamental PD Escalation

Source: S&P Global Market Intelligence, as of August 23, 2022. For illustrative purposes only

The most important factors that impacted PD were total equity, profitability (EBIT margin) and liquidity (cash/current liabilities), indicating that the company had high business and financial risk factors.

As the pandemic forced the company to halt operations, company earnings fell more than 50% between FQ2020 and FQ2021, from $88M to $40M, with a subsequent drop of 41%, finally ending with a negative profit margin of -18.11%. As Christopher & Banks’ revenue growth slowed, the company went deeper and deeper into debt.

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[1] S&P Global Ratings does not contribute to or participate in the creation of credit ratings generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate PD and Credit Model scores from credit ratings issued by S&P Global Ratings.