PARAMUS, NEW JERSEY - MARCH 18: A view of the empty parking lot as the Westfield Garden State Plaza ... [+]
Closed for business! That is the sign on the doors of non-essential retailers in 45 states, with “non-essential” being defined as stores that trade in discretionary (clothing, home furnishings, electronics, beauty) as opposed to life-preserving products (food, pharmacies, cleaning supplies). Closures are expected to extend through April 30, but given the unpredictable nature of the coronavirus pandemic, local closures could be mandated longer.
Adding up the major national non-essential retailers impacted, Neil Saunders of GlobalData Retail estimates more than 190,000 stores have been closed, accounting for nearly 50% of U.S. retail square footage. That effectively closes down the nation’s roughly 1,200 malls and most stores in strip shopping centers and on America’s Main Streets.
To say this is going to be devastating to American retailers is to put it mildly. With little to no revenues coming in for non-essential retailers through at least the end of April, other than sales from digital channels, retailers will face a day of reckoning later this year or early next.
Credit rating downgrades
That day just got closer for nine major retailers, as Fitch downgraded credit ratings for:
- Capri Holdings (Michael Kors, Versace, Jimmy Choo)
- Dillard’s
- J.C. Penney
- Kohl’s
- Levi Strauss
- Macy’s
- Nordstrom
- Signet (Kay Jewelers, Zales, Jared, Piercing Pagoda)
- Tapestry (Coach, Kate Spade, Stuart Weitzman)
In addition, this week S&P downgraded L Brands (Victoria’s Secret) and Gap. And to add insult to injury, S&P moved Macy’s from its stellar S&P 500 to S&P SmallCap 600 list.
In Fitch’s credit downgrade, its model assumed these nine retailers would not open until mid-May and that revenues would fall by a stunning 90%, assuming a limited shift of sales to digital channels. The credit agency also assumed sales at these retailers would remain down double-digits in 2021.
“Credit ratings agencies use a complex calculation that includes not just sales trends, but also when debt is coming due,” says BDO’s David Berliner. “A lot of lenders may not want to force liquidation so they will give loan extensions and kick the problem down the road because they can’t handle that many distressed companies at once.”
“Just like hospitals, lenders will want to flatten the curve to not be overwhelmed and only deal with the ones where there is nothing that’s going to help them,” Berliner adds.
The recently downgraded retailers are all venerable brands, but not all are guaranteed to make it due to the damage caused by COVID-19.
Bankruptcy report
And even if all these downgraded retailers survive, Berliner is sure that many more won’t. He’s the expert, being a BDO Advisory partner in bankruptcy and restructuring and co-author of BDO’s “Retail in the Red” bi-annual report, the latest of which was just released in March and reported retail bankruptcies in the second half of 2019 though the first two months of 2020.
Prepared just as the coronavirus was breaking, the report shows the pace of bankruptcies accelerated somewhat from 2018 to 2019 – 20 vs. 22 – but could go off the charts in the second half of 2019 and into 2020.
“For quite a while, we have seen department stores that anchor malls struggling, which has hurt a lot of specialty apparel and shoe retailers that fill malls,” Berliner says.
“Then there is the trend of more shopping going online and retailers having way too many physical stores. Now with COVID-19 in the mix, it is really going to accelerate the trends with more store closures and ultimate failures,” he adds.
The strong will get stronger, the marginal weaker, and the weak will die
During the coronavirus shutdown, the government has provided a lifeline to what are defined as essential retailers which can remain open during the crisis, including mass merchandisers and dollar stores that sell food and household supplies, grocery and drug stores, hardware stores, convenience stores and e-commerce retailers. These retailers are likely to emerge stronger than before.
As for non-essential brick-and-mortar retailers that sell everything else, they are left out in the cold.
“The big retailers are going to do really well and benefit from this, but there is going to be a lot of distress for marginal retailers with many that won’t make it. Then malls will close. We are going to see a heightened and accelerated retail transformation,” he says adding that it is long overdue.
“We simply have too many stores in the U.S. compared to other industrialized Western countries,” Berliner shares. “Many retailers haven’t taken the necessary steps to right-size their operations because of long-term leases that made it too expensive to close stores.”
As for the retailers on the brink, Berliner points to those retailers that were forced to close stores before the coronavirus. “Since we began our biannual bankruptcy tracking, we have found that retailers closing stores are often a precursor for an eventual bankruptcy filing,” he explains.
In 2019, the list of retailers closing 25 or more stores include:
- Ascena Retail Group
ASNA (120 announced closures) - Christopher & Banks
CBK (30-40) - Express (66)
- Gap (230) and downgraded by S&P
- GNC ( 230)
- H&M (160)
- JC Penney
JCP (94) and downgraded by Fitch - K-Mart (45)
- Macy’s
M (125) and downgraded by Fitch and S&P - Newell Brands
NWL (100) - Olympia Sports (76)
- Sears (51)
- Victoria’s Secret (53) and downgraded by S&P
- Walgreens
WAG (195)
During the second half of 2019, many retailers that were on previous store clsoing lists filed, including Charming Charlie, Barney’s, A’Gaci, Avenue Stores, Sugarfina, Fred’s, Forever 21, Destination Maternity. And in 2020, Papyrus, Lucky’s Market, Earth Fare, Pier 1, and Modell’s Sporting Goods
However, Pier 1 and Modell’s were late filers and their plans have been put on hold because the current crisis has made liquidation of assets impossible. “In a perverse way, we aren’t going to see many filings during the COVID-19 crisis. They are going to have to wait for a better time to liquidate,” he says.
And liquidation, rather than reorganization or restructuring, is going to be the most likely end game of the bankruptcy filings that ultimately result.
“Based on the recent trends with retail bankruptcy filings, I suspect we will see an increase in liquidations and few reorganizations,” he says. “I also think there will be more asset sales, where pieces of failing retailers, which may only be certain good store locations and the intellectual property assets, are sold in Bankruptcy code section 363 asset sales.”
Consumers are going to determine the winners and losers
Just as way too many retailers went into the coronavirus weakened with too much debt and brick-and-mortar exposure, American consumers are also facing the crisis in a weakened state. Their credit cards are maxed out and savings non-existent as they live paycheck to paycheck with nothing to fall back on.
“We are seeing some very distressing trends regarding consumer borrowing,” Berliner warns, noting that Americans have increased borrowing for the 22nd straight quarter so that by the end of 2019, household debt exceeded $14 trillion for the first time.
“Household debt is now $1.5 trillion over its previous peak in 2008,” he reports. “We all remember what happened after that.”
“Now we are in this climate where people are losing their jobs and hunkering down. Consumer confidence plummeted in March, as expected. Consumer behavior is going to be a real wildcard,” he says. “I don’t know if they will go back to the way they shopped before COVID-19, or even if they will be able to.”
And even if they do return to stores once they reopen, what will department stores and fashion retailers, in particular, have to offer? Last season’s merchandise not the current season’s, which only underscores the weakness in the retail supply chain.
“Everybody is canceling orders, so the goods aren’t going to be coming in for summer or fall,” Berliner remarks. “It’s going to take quite a while to ramp the supply chain back up to get the goods over here. So that’s going to be another big factor separating the weak from the strong. The supply chain is going to hurt a lot of retailers on the backend.”
While he sees weak prospects for fashion in the post-coronavirus retail world, Berliner thinks that all the time people have spent at home will benefit retailers that offer decorative home furnishings. However, big-ticket purchases, like furniture, will likely be put on hold. He also sees growing demand for kitchen gadgets, housewares, and countertop food preparation items, though there again, major appliances might see weaker demand.
With the threat of a global recession mounting by the day, Berliner says the disparity between the strong and weak retailers is going to become even more pronounced.
“Bottom line, I expect there will be fewer retail chains surviving post-COVID-19 and the surviving chains, particularly apparel and other mall-based specialty stores, will reduce the number of brick & mortar store locations,” he concludes.
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