Monday, March 23, 2020

The Last Domino?

Life has been tough on all retailers in recent weeks, particularly the distressed ones. First restaurants and bars were ordered to close, then major retailers elected to close, and then entire malls followed suit. The response to COVID-19 threatens to impact retail foot traffic in ways never before experienced – and to exacerbate slowing sales trends at brick-and-mortar stores as shoppers continue to shift dollars toward online retailers. As noted by Retail Dive, retail traffic for the second week of March was down 30% year-over-year. This is certainly reflected in the recent announcement by Amazon that they will be hiring another 100,000 workers to handle the overload in warehouses and delivery systems, while Walmart his hiring another 150,000 employees to support the flood of both online and store traffic. The rush to online shopping should create at least some concern that when we eventually “flatten the curve”, not all the business will return to the brick-and-mortar side of the scale.

Not all retailers are facing a doomsday scenario. The fear of quarantines has implanted panic into the hearts of shoppers, causing them to overwhelm supermarkets, drug stores, warehouse clubs, discounters, dollar stores and home improvement stores. There’s no shortage of business among retailers that stock essential goods. Even Best Buy reported a run on home office equipment as many employees are encouraged to work at home. A long list of leading retail chains that rely on discretionary spending should be expected to survive a lengthy slide in performance, although it won’t look pretty on their annual reports this year. We’re talking about the likes of Apple, Ulta, TJX divisions, Kohl’s, Dick’s, Auto Zone, and many others.

That leads naturally to a discussion about those on the edge, the distressed retailers. For this segment of retail there was already much consternation about long-term survival. Among department stores, Neiman-Marcus and JCPenney are both on thin ice. Neiman has been struggling with debt; incremental sales declines will likely weigh heavily on its chances to remain viable. Penney faces similar debt problems. Although new CEO Jill Soltau is making measurable efforts to change the way this once-formidable retailer does business, it may be too little too late. It has been attempting to restructure debt, but it’s still operating with negative cash flow and appears to be heading for at least 15% sales declines in 2020, which may be too much to overcome.

It was already a bad year for Pier 1 before coronavirus. It had to close approximately 450 stores and file for bankruptcy. It appears that COVID-19 may force an eventual liquidation of the chain. Ascena Retail Group, owner of Ann Taylor, Loft, Lane Bryant, Catherine’s and Justice, is also at risk. The apparel retail group recently liquidated the Dressbarn chain following the sale of its Maurices chain earlier last year. It has considered selling other divisions as well. Time will tell if it is able to avoid bankruptcy this year, but serious doubts remain. Destination Maternity, which had already filed for bankruptcy, is likely not to withstand the loss of sales over the coming months. Another apparel chain to keep an eye on is J Crew. And with so many mall based apparel chains and department stores under pressure, there will only be more pressure on many regional malls to keep the lights on.

Athough this is not the most comforting article you could be reading, I am cautiously optimistic that it may be a much healthier environment for retailers that will come out of this and recover, which I believe represents the vast majority of brick-and-mortar stores. Maybe we’re entering an era when retail supply is more in balance with demand and overstored markets are a thing of the past; maybe it took the last domino to fall before that could happen.

Bob Sheehan
Vice President of Research

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