Bankruptcy, credit issues face retailers during COVID-19 crisis - Firebaugh & Andrews

The retail sector is reeling from the fallout of the coronavirus outbreak and the protocol around social distancing that has temporarily shuttered more than 47,000 chain stores as consumers are staying home.

While many of the closed stores have said they will remain open online, consumers are not shopping for non-essentials as they may fear for their jobs if this crisis drags on. Neil Saunders, managing director of GlobalData Retail, said the retail landscape has gone from fairly normal to total disruption beyond that the industry has seen since the Second World War.

Moody’s predicts nearly 80 million of the 153 million jobs in the U.S. economy are at high or moderate risk. Mark Zandi, chief economist at Moody’s, said that doesn’t mean all of those jobs will be lost, but he does expect as many 10 million of the impacted workers will see reduced wages, through layoffs, furloughs or fewer hours. Zandi said the job market is in free fall and businesses have no choice but to reduce payrolls.

Coresight Research predicts there will be 10,000 to 12,000 permanent store closures by the end of the year. Matthew Shay, president of the National Retail Federation, said if Washington does not create a financial bridge the situation will be dire for many retailers this year. Shay advocates for bridge loans from the Federal Reserve for what he says will turn the economy back on and put people back to work.

“This is not like in 2008 when there was some bad behavior. Many of the retailers were running solvent businesses and through no fault of their own have had to shut down. They will have to reduce staff and some will have credit issues if something is not done,” Shay said Tuesday.

Shay said he is hopeful the U.S. Senate will soon pass a resolution that will deliver roughly $2 trillion in aid to consumers, large employers who need stabilization and other industries like retail that have been hit hard from the COVID-19 crisis. He said consumers are important to the equation and he applauds the package that will ensure help for every segment hurt.

REALITY FOR MACY’S, DILLARD’S
Macy’s recently suspended its quarterly dividend and withdrew its 2020 outlook given the uncertainty around the crisis. Macy’s also accessed $1.5 billion from its creditors to help with liquidity.

JCPenney recently surprised Wall Street with unexpected profit and positive free cash flow in its fiscal fourth quarter, but that success will be short-lived if the shutdown continues. JCPenney held $386 million in cash and short-term investments in January. But with losses for the fiscal year amounting to $257 million, analysts said the company will have to find a new source of funding in the foreseeable future or look again at its debt.

Little Rock-based Dillard’s is not without its own issues. Seeking Alpha analyst Adam Levine-Weinberg said last week because of the company’s low profit margin, seasonality of its business and low e-commerce penetration, it will likely be hit harder by the growing COVID-19 pandemic than Macy’s. He said Dillard’s biggest advantage relative to Macy’s is that it has less debt. As of the end of fiscal 2019, Dillard’s had less than $300 million of net debt (excluding operating leases), compared to $3.5 billion for Macy’s. Even accounting for Macy’s being about four times Dillard’s size, this is a significant difference in their leverage profiles.

He said Dillard’s real estate value is considerably lower than Macy’s and if sales plunge this spring, there could be working capital challenges at Dillard’s given the company’s $892 million of payables at the beginning of the last quarter compared to cash of $277 million.

Luxury retailer Neiman Marcus is in talks with lenders to file for bankruptcy as it struggles to meet its $4.3 billion debt load. The retailer has not made any public statement regarding the talks other than to say COVID-19 shutdowns are devastating to retailers.

GROCERY, PHARMACY EXPANSIONS
While department store chains are shuttered, grocery and pharmacy retailers have remained open and are struggling to keep shelves stocked and employees healthy on the front lines of the COVID-19 outbreak.

Walmart said March 19 it will hire 150,000 additional employees in its stores and warehouses through the end of May. That represents a roughly 10% increase in its current workforce, the company said. Walmart also reduced store hours to give employees time to restock shelves and clean the stores. The Bentonville-based retailer also announced bonuses to hourly workers.

Dollar General said it plans to hire 50,000 employees by the end of April, as it nearly doubles its hiring rate to support heightened demand for household essentials amid the COVID-19 pandemic. Most of the new hires are expected to be temporary. Dollar General operates 16,300 stores in 45 states.

CVS Health is also hiring 50,000 workers and delivering bonuses to employees who are required to work on-site during the coronavirus pandemic.

Amazon said earlier this month it plans to add 100,000 U.S. jobs full and part-time. The jobs are in fulfillment centers and delivery networks to meet the surge in demand from people relying on Amazon to practice social distancing.

Zandi many of the new retail jobs will be temporary and scale back when the COVID-19 crisis passes. Shay commended the retailers for adding jobs but said it’s imperative the sector receives financial relief as doors remain closed to customers but their creditors are looming.

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