US retailers teeter on the brink as 630,000 outlets close

Few businesses need emergency cash more than retailers, but US $ 2.2 billion stimulus bill should not stop brick and mortar chains hit hardest of the coronavirus to hang.

While Amazon, Walmart, and a handful of other operators are fortunate enough to emerge from the crisis in a stronger position thanks to a boom in online deliveries and the rush for basic household goods, much of the rest of the sector faces a historic crisis.

In the United States, nearly 630,000 outlets have been forced to close due to fears about Covid-19 and movement restrictions to limit its spread, according to Coresight estimates seen by the Financial Times. As the National Retail Federation calculates that $ 430 billion in industry revenue could evaporate over the next three months, the question is how many of them will reopen.

In response to the crisis, retailers such as Victoria’s Secret owner L Brands are workers on leave. Dividend payments have been deferred at Macy’s and Nordstrom. According to Autonomous Research, Best Buy, TJX and Kohl’s are among 126 consumer discretionary firms that draw $ 86 billion in total from lines of credit.

Some companies, including the Mattress Firm, have told landlords that they will not be paying the rent required for April.

This year, 30 other nationally known US retailers could file for bankruptcy, industry consultant Jan Rogers Kniffen predicted. Particularly vulnerable are department stores and clothing chains in malls that have long struggled to remain relevant in the Amazon era.

Retail leaders and their advisers are looking into the details of the Congress bailout bill, which includes $ 454 billion in federal loans to crisis-affected businesses.

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Big questions remain as to how and when companies can access the funds and the conditions attached, although Matthew Shay, NRF chief, said that overall the package promised a “crucial bridge” for the sector . Mickey Chadha, senior credit officer at Moody’s credit rating agency, added that cash could help premium retailers “fix temporary liquidity problems”.

Long before the coronavirus, however, many retailers struggled to keep creditors at bay. Household names, including Forever 21 and Pier 1, have filed for bankruptcy in recent months and the sector accounted for almost a fifth of the debt of US businesses in default in the fourth quarter.

Heavily indebted trash retailers, cited by rating agency Moody’s, include luxury chain Neiman Marcus, with $ 6.1 billion in outstanding debt, department store operator JCPenney ($ 4.2 billion) dollars), women’s clothing company Ascena ($ 1.8 billion) and a clothing retailer. J Crew ($ 1.4 billion).

Column chart of maturities up to the end of 2022 (in billions of dollars) showing that American retailers are facing increasing debt repayments

Mark Cohen, director of retail studies at Columbia University and former CEO of Sears Canada, doubted that federal loans could resuscitate heavily indebted businesses. “A company that was struggling to get into this crisis and already has leverage is unlikely to turn around by taking out additional loans,” even on favorable terms, he said.

The corporate bond markets are increasingly concerned about how discretionary retailers will fare. A Macy’s Link which matures in 2023, for example, has gone from over $ 100 at the start of the month to $ 70, according to data from Finra.

Macy’s balance sheet has long been in better shape than its struggling competitors, although the department store chain lost its investment quality rating from S&P Global last month and was cut further into unwanted territory during ” a series of sector downgrades last week.

Not everyone is sure that the coronavirus will directly lead to a wave of retail bankruptcies. “I expect to see a slight increase as the companies that were on the brink have a greater risk of falling faster, but I don’t think it will be the Armageddon that everyone thinks,” said Perry Mandarino, Head of Restructuring and Co-Head of Investment Banking at B Riley FBR.

The scale of the crisis is such that the bankruptcy process itself is not working properly. New York-based Modell’s Sporting Goods has suspended liquidation sales because customers cannot visit its stores, and a judge granted his request last week to stay Chapter 11 proceedings.

A major restructuring banker argued that lenders and homeowners would do everything they could to “press the pause button” for the duration of the crisis. Professor Cohen added that it may be in the interest of creditors to be more flexible than usual. “The assets they would seize are currently worth a fraction of what they were before it exploded,” he said. “There will have to be a generalized tolerance.”

But the creditors have their own bills to pay – as the owner of the Taubman shopping center pointed out in a note to the tenants, in which he told them that he expected the rent obligations to be met.

In the end, the longer deals remain stalled, said Mr. Kniffen, the more retailers will fold. “You can shoot your revolver, you can put your employees on leave, you can refuse to pay the rent – but if it goes on for a while, you’re going to run out of levers to fire.”

And companies that have gone through the bruised but intact closure are faced with the prospect that the impact will be felt long after the virus has been contained, placing them further behind more dominant rivals.

Traffic restrictions threaten to convert even more consumers both to online shopping – to the benefit of retailers who have invested in e-commerce – and to chains that remain open during the crisis such as Walmart, which employs 150,000 workers to respond on demand.

Amazon – which last week entered into two leases with New York bankrupt supermarket Fairway as part of a brick and mortar expansion – is hiring 100,000 people.

John San Marco, research analyst with $ 356 billion asset manager Neuberger Berman, said he spent much of his time trying to assess the duration of the coronavirus disruption. But there is no doubt, he said, that the crisis will lead to “a significant acceleration in the abandonment of the retail trade”.

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