Coronavirus Quarantines Could Spell Doom for Already Distressed Retailers

Stores were already challenged by changes in consumer behavior

a closed mall
Vacant malls and shopping centers are likely to be the norm as consumers avoid public places to prevent spreading the coronavirus.
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Key insights:

Distressed retailers, already struggling to attract shoppers and service debt, may find it difficult to remain solvent due to the spread of the coronavirus and measures taken by governments and companies to contain it.

The response to the contagion, ranging from mass store closings and event cancellations to shifting many employees to work from home—all in tandem with fears of a recession—may prove insurmountable for a number of companies.

As Sarah Wyeth, lead retail analyst at rating agency S&P, put it: “Not that many retailers have the capacity to absorb a hit like this.”

That’s especially the case for weaker chains already beset by a lack of liquidity, unsustainable capital structures or execution problems. More specifically, retailers backed by private equity, which leverage companies with debt when they acquire them, will be challenged.

Sucharita Kodali, a retail analyst at research firm Forrester, said the future for some of these businesses seems near-impossible “unless they get some extensions or forgiveness on payments.”

Refinancing is about to get much harder

Disruption of the markets—the Dow Jones Industrial Average fell below 20,000 near mid-day trading today—is one of the contributors to a recession, according to Mickey Chadha, a senior credit analyst at Moody’s.

While there’s the psychological effect of a decline in the stock market, reverberations from the sell-off in equities spill over into debt, deeply damaging the health of companies, he said. That’s because businesses rely on the credit markets to function.

Distressed retailers in this type of environment will have difficulty getting refinanced at a rate they can afford, if they’re able to obtain financing at all, Chadha said. This pertains especially to speculative-grade issuers with a maturity in the next year or so, Wyeth concurred.

At the top of rating analysts’ watch lists are brands such as J.Crew, GNC and Lands’ End, all of which have upcoming maturities on their debt in early 2021 and could have difficulty refinancing. That’s if the volatility in equities continues to spill over into the capital markets, effectively closing access to them for troubled companies.

J.Crew is notable because it is currently attempting a refinancing tied to its IPO of Madewell, which was to take place in early March, according to David Silverman, a retail analyst at Fitch.

Proceeds from the IPO, which was postponed until the end of April, were to pay off a portion of the apparel brand’s term loan, with the remainder refinanced with new debt, he said.

Even under normal circumstances, pulling off an IPO and a refinancing would have been difficult for any mall-based apparel retailer, Silverman added.

Sellers of discretionary goods are at risk

It’s not just businesses in need of refinancing within the next 12 to 18 months that are in danger. Any retailer selling nonessential items with a shortage of cash flow and high debt load is at risk, including luxury retailer Neiman Marcus and department store JCPenney.

While retailers of consumer staples such as food and household cleaning products are expected to fare well, purveyors of discretionary goods are likely to see their sales decimated in the near-term as consumer confidence fades. An early sign of trouble: The University of Michigan’s consumer sentiment index fell by about 5% to 95.9 in early March from 101 in February.

“Discretionary spending could dramatically fall, at least temporarily,” Wyeth said.

Starbucks, for example, experienced a decline in comparable sales of 78% in China in February, with 80% of its stores closed at one point. While these numbers are specific to the food service sector, they give some sense of the potential extent of the damage.

J.Crew, GNC and Lands’ End, as well as Neiman Marcus and JCPenney, did not respond to a request for comment.

Retail was already facing challenges

The retail sector was already considered to be in a recession of its own before the coronavirus, which first appeared in Wuhan, China in December and declared an international public health concern by the World Health Organization in late January.

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