The coronavirus pandemic spreading around the world is leaving a wake of destruction in its path.
Restaurants across the country have closed or been reduced to takeout and delivery. Airlines have had to drastically cut back on flights and slash prices, and staples of American life like Disneyland and the NBA have gone dark.
However, apparel retail, an industry that was already struggling before the outbreak, may feel the long-term sting of COVID-19 even more than other struggling sectors. Like restaurants, many retailers have already closed stores, and a number of major retailers have sent clear warning signals. Zara-parent Inditex, the world's biggest apparel retailer, said it would suspend its dividend in order to conserve cash. Gap (NYSE:GPS), which has thousands of stores around the world, cut its share buyback program even though its stock hasn't been this cheap in 20 years.
Here are three other reasons why the outbreak presents a distinct set of challenges for apparel retailers.
1. The curse of seasonal inventory
Unlike most retailers, clothing stores' offerings change significantly over the course of the year, especially in the colder parts of the country. Today, retailers are likely sitting on billions of dollars of spring assortments and winter gear it was trying to get rid of. If a store had markdowns on parkas and boots last week or the week before, it's likely now stuck with those items until next winter. Meanwhile, these stores may not open soon enough to move spring apparel like light jackets.
There's no easy way for these chains to store all that gear. They either have to sell it a significant discount online, as retailers like Gap and Macy's (NYSE:M)are already doing, or pass it along to a deep discounter or off-price chain like TJ Maxx -- but those stores also have more inventory than they need right now.
By the time the worst of the epidemic is over, retailers may need to stock up on summer items like sandals, shorts, and swimsuits.
2. Who needs new clothes now?
Schools and businesses are closed across the country, and gatherings -- whether they're just dinner out, or a larger celebration like a wedding -- are essentially banned. Almost anyone who can is working from home as well. In other words, the occasions that would normally prompt shoppers to buy new clothes aren't happening right now, and it's unclear when they will begin again.
That means that at a time when retailers have been forced to close their stores, they're also seeing demand nosedive as well. Considering that a recession is likely to follow the crisis, retailers may not see the level of demand they were just months ago for a long time.
3. Malls were already in trouble
The American shopping mall, which may have reached its heyday in the 1990s, has been struggling for years. Online retailers like Amazon have been consistently grabbing market share, and in the smartphone era, malls have lost their luster as a gathering place for teens and others.
Class C and D malls across the country are already failing. Macy's said earlier this year it would close stores in lower-tier malls, and the epidemic could put higher-end shopping centers in jeopardy. According to REIS Moody's Analytics, mall vacancy rates were at a 20-year high in January at 9.7% before the coronavirus outbreak hit. If vacancy rates keep rising, blight will set in and drive customer traffic -- as well as new tenants -- away. That vicious cycle can force malls to close their doors entirely.
Retailers also seem to be overly optimistic about their reopening dates, as a number have said they'd only be closed through the end of March. New York City Mayor Bill De Blasio, on the other hand, recently told constituents that April would be worse than March, and that he fears May could be worse than April. While the rest of the country may not be as impacted by the pandemic, it's clear that at least some stores will be closed until May. That could push a number of malls over the edge, and blight other shopping centers that were previously in good shape.
One apparel stock for the long term
While almost every brick-and-mortar apparel seller will face substantial challenges over the coming months, there is one stock that could emerge from this crisis in a stronger position: Stitch Fix (NASDAQ:SFIX), the online personalized styling service. Unlike most apparel businesses, Stitch Fix doesn't have any stores, so it isn't directly affected by the wave of store closings due to social distancing measures. The company also has a strong balance sheet with no debt and about $300 million in cash and short-term investments, so it should be able to manage through a few slow quarters.
Stitch Fix dialed back its revenue growth guidance for the second half of its fiscal year for a number of reasons, including increased digital advertising costs on platforms like Facebook. The coronavirus crisis and the likely recession that will follow should help lower those costs and eliminate competition in a bloated industry. Meanwhile, as Americans are now spending most of their time indoors and unable to shop in stores, they may be more likely to try out Stitch Fix's unique model.
With a profitable business, top-line momentum, and a nimble online sales model, the data-driven online apparel company should emerge from this crisis in a stronger position than its competitors, ready to capture market share and deliver strong growth.