Please ensure Javascript is enabled for purposes of website accessibility

Stock Market News: These Coronavirus-Crushed Stocks Face a New Threat

By Dan Caplinger – Updated Apr 1, 2020 at 11:38AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Major benchmarks lost ground Wednesday morning on new worries about the pandemic.

Wednesday morning didn't bring any relief to Wall Street, as investors continued to worry about the short- and long-term impacts of the novel coronavirus pandemic on the global economy. Warnings from President Trump about how difficult the coming few weeks are likely to be weighed on sentiment, and news from various state and local government officials suggesting that disruptions to daily life could last longer than anticipated raised new questions about the ability of many businesses to weather the crisis. As of 11 a.m. EDT, the Dow Jones Industrial Average (^DJI -1.62%) was down 593 points to 21,324. The S&P 500 (^GSPC -1.72%) fell 78 points to 2,506, and the Nasdaq Composite (^IXIC -1.80%) dropped 179 points to 7,521.

The retail sector has taken a huge hit as a result of the COVID-19 outbreak, with many retailers having had to close their store operations entirely. Given the challenges that brick-and-mortar retail companies already faced even before the coronavirus hit, the loss of sales in store locations has hurt them at a time when they're least able to absorb the blow. That spelled bad news for Macy's (M -0.44%), Tapestry (TPR -4.17%), and Capri Holdings (CPRI -4.92%) Wednesday, and a disturbing trend could spread throughout the industry if there's no relief soon.

Hitting junk bond status

Macy's, Tapestry, and Capri all faced the dubious distinction of having their bond ratings cut. Rating analysts at Fitch reduced their rating on Macy's from BBB- to BB+, while doing a double downgrade on Tapestry's rating from BBB- to BB. Capri's former BBB- rating also moved lower to BB+, sending its stock down 14%.

Michael Kors store as seen from inside of a mall.

Capri is the parent company of Michael Kors. Image source: Capri Holdings.

The move measures Fitch's long-term estimate of how likely the companies are to default on their outstanding debt. In making the assessment, Fitch noted that the retailers face two different but equally scary threats. In the short run, the fact that the retail companies are having their in-store sales activity interrupted will have a marked impact on revenue and cash flow, making it harder to support their debt payments in the near term. From a longer-term perspective, Fitch noted that even after the worst of the coronavirus outbreak has passed, consumers could face a recession that will make them less likely to spend on discretionary purchases.

Moreover, the downgrades are especially important because they take the three companies out of the realm of investment-grade debt and put them instead into the high-yield debt market -- aka the junk bond market. That will increase the interest these issuers have to offer in order to raise capital in the future, which is more likely than ever because of the negative economic impacts from the coronavirus.

Macy's, whose shares fell 3%, also suffered the indignity of getting ejected from the S&P 500 index. With a market capitalization of just $1.5 billion, the retailer had shrunk below the level at which the large-cap index typically keeps ailing companies as their value diminishes.

Can these retailers recover?

To bounce back, retail companies will have to get through increasingly tough conditions. Macy's has already furloughed thousands of its workers to try to save cash. Tapestry, which sells the upscale Coach line of handbags and accessories and whose shares were down 12% Wednesday morning, suspended its dividend and stock repurchases and is relying on borrowings for expense management. And Capri, parent of Michael Kors, has already warned about the financial impacts it's seeing from the coronavirus.

At this point, it's impossible to know just how bad those conditions could get. As they fight to survive, these three retailers will have to work a little bit harder to overcome the pressure of having a junk bond rating.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tapestry. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Capri Holdings Limited Stock Quote
Capri Holdings Limited
$40.19 (-4.92%) $-2.08
Tapestry, Inc. Stock Quote
Tapestry, Inc.
$29.66 (-4.17%) $-1.29
Macy's, Inc. Stock Quote
Macy's, Inc.
$15.72 (-0.44%) $0.07
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,590.41 (-1.62%) $-486.27
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,693.23 (-1.72%) $-64.76
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,867.93 (-1.80%) $-198.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.