What happened

Retail stocks were falling broadly today as the sector reacted to the March retail sales report from the Census Bureau showing a historic plunge as the coronavirus pandemic swept the nation. Overall adjusted retail sales fell 8.7% from February, and 6.2% from March a year ago, with discretionary chains getting hit especially hard. Core retail sales, which exclude cars and gasoline, were down 3.1% from February.

Among the stocks that were falling on the news as of 10:56 a.m. EDT today were Foot Locker (NYSE:FL), which was down 5.6%; Best Buy (NYSE:BBY), which was off 6.4%; Lowe's (NYSE:LOW), which had fallen 5.2%; Macy's (NYSE:M), which had given up 8%; and TJX Companies (NYSE:TJX), which had lost 4.9%. The S&P 500, meanwhile, was down 2.6% as the broader market index responded to the retail sales report, a weak manufacturing report, and disappointing earnings reports from banks.

A blurry image of shoppers passing through a mall

Image source: Getty Images.

So what

The retail report showed a clear bifurcation between retailers selling essential goods and those focused on nonessentials like apparel, home goods, and electronics. Sales at clothing stores, for example, fell more than 50% from February, while sales at grocery stores jumped 27% as Americans stocked up on goods like food, toilet paper, and cleaning supplies in preparation for stay-at-home orders.

Of the group above, only Best Buy had major news to report, but it showed that even relatively strong retailers are struggling during the outbreak. The electronics retailer said that its sales were down about 30% since it shifted to curbside service only, and it said it would furlough 51,000 employees starting April 19, though it would retain 82% of its full-time employees. Best Buy is taking other steps to shore up its cash position, including reducing executive compensation, and trimming operating expenses and capital expenditures. Overall electronics sales fell 15% last month, according to the Census Bureau.

Macy's, Foot Locker, and TJX Companies (the parent of TJ Maxx, Marshalls, and Home Goods) all have significant exposure to the apparel sector, which has been hammered by the pandemic. All three retailers have been forced to close stores, and even online apparel sales are likely down significantly as Americans stuck at home have no events that they need new clothes for, like work, a date, or a wedding.

According to Reuters, Macy's last week retained the investment bank Lazard to help improve its capital structure and shore up its finances, a sign of the difficult position the company is in. Meanwhile, Reuters also reported Tuesday night that J.C. Penney is considering filing for bankruptcy, sending shares of that ailing stock plunging and pressuring other department store chains as well. Department store sales were down 20% in March from February.

Finally, Lowe's appears to be in a better position than its peers above. As a home-improvement retailer, its stores are considered essential, and the company has kept them open. Though the chain is likely to see a slowdown in sales as Americans delay home improvement projects during economically uncertain times, the company does not have the same set of risks as other discretionary retailers. In fact, the Census Bureau reported that home improvement retail sales rose slightly last month.

Now what

The big question for the retail industry right now is how long will these lockdown-style conditions be in effect across the country. New daily COVID-19 cases appear to have peaked nationally, a promising sign, and governors of affected states are starting to plan reopening steps, while President Trump is aiming for a reopening by May 1. 

Nonetheless, public health officials have urged caution, and even if these stores reopen, customers may not necessarily flock back since they may still be wary of the virus. What is clear is that these retailers will continue to face challenges for at least the next few weeks, so investors should expect things to get worse before they get better.