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Will the Coronavirus Finish What the Retail Apocalypse Started With Department Stores?

By Rich Duprey - Apr 15, 2020 at 9:15AM

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Data suggests numerous chains are at high risk of default.

A retail sector already hobbled by falling sales, lower customer traffic, and too many stores is now on the verge of being pushed over the edge.

The coronavirus pandemic, which has shut down all nonessential business (a category into which most retailers fit), may cause many of the weakest companies -- and possibly a few more that were financially borderline beforehand -- to turn off the lights for good.

Abandoned shopping center

Image source: Getty Images.

Rising risk profiles

The prospects for default are skyrocketing as pandemic-induced closures turn off the spigot of what little revenue these retailers had trickling in. 

Data from S&P Global Market Intelligence indicates the median risk of default within one year soared from less than 10% at the end of February to over 40% at the beginning of April, and experts don't see the economy beginning to reopen until mid-May at the earliest. The potential for a return to normalcy is even further into the future than that.

Not surprisingly, troubled department store chains including J.C. Penney (JCPN.Q) and Macy's (M -1.91%) had the highest risk with the one-year probability of default exceeding 42%.

If you thought last year was bad

Not surprisingly, the worst off are those businesses that are mall-based. Shopping malls were already seeing weak foot traffic, and the Christmas holiday did little to boost results. 

One retailer that did see better comparable-store sales over the two-month holiday shopping period than its peers, Kohl's (KSS -19.64%), still suffered a 0.2% decline from the prior year. In comparison, Macy's was down 0.6% and J.C. Penney suffered a devastating 7.5% drop.

The reason for Kohl's somewhat better showing is that it is the least dependent on shopping malls, with many of its stores freestanding or in strip malls.

Such tepid results explain why so many retailers went bankrupt last year and a record number of stores closed. Coresight Research said over 9,500 stores were closed in 2019, which was better than the 12,000 stores it had originally predicted, but still the worst performance since it began recording the data in 2012.

Now it's about to get worse.

The tsunami is building

In just one week last month, some 47,000 stores were forced to shut down because of the coronavirus, though most had expected it would be just for two weeks. Now we know it is going to be much longer than that, with no firm date for them to reopen.

Coresight says some will never recover. In its report on the latest closure figures, CEO Deborah Weinswig said, "We anticipate that some of the retailers that have recently announced temporary store closures -- including some well-known names -- will never reopen their doors."

The research firm estimates over 15,000 stores could close for good in 2020.

Warning signs are everywhere

Having navigated the trade war with China last year, retailers were preparing for the normalization of relations with that U.S. trading partner. The onset of the pandemic has thrown all that into chaos, and their survival is now in doubt.

Nordstrom (JWN -1.75%), which previously seemed financially secure, albeit suffering from declining sales and a heavy debt burden, recently announced it was suspending its dividend and halting all stock buybacks. And it said that if its stores remain closed for much longer, "our financial situation could become distressed."

Gap (GPS 3.03%) also suspended its dividend, drew down $500 million on its credit line, and furloughed most of its employees. Previously it reversed its decision to spin off the Old Navy brand to shore up its finances. Macy's is now exploring potential restructuring options.

The end is nigh

With all their stores closed, no way to make any money other than off their e-commerce sites, and some substantial debt balances, retailers are dangerously close to going under.

While they had barely kept their balance while walking along the edge during the main onslaught of the retail apocalypse, the coronavirus pandemic may finally finish off those that have managed to survive.

 

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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$17.97 (-1.91%) $0.35
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.49 (3.03%) $0.25
Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$28.68 (-19.64%) $-7.01
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
JWN
$20.76 (-1.75%) $0.37

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

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