The coronavirus pandemic is causing all kinds of havoc for individuals and businesses. Over 30 million people have filed for unemployment benefits in the U.S., and the country faces a major recession. Importantly, there are businesses that will be hit harder than others, and those are the ones you want to avoid.
Macy's (M 7.52%) and Nordstrom (JWN 7.84%) are having to endure an extremely challenging scenario. With the majority of their revenue stemming from their brick-and-mortar stores, the current environment is crippling sales from that channel. Retail businesses have been under tremendous pressure from online competition for years, and now, the coronavirus outbreak is putting further stress on the industry.
Going from bad to worse
From 2015 to 2020, Macy's revenue has gone from $28 billion down to $25 billion. Struggling to get visitors into its stores, it has gone on a campaign of shrinking its physical footprint to try to match its scale to actual demand. This was all before the coronavirus outbreak started. Now, with the incredible change in circumstances, it may need to accelerate its plans to become smaller.
As of Feb. 1, the company had $685 million in cash and equivalents and a whopping $5.2 billion worth of inventory. The company also tapped its credit facility, borrowing $1.5 billion. The added cash will give it more flexibility to make changes in the near-term. Still, its ability to turn that inventory into cash in the coming weeks and months will be crucial for the company. Otherwise, it may have to take substantial discounting measures if products go out of season, further complicating its troubles.
Admittedly, the inventory figure is the norm for Macy's at this time of year. What's different now is that sales are going to be much lower than usual. Even though stores are beginning to reopen, the demand for clothing will likely be lower for at least a few months longer. Many schools will continue with remote learning in the fall, reducing back-to-school shopping. Businesses with employees that are capable of working from home are encouraged to continue operating remotely, similarly reducing the demand for new apparel.
Under pressure from the drastic changes stemming from widespread stay-at-home orders, Macy's is moving to adapt. The problem for investors is that moving in haste increases the probability of making a costly mistake. And Macy's massive footprint with 776 locations makes it particularly more exposed to downside risk, because it's more difficult to make changes at such a large scale. What's more, even if it does handle the current pandemic well, it's still going to be competing with a difficult market for brick-and-mortar retailers in the aftermath.
Discounting is the only way
Nordstrom appears to be in a better position to deal with the shutdowns compared to Macy's. In a May 5 press release, the company said, "While stores are temporarily closed, the company is generating solid online traffic and conversion and clearing excess inventory through increased marketing and promotional efforts."
Additionally, the company said it would be permanently closing 16 of its full-line stores. Importantly, Nordstrom operates 116 full-line stores (full-price) and 247 Nordstrom Rack stores (off-price). The announcement will further shift the balance in favor of off-price locations.
Furthermore, the company has $853 million in cash and $1.9 billion worth of inventory as of Feb. 1. Indeed, Nordstrom has a better cash to inventory ratio than Macy's. However, it's still a vulnerable position to be in when many stores will be closed and the return to normalcy is uncertain.
A decrease in sales will highlight a negative trend for the company. That is, from the fiscal 2015 to fiscal 2019, revenue rose from $14.4 billion to $15.5 billion, but net earnings actually declined from $600 million to $496 million in the same period. If the bottom line shrank while revenue was rising, it will only fall further with sales declining and discounting becoming the norm in the near-term.
Importantly, while Nordstrom is in a better position compared to Macy's, it is also priced more richly. Nordstrom's trailing price-to-earnings ratio is 4.9, compared with Macy's 2.9.
What this means for investors
The coronavirus is hitting brick-and-mortar retailers especially hard. Fortunately, Macy's is already reopening stores in several states, and Nordstrom is following suit. But there's no telling when customers actually return to those stores at the same level as they did before the outbreak. Meanwhile, the companies will have to incur the added expenses of increasing the safety of their shoppers and associates.
A reduction in sales and an increase in coronavirus-related expenses is a certainty in the short-term for these two retailers. Meanwhile, the top-line recovery will be far less certain. Department stores were on the decline before the pandemic disrupted life around the world, and investors should avoid Macy's and Nordstrom stock as the risk far outweighs any return.