The year 2020 could go down in history as one of the worst years ever for retail. A combination of the fallout from COVID-19 and e-commerce growth pushed companies such as Neiman Marcus, JCPenney, and Tuesday Morning into bankruptcy. Lord & Taylor will shut its doors after nearly 200 years in existence.
The retail apocalypse is far from over. Considering the bankruptcies of many venerable, high-profile retailers, investors' attention should also turn to Macy's (M +2.80%). The demise of Lord & Taylor shows that a prestigious history will not, by itself, protect a department store chain. Moreover, even after the pandemic ends, it is not clear that the retail stock can recover in a post-pandemic world.
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Macy's and COVID-19
Indeed, COVID-19 has added pressure to a company that struggled before the pandemic. In February, just before coronavirus took root in the U.S., Macy's announced a plan to close 125 stores over the next three years. It also declared an intention to reset its cost base, a move that could save $600 million in 2020 alone.
However, a more substantial reset came amid COVID-19. After the coronavirus hit, Macy's announced the temporary closure of all stores, although the digital business remained in operation during the pandemic. The company also suspended its dividend.
This could not have come at a worse time for Macy's. It had exhausted its $1.5 billion credit facility by the spring, leading to questions as to whether it could outlast the disruptions from the pandemic. To sustain itself, it sold $1.3 billion in senior secured notes backed by real estate assets. It also arranged an additional $3.15 billion in an asset-based credit agreement.
The struggle continues
However, this has left the company with almost $5.4 billion in combined short and long-term debt. This is a heavy burden for a company reporting a $4.3 billion EBITDA loss in the first half of its fiscal 2020.
Even worse, Macy's has not recovered quickly since pandemic restrictions loosened over the summer. In the quarter ended Aug. 1, net sales declined 36% year over year to $3.6 billion. This led to the company reporting a loss of $1.39 per share, or $431 million, during the same period.
For the year, analysts expect a loss of $3.62 per share -- not a small amount for a stock that trades for $7.36 as of this writing. A disappointing performance in the holiday quarter also has the potential to contribute to the losses -- that could particularly devastate its flagship store in New York City, where officials may impose a second lockdown.
Can Macy's turn itself around?
On the bright side, news from Pfizer regarding a vaccine may bring some much-needed relief for the department store chain, but the timing of a potential comeback remains tenuous. Though analysts predict a profit of $0.66 per share in the next fiscal year, the uncertainty surrounding a post-pandemic recovery makes this figure tough for bullish shareholders to hang their hat on.
Moreover, like JCPenney, Neiman Marcus, and other retailers that recently declared bankruptcy, Macy's remains largely a 20th-century store trying to remain relevant in a 21st-century retail environment. Its stagnant net sales growth over the last few years indicates that it may not offer the goods and shopping experience consumers now seek.
Additionally, with a growing debt load, it is unclear whether Macy's will have the financial strength to fund its turnaround. With few signs the company can forge a substantially different path than its struggling peers, Macy's stock is one parade investors should avoid.
