With stores closed and mounting expenses, signs of more troubled times ahead are everywhere. J.C. Penney missed an April interest payment. Neiman Marcus is teetering on the edge of bankruptcy after missing an interest payment of its own this month. Sycamore Partners wants out of its agreement to buy Victoria’s Secret. Gap isn’t paying rent.
Some brands have announced layoffs or permanent store closures. Massive discounting continues online as fashion brands attempt to salvage whatever they can out of an otherwise lost season.
Other companies are still rushing to shore up their finances, such as Macy’s Inc. The department store is negotiating with its banks to line up new funding, but is seen as making headway.
A large debt load heading into the crisis is certainly cause for concern among retailers. But the ability to take on more debt right now is actually a sign of strength, since bond investors are only willing to put new money into companies they are confident will make it through turmoil.
VF Corp teed up $3 billion bond sale and plans use the proceeds to repay creditors and funds it borrowed under its senior unsecured revolving credit facility. PVH Corp has begun a private euro offering of roughly 350 million euros worth of notes due in 2024. American Eagle Outfitters is offering $400 million worth of convertible senior notes that will mature in 2025. The proceeds will be used for general corporate purposes.
“There’s going to be a more pronounced bifurcation between the haves and have-nots,” Mickey Chadha, vice president and senior credit officer of Moody’s Investors Service, told WWD.
The coronavirus, he said, only accelerated the inevitable. The results then will be contingent on factors set in place prior to the pandemic. Things like a company’s credit rating, balance sheet, liquidity and ability to leverage its assets, among other things.
“All the trends going into this pandemic are going to be magnified as we come out,” Chadha explained. “The stronger players are going to get stronger because they were able to withstand the pressure. And the weaker players — they’re burning cash and not getting any revenue — they’re going to get weaker and give up market share.”
Even before the current health crisis, mall-based stores, particularly department stores, were struggling. Some industry experts argue that they lack sophisticated e-commerce businesses, cash on their balance sheets and consumer demand as people became increasingly comfortable shopping online. Others were simply overextended.
And the ratings speak for themselves.
WWD pulled together data from Moody’s Investors Service to find out which retailers were most credit-worthy — and which ones were most likely to default on their loans.
Moody’s Credit Ratings
|TJX Companies||A2||Investment Grade||Upper-medium grade/ low risk||Negative|
|Ralph Lauren||A2||Investment Grade||Upper-medium grade/ low risk||Negative|
|VF Corp||A3||Investment Grade||Upper-medium grade/ low risk||Stable|
|Tiffany & Co.||Baa2||Investment Grade||Medium grade/ moderate risk/ Some speculative characteristics||Ratings Under Review (RUR)|
|Tapestry||Baa2||Investment Grade||Medium grade/ moderate risk/ Some speculative characteristics||Negative|
|Dillard’s||Baa3||Investment Grade||Medium grade/ moderate risk/ Some speculative characteristics||Stable|
|Nordstrom||Baa3||Investment Grade||Medium grade/ moderate risk/ Some speculative characteristics||Negative|
|PVH Corp.||Baa3||Investment Grade||Medium grade/ moderate risk/ Some speculative characteristics||Stable|
|Macy’s||Ba1||Speculative Grade||Speculative / substantial credit risk||Negative|
|Gap||Ba2||Speculative Grade||Speculative / substantial credit risk||Negative|
|L Brands||Ba3||Speculative Grade||Speculative / substantial credit risk||Negative|
|Lands’ End||B3||Speculative Grade||Speculative/ high credit risk||RUR|
|Men’s Wearhouse (part of Tailored Brands)||B3||Speculative Grade||Speculative/ high credit risk||RUR|
|J.C. Penney||Caa3||Speculative Grade||Poor standing/ high credit risk||Negative|
|Neiman Marcus||Caa3||Speculative Grade||Poor standing/ high credit risk||Stable|
|Ascena Retail Group||Caa3||Speculative Grade||Poor standing/ high credit risk||Negative|
|J. Crew||Caa3||Speculative Grade||Poor standing/ high credit risk||Negative|
The weakest companies tended to be department stores, such as J.C. Penney, Macy’s and Neiman Marcus. Or, retailers that have a lot of real estate in malls, including the Gap, Men’s Wearhouse, J. Crew and Ascena Retail Group, parent company to the Ann Taylor, LOFT, Lane Bryant and Justice brands.
The company’s rating “outlook” describes the investment firm’s opinion regarding the likelihood of a ratings upgrade or downgrade over the medium-term. Positive, negative and developing outlooks all describe a higher likelihood of a ratings change, whereas stable indicates a low likelihood. In the midst of a global pandemic then, where information changes daily, almost all retailers are struggling with how to stay afloat.
Digitally native brands, by contrast, were born online and understand the importance of operating an omnichannel model. The brands that did open brick-and-mortar stores were able to strategically build out their store fleets, although hot new names that were never able to post profits might now find their backers have less patience.
Legacy retailers and mall owners did have one thing going for them though: experiences that could only take place in real life. Hence the shopping centers with fancy restaurants, gyms, movie theaters, amusement parks and even office space for rent. But as the need for social distancing persists, these experiences will likely fade away or decrease in attractiveness — at least for now.
“We’re not anticipating that once the shutdown, or mandatory stay-at-home orders, are rescinded people will immediately go back to malls and department stores,” Chadha said. “There will be some level of skepticism. People will still be a little bit uncomfortable. Even in the back half of the year — when things open up — it’s going to be a slow return back to normal.”
Not only that, but when retailers finally do open up their stores again, they’ll be met with an inventory problem. All of last season’s assortment hasn’t moved since March. That means firms will have to find a place to put incoming inventory.
“They’re going to try to get rid of that inventory at any cost, so it will become a heavy promotional environment,” Chadha said. “That again lowers the pricing and margins of these companies. Because it costs money to hold that inventory in the stores.”
Meanwhile, e-commerce penetration will multiply, as will closures as companies look to rearrange their store fleets.
But not everyone will be prepared for the massive shift. Those without the funds to pay their bills will have to tap into resources anyway they can. Some retailers will opt for bankruptcies, while others will default on interest payments, seek to renegotiate the terms of their credit agreements or even buy back their debts at a higher discount. Tapping into credit facilities also helps extend access to cash.
“It’s mostly a game of right-sizing your balance sheet,” Chadha said.
Banks and private investment firms will likely only want to back companies that have the least probable chance of default. But financial assistance from the government is another way to access funds when the lending market dries up. While Chadha said there are no retail-specific bailouts, there are a number of more specific government programs, along with corporate bonds and tax breaks.
Even so, much like the private sector, the firms that benefit from government assistance will likely be the ones that were strongest going into the crisis.
Many distressed retailers are owned by private equity firms, which means they don’t qualify for government funding, Chadha said. The ones that do manage to receive government funds are probably already over-leveraged. A few months of assistance from the federal government likely won’t do much to turn them around, he added.
“The risk appetite for weaker companies will be low,” Chadha said. “Stronger companies will get the money from government programs. If the weaker firms do get help, it won’t be enough.”
Earlier this month, the U.S. Senate passed a $484 billion coronavirus aid bill. The bill provides support to small businesses. About $320 billion was funneled into the Paycheck Protection Program, according to Moody’s vice president Rebecca Karnovitz. The program provides business loans that can be forgiven as long as the companies spend it on business expenses, such as retaining and paying employees.
“The PPP will provide liquidity relief for businesses that are able to secure loans through the program,” Karnovitz said. “Nonetheless, many small businesses that are currently closed or operating at reduced levels could still struggle to remain financially viable, even if lockdowns are progressively lifted over the coming weeks. A wave of small business bankruptcies would weigh on a recovery in employment and economic activity.”
There’s also the Main Street Lending Program, which calls for the Federal Reserve to purchase 95 percent of the loans. The lender only has to buy the remaining 5 percent. The new program’s set-up benefits both the lending bank and the potential borrower, and hopefully motivates banks to approve more loans.
But even the language of the act said the program is intended for businesses “that were in good financial standing before the pandemic.”
That means lenders won’t have an incentive to lend money to firms that are likely to default, because they might not get their money back.
“The overall takeaway is that a lot of these provisions and the government support programs will help some of the retailers, but not others,” Chadha said. “The trajectory of the weaker retailers is a downward trajectory. It’s not going to change because of these government-support programs. That’s not enough to change that trajectory for them.”