The cash crunch isn’t ending as stores open.
“U.S. apparel and footwear retailers are undergoing a sector-wide shock that will push weak players into default and reverberate into 2021,” said Raya Sokolyanska, senior analyst at Moody’s Investors Service, which on Thursday issued a sobering report for on-the-fence retailers.
“For most apparel retailers, liquidity management will remain a key focus after stores reopen, as they contend with clearing inventory and weak consumer demand,” Sokolyanska said. “We project earnings recovery in 2021 to a level 15 percent to 35 percent below pre-coronavirus 2019 results, reflecting still-weak discretionary spending and the resumption of deferred investment.”
Moody’s projected earnings before interest, taxes, depreciation and amortization would fall by 50 percent to 100 percent this year for most retailers as they try to get back on their feet after the coronavirus shutdown — assuming that there’s no second wave to the pandemic and that the economy recovers in 2021.
Those assumptions leave plenty of room for an even bleaker picture as the world feels its way forward, racing to find a vaccine and trying to get the 38.9 million Americans who have filed for unemployment in the last nine weeks back to work.
“Retailers will remain fully focused on liquidity through most of 2020,” Moody’s said. “Deep cost cuts, deferred rent and delayed vendor payments can sustain companies through May, and many apparel retailers have sufficient liquidity to support operations for a longer period of store closures. However, once stores reopen, liquidity pressures will continue due to the slow return of store traffic, heavy discounting to clear stale inventory in Q2 and Q3 and the need to pay previous vendor bills.”
Retailers that might have tried to restructure their debts, might instead turn to bankruptcy courts and try to move forward with a fresh start.
“Bankruptcies such as J. Crew’s could be more common in this cycle than out-of-court restructurings, because they would allow companies to cancel leases and reduce vendor payments,” Moody’s said.
Among the other companies that were forced to give up the ghost and file for Chapter 11 are Neiman Marcus Group, J.C. Penney Co. Inc., True Religion and Centric Brands.
The debt watchdog recently moved the credit ratings of Ann Taylor and Loft parent Ascena Retail Group Inc. and J. Jill down to “Caa3” to “reflect the high risk of default via distressed exchange or bankruptcy.”
Although the Moody’s report sticks with retailers, there is a growing concern that all the difficulties for merchants will ripple down the supply chain, ultimately bringing vendors to bankruptcy court as well.