Retail’s downgrades on Wall Street have begun.
After Macy’s was booted off the S&P 500 Wednesday morning and downgraded to a negative outlook, the credit watchdog Fitch Ratings took a number of fashion’s key players down a notch as well.
“Fitch expects the impact on revenues for the global consumer discretionary sector from the coronavirus pandemic to be unprecedented as mandated or proactive temporary closures of retailer stores and restaurants in ‘nonessential’ categories severely depresses sales,” the credit agency said in one report.
The credit agency added that the downturn in discretionary consumer spending will likely extend into 2021.
“Numerous unknowns remain including the length of the outbreak; the time frame for a full reopening of retail locations and the cadence at which it is achieved,” according to Fitch Ratings. “Fitch has assumed a scenario where discretionary retailers in the U.S. are essentially closed through mid-May with sales expected to be down 80 percent to 90 percent despite some sales shifting online, with a slow rate of improvement expected through the summer. Given an increased likelihood of a consumer downturn, discretionary sales could decline in the mid-to-high-single digits through the holiday season.”
The news comes as retailers around the country remain shut. While the temporary closures, meant to prevent the spread of the coronavirus, were originally intended for two weeks, many have extended their closures for the foreseeable future.
And while not all locales in the U.S. are under government-mandated lockdown, President Trump extended his social distancing measures until at least April 30, adding that all nonessential businesses should remain closed during this time.
To compensate, many retailers have begun furloughing employees for the foreseeable future. Macy’s furloughed roughly 125,000 employees in 775 stores nationwide. Kohl’s said it will temporarily furlough in-store, distribution center and office associates. According to the department store’s 2018 annual report, Kohl’s employed some 129,000 workers. A representative for Kohl’s, however, said the furloughs will impact only about 85,000 associates, the majority in-store and distribution center workers.
J.C. Penney also said it would begin furloughing the majority of its hourly associates and some corporate staff on Thursday.
Macy’s and J.C. Penney are among the most vulnerable to the closures as consumers and investors alike continue to shift away from mall-based retailers.
Fitch predicted that Penney’s in particular will likely require additional funding for holiday 2021 and downgraded the stock to a “CCC” rating, or extremely high risk.
Levi’s and Kohl’s fared slightly better, with BB and BBB ratings, respectively, or stocks considered below investment grade. But both companies have enough liquidity to manage through the crisis. Levi’s ended the 2019 fiscal year with $1 billion in cash and zero used in its $850 million revolving credit facility. Kohl’s ended the year with $700 million of cash and recently drew down on its $1 billion unsecured credit revolver.
Meanwhile, markets around the world continue to plummet. In the U.S., the Dow Jones Industrial Average is down roughly 18 percent in the last month, closing down 4.34 percent Wednesday to 20,965.70. The S&P 500 is down 16.5 percent in the same time period, closing 4.41 percent in the red Wednesday to 2,470.50.