Crunch time has come to retail.
With stores shut down by the coronavirus crisis and the economic outlook dire — or worse — fashion’s most vulnerable companies are starting to hit their financial limits.
J.C. Penney Co. Inc. said it would not make a $12 million interest payment due Wednesday and would take advantage of the 30-day grace period to “evaluate certain strategic alternatives.”
That Penney’s — which has annual sales of $11.2 billion and total debt of $5 billion, according to S&P Capital IQ — is not making such a relatively small payment shows just how tight finances have become in retail, with stores dark, workers furloughed and bills still piling up.
On the other end of the price spectrum but in the same boat, Neiman Marcus Group is said to have told lenders that it planned to not make an interest payment that was also due Tuesday.
Kicking an interest payment down the road for days or weeks could be the last ditch of last-ditch efforts.
But Neiman’s and Penney’s are far from the only retailers that went into the COVID-19 crisis on debt watch lists. Moody’s Investor Service previously said 77 percent of the $24 billion in outstanding apparel and retail debt that it judged to be of “poor standing” is owed by six companies: Penney’s, Neiman’s, Rite Aid Corp., J. Crew Group Inc., Ascena Retail Group Inc. and Academy.
On Wednesday, S&P Global Market Intelligence also called out other companies at risk with probability of default over the next year hovering between 8 and 10 percent, including L Brands Inc., Tailored Brands Inc. and Destination XL Group.
All of those companies — and many more that were never seen as being in any kind of immediate peril — are now being looked at closely, with lenders and investors trying to gauge how well they will fare once consumers do return to stores.
True Religion might have been one of the first of well-known U.S. fashion companies to file for COVID-induced bankruptcy on Monday, but experts believe it will be just the first among many.
Retailers and brands facing a cash crunch are running out the clock in hopes that some alternative will present itself, such as some more support from Washington or concession from lenders who think they might be hit harder in a bankruptcy.
A Penney’s spokeswoman cast its delay on Wednesday this way: “As a result of the pandemic, J.C. Penney made the strategic decision to not make an interest payment due on April 15th and take advantage of the 30-day grace period to continue ongoing discussions with lenders and maximize financial flexibility. J.C. Penney has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet, a process that has become even more important as our stores have also closed due to the pandemic.”
While retailers have been able to still sell some goods via the web — although operations at warehouses have been slowed by social distancing orders — the closure of stores, where the vast majority of sales still occur, has been a big hit across the industry.
The Census Bureau said March sales at apparel and accessories specialty stores fell a whopping, seasonally adjusted 50.5 percent to $11.1 billion compared with February. Department stores sales dropped 19.7 percent to $8.8 billion.
Nonstore retailers, a category that is dominated by e-commerce, saw sales increase just 3.1 percent in March.
There were some big winners as retailers ramped up the sale of essentials as people prepared to stay at home under government-mandated lockdowns. Grocery store sales rose 26.9 percent for the month and sales at general merchandise stores rose 6.4 percent, even though that increase included the massive decline at department stores.
Total retail sales dropped 8.7 percent for the month.
“March was a month that started out with many stores still open, but far more are closed now,” said Jack Kleinhenz, chief economist at the National Retail Federation. “This is a market of haves and have-nots. The haves are the stores that remain open with lines out the doors to buy daily necessities while the have-nots are the stores that have closed and are taking the brunt of the impact of the pandemic….Don’t be surprised if the data going forward shows a worsening situation. Even if the economy begins to reopen in May, consumer behavior may take a long time to adjust. The road to recovery could be long and slow.”
The reality of the retail collapse in March sparked a new round of selling on Wall Street on Wednesday, with the Dow Jones Industrial Average dropping 1.9 percent, or 445.41 points, to 23,504.35.
As the economic outlook worsened, European markets were moving down even faster, led by the FTSE MIB in Milan, which dropped 4.8 percent to 16,719.07.
Among the decliners in the U.S. were Penney’s, off 26.3 percent to 23 cents; Express Inc., 16.7 percent to $2; Kontoor Brands Inc., 13.6 percent to $18.41; Tailored Brands, 13.1 percent to $1.79; Chico’s FAS Inc., 12.4 percent to $1.41; PVH Corp., 11.7 percent to $42.33; XCel Brands Inc., 11.7 percent to 53 cents, and L Brands Inc., 10.3 percent to $12.62.
The luxury crowd in Europe posted smaller declines, including LVMH Moët Hennessy Louis Vuitton, down 2.8 percent to 342 euros, and Kering, 1.8 percent to 475 euros.
Everybody is anxious to get back to work, but they don’t know just when or exactly how that will happen. President Trump, meanwhile, is enlisting the help of top executives to get things moving eventually.
The White House introduced the “Great American Economic Revival Industry Groups,” which includes leaders who will help jump-start the economy once social distancing requirements are relaxed. The 200-plus people listed as part of the groups include some of America’s most prominent chief executive officers and thought leaders.
“President Donald J. Trump announced many of the esteemed executives, economists, scholars and industry leaders who together will form various Great American Economic Revival Industry Groups,” according to a statement from the White House. “These bipartisan groups of American leaders will work together with the White House to chart the path forward toward a future of unparalleled American prosperity. The health and wealth of America is the primary goal and these groups will produce a more independent, self-sufficient and resilient Nation.”
Among the ceo’s listed were Walmart Inc.’s Doug McMillion and Target Corp.’s Brian Cornell, both of whom stood along Trump in the Rose Garden last month as he declared a nationwide state of emergency.
There’s also Amazon founder and ceo Jeff Bezos; Simon Property Group’s chairman and ceo David Simon; Apple ceo Tim Cook; CVS Health’s president and ceo Larry Merlo; Proctor & Gamble’s chairman and ceo David Taylor; Facebook founder, chairman and ceo Mark Zuckerberg; Walgreen vice chairman and ceo Stefano Pessina; Tesla cofounder and ceo Elon Musk; Johnson & Johnson’s chairman and ceo Alex Gorsky, and Google-parent Alphabet ceo Sundar Pichai. There are also a few intellectuals, such as publishing executive Steve Forbes and former U.S. secretary of state Condoleezza Rice.
The hope is to get the country up and running as soon as it is safe to do so in order to limit the economic downturn. China is starting to come back to life after its late January shutdown and parts of Europe are tentatively starting to reopen in small ways, but most of the major U.S. population centers remain locked down tight.
And, economically, a lot of damage has already been done.
Kristalina Georgieva, managing director of the International Monetary Fund, projected the global economy would shrink by 3 percent this year with only a partial recover next year with 5.8 percent growth.
“That is our baseline scenario,” Georgieva said. “We know that it could get much worse depending on many variable factors, including the depth and duration of the pandemic.”