The intense pressures of the coronavirus have forced fashion, already in the midst of massive structural change, to the Tipping Point — and in so many ways.
Now that stores across the U.S. have gone dark and consumers are at home and hunkered down with everyone focused on health and safety, the industry is starting to turn to the repercussions of an almost complete shutdown of business.
In the first in a series of articles on the Tipping Points that promise to bring systemic change to fashion, WWD examines the potentially massive wave of bankruptcies that could be building in the industry.
Retailers are at the top of the supply chain — and in the spotlight.
Pressure will only grow on brands and factories if retailers succumb to creditors since they are the link in the chain that gets money from consumers, pumping new funds into the entire fashion system. Debt watchdog Moody’s Investor Service recently highlighted just how much debt is concentrated.
Seventy-seven percent of the $24 billion in outstanding apparel and retail debt that Moody’s judges to be of “poor standing” with “very high credit risk” is owed by six companies: J.C Penney Co. Inc., Neiman Marcus Group, Rite Aid Corp., J. Crew Group Inc., Ascena Retail Group Inc. and Academy.
Each company has been working to find their own way forward, but the path has become much, much rockier in the midst of the COVID-19.
Already, some smaller retailers have filed for bankruptcy, including online auction house Paddle8 Inc., e-commerce marketplace Generation Zero Group Inc., online retailer Bluestem Brands Inc. and furniture retailer Art Van Furniture Inc., according to a tally by Standard & Poor’s.
Sounding the alarm over the potential impact of the crisis, Matthew Shay, chief executive officer of the National Retail Federation, on Wednesday put out a call for help in a letter to President Trump and Congressional leaders that noted retail is the nation’s largest private-sector employer, supporting 52 million working Americans.
“The retail industry is being dramatically impacted by social-distancing that is both voluntary and publicly mandated, and our members tell us that the most important support they can get from the federal government would be access to credit that can sustain them until consumers are back in the marketplace,” Shay said. “Labor and benefit obligations, rents, loan payments are all crippling burdens if no sales are being made for days or weeks at a time, and our members are suffering cumulative losses that amount to tens of billions of dollars a week.”
Shay suggested a “mandatory default and foreclosure stay or directions from federal authorities on rent abatement might provide some needed relief for retailers faced with closure orders.”
“Assistance in providing for payroll costs might help slow layoffs that will be inevitable if retail sales continue to collapse,” he said. “Expanding the employee retention tax credit to businesses that are suffering financial losses because of this crisis would help to offset payroll costs at a time when sales are in a decline.”
Washington is working on an overall economic aid package, but there was little sign of relief on Wall Street on Wednesday, where trading was briefly halted to slow the selling.
The Dow Jones Industrial Average dropped 1,338.46 points, or 6.3 percent, to 19,898.92, leaving it down 32.7 percent from its all-time high, just set on Feb. 12.
Among the hardest hit were Seritage Growth Properties, down 43.4 percent to $7.43; G-III Apparel Group, 38.5 percent to $4.50; Guess Inc., 38.1 percent to $3.92; Coty Inc., 31.1 percent to $3.74; Simon Property Group Inc., 23.7 percent to $44.92, and J.C. Penney Co. Inc., 20.8 percent to 41 cents.
Stock price declines on their own don’t send retailers or brands to bankruptcy court — insolvency comes when companies can’t pay their bills.
In normal times, companies trying to manage a heavy debt load have a looming payment due and are racing to bolster operations, or sell ancillary businesses to raise the necessary cash or inspire enough confidence in lenders to be able to refinance the debt and pay it down the line.
Retailers also rely on brands to ship goods on the promise of being paid later. And sometimes companies, Barneys New York is a recent example, can lose the confidence of vendors and be unable to secure goods to carry on with business.
But now the whole system is shutting down. Sales associates have been sent home and stores are closed. Some money is coming in to retailers through their web sites, but it won’t be enough to keep afloat businesses that are still predominantly brick-and-mortar-based.
Many associates are being paid for the time being — and presumably with the help of business interruption insurance — but rent and payments to vendors and service providers are all coming due.
Retail — everyone else — is in for a long haul.
“This is clearly going to be an event which is not going to be over in two weeks, and it’s an event where things are not going to return to normal when it’s over,” said Mark Cohen, director of retail studies at Columbia Business School, who was previously chairman and ceo of Sears Canada Inc.
“This is going to change the culture of the society that we all live in, buying behaviors are going to fundamentally change, the enterprise that services the public will be fundamentally changed,” he said. “How will retail look on the other side of this pandemic?”
For now, many are doing what they can to hold on.
Ascena, which operates Ann Taylor, Loft, Lane Bryant and more, has been strained financially and recently took to the market to repurchase some of its own debt.
The company said it was taking “proactive actions designed to optimize the company’s balance sheet.”
“Bankruptcy is not being considered,” Ascena stressed a week ago. “The company remains in full compliance with all of its obligations under its financing agreements and intends to remain so.”
But while the threat of bankruptcies across the industry is a clear and present danger, it’s less clear how the process would work in practice now. Debtor-in-possession lenders that fund companies in bankruptcy are expected to be extremely cautious and retailers can’t offer the necessary 12-week cash-flow forecasts amid the crisis, bankruptcy experts said.
“One of the key pieces of the process is between the time you realize you have a liquidity problem and the time you go to your potential capital sources or the market,” said Mette Kurth, partner at Fox Rothschild LLP, who advises clients on bankruptcy issues.
“You need to have your cash-flow forecast and a business plan that tells [lenders] why they should support your company, where you believe this process is going to take you, and why you believe this will restore your balance sheet,” she said. “That is the problem right now.”
In the past week, dozens of brands and retailers have closed stores en masse, as public health officials warn of the catastrophic dangers of unrestrained community spread of the coronavirus.
The strain of that is hitting both retailers and workers.
On Tuesday, Brooks Brothers ceo Claudio Del Vecchio informed store associates that the company was closing “the majority of our North American stores and manufacturing locations at Long Island City, Garland, [N.C.] and Southwick [in Haverhill, Mass.] from March 17 through Sunday, March 29,” according to a copy of a company memo, which was reviewed by WWD. Del Vecchio said the company’s Madison Avenue flagship will remain open “with shortened hours and limited staff.”
What that means for its employees is unfolding. The memo said corporate employees, executive management, store managers and others would face “a 10 percent payroll reduction of base salary.” Meanwhile, store associates, supervisors and assistant managers would be in a “non-paid status,” according to the memo, which said those employees would be eligible to seek unemployment.
According to a source, the intention is to bring the staff back when the stores reopen, but for now, the company has worked with state and local agencies to ensure that its furloughed workers can quickly fill out the necessary paperwork in order to obtain unemployment funds as quickly as possible.
The source said Del Vecchio “wants to make sure there’s a business to come back to.” Earlier this year, before the crisis, sources indicated the ceo was seeking to sell the iconic retailer, which has struggled to grow over the last few years as fashion has turned away from preppy styles.
In response to a query from WWD on Wednesday afternoon, the company said of its current situation: “Brooks Brothers, like many peers, continues to navigate a challenging retail environment as the industry rapidly evolves. These headwinds — combined with the current COVID-19 crisis — have accelerated our need to make difficult yet necessary decisions to ensure the continuity of our business and in the long term protect our employees and customers.”
Julie Kelly, manager and international vice president of the New York-New Jersey Regional Joint Board, Workers United, the union that represents Brooks Brothers employees, said, “We are actively working with all of our members and keeping health and safety and their income as top priorities.
“There are companies doing the right thing by paying their employees right now, even when closed, like Joseph A. Banks and Rothmans,” she said, referring to other companies whose employees are represented by the union.
“But there are others, some owned by billionaires like Brooks Brothers, that are refusing to even allow workers to use vacation or sick pay,” she said. “That’s outrageous and wrong and we’re fighting it every minute. A true recovery requires that workers and jobs come before bailouts and corporate tax cuts.”
The strains at Brooks Brothers might be a sign of things to come for others in the industry.
It seems clear that some won’t be able to right their finances. And if they fall, the fall could come quickly.
In normal circumstances, a bankruptcy reorganization process can offer troubled retailers some much needed relief by allowing them to hit pause on some debt collection and give them the opportunity to renegotiate or reject leases, and manage unsecured debt owed to vendors and others. The process can limit their obligations, while giving them time to restructure, or conduct a sale process to find a going concern buyer.
But as lenders and buyers hold back, the process may hold the threat of Chapter 7 liquidations instead, bankruptcy experts said.
“It could even lead to an increase in Chapter 7 filings, or it may be that they would be very quick liquidations,” said Bradford Sandler of Pachulski Stang Ziehl & Jones, who represents companies and creditors in bankruptcies. “But how do you have a liquidation sale if [people] can’t even make it to the store?”