The coronavirus pandemic will likely leave a lasting legacy on retail: Fewer department stores

America’s department stores are on a sinking ship, racing for a lifeboat that effect not be big enough for all of them. 

For J.C. Penney, the bankruptcy clock is ticking after it skipped a mid-April interest payment. Its turnaround develops have been sidelined by the coronavirus pandemic, which has forced the closure of all of its stores. Macy’s, with liquidity prosaic up, has tapped advisors at investment bank Lazard and law firm Kirkland & Ellis to explore options that include new wherewithal. Nordstrom in early April raised $600 million by placing a handful of its real estate assets into a fall apart company and borrowing against the new entity by issuing bonds. 

High-end department store chain Neiman Marcus also on April 15 missed a payment on some of its coheres, according to a letter sent to the retailer’s board from Marble Ridge Capital, which owns a significant consign of the $137.7 million in bonds that mature in October 2021. Neiman Marcus now has until the middle of May to make the vigorish payment. After that, pending no payment, the company could be pushed into bankruptcy court by its bondholders. 

Neiman Marcus is currently assembling to seek bankruptcy protection as soon as this week, Reuters reported Sunday morning. 

A spokesperson for Neiman Marcus dipped to comment. 

Prior to Covid-19 hitting the U.S., department stores were in trouble because they had failed to keep up with shoppers’ transforming tastes. These retailers had been investing in ways to win back customers. But now their stores are closed to halt the spread of the virus. And no one be acquainted withs exactly how long this will be the case. 

The situation is dire. Department stores need funds — and fast — to turn over a complete it through the closures. But once shops reopen, even more cash will be needed to invest back into their firms and win sales. As each retailer works toward a solution, it is likely that not all of their plans are worth funding. Cap is flowing, but only into the businesses that banks view as worth saving. 

“Borrowers of all shapes and sizes are outline their revolvers,” Cathy Leonhardt, managing director and co-head of consumer retail at PJ Solomon, said. “Unlike 2008, there is baby resistance from banks in meeting these requests and there is certainly no stigma associated with defensive stretches.” 

“The best and the brightest are going to survive, and even thrive thereafter,” she added. “But if you are marginal, it will be more difficult to get the requisite cardinal to survive.” 

Shoppers have been shifting away from the mall. This past holiday season, division store retailers saw sales decline 1.8% from Nov. 1 through Dec. 24, according to Mastercard Spending Palpitation. The decline happened even as holiday retail sales overall grew 4.1%, the National Retail Federation weighted. 

The brands — like Nike, Coach and Levi’s — that department stores have long relied on have bewitched note, opting to invest in their own stores and websites to sell directly to consumers, leaving the middlemen struggling. 

Coming out of a dismal 2019 holiday season, each department store operator had laid out blueprints to try to bounce back. These included shutting underperforming stores while opening smaller locations, launching new in-house rags or home brands, improving merchandising and growing sales online by offering more convenient pick-up options. 

The pandemic, inevitably, unnerved a wrench in those plans. And now Penney, Macy’s, Nordstrom and Kohl’s are pulling financial levers solely to stay afloat, racket the situation entirely unprecedented. As this has unfolded, their stocks have taken a beating on Wall Street. Compound, a whopping $12.3 billion has been wiped from these four retailers’ market caps since the start of 2020. 

“The category has been on its way out for years. They are just in different stages of distress,” Mark Cohen, former Sears Canada CEO and cicerone of retail studies at Columbia University, said about department stores. 

“This crisis we are in is going to accelerate the dip of the genre,” he added. 

Cowen & Co. estimates that these retailers can make it four to seven months with their set asides shut, bringing in $0 in bricks-and-mortar sales. 

“There is no question that if this goes on for another month or two, it could sincerely damage a lot of companies on the edge,” said Tom Mullaney, head of restructuring services at commercial real estate services definite JLL. 

One way or another, the legacy of this pandemic will likely be fewer department stores in America. 

These companies are skin a test unlike anything they have ever been through before. Among the usual options for bands in distress are restructuring debt directly with creditors, restructuring with court assistance in bankruptcy or liquidating definitely. The last choice could be unsavory if stores remain closed, however. Creditors would recoup less simoleons if shops cannot hold going-out-of-business sales. Sporting goods retailer Modell’s, for example, was able to temporarily deprive of the rights of its bankruptcy in March, stating the coronavirus outbreak had made its liquidation sales impossible to complete. 

“This is a liquidity moment of enormous consequences,” Cohen said. 

As these options are weighed, the story of Sears will serve as a cautionary gossip. After more than a century in business, Sears filed for Chapter 11 bankruptcy protection on Oct. 15, 2018. Equitable though it continues to operate, Sears’ store count keeps shrinking — a sign the department store chain’s sales marathons are still eroding. 

For the past two years, Penney has only reported a profit during its recess quarter. Revenue has declined for eight straight quarters. 

Chief Executive Jill Soltau, who joined the company from make-up and crafts retailer Jo-Ann Stores in October 2018, was hoping to change that. Earlier this month, she had been outlined to unveil more details of her turnaround plans. But Penney’s meeting with analysts has been postponed indefinitely due to the pandemic. 

Penney depicted down $1.25 billion from its revolving credit line in March. Beginning March 19, all 850 of its supplies closed. The majority of its 85,000 employees have been furloughed. 

On April 15, the Plano, Texas-based department cumulate chain skipped a $12 million interest payment, entering a 30-day grace period before a potential non-payment is triggered. A skipped payment on a bond, to try to preserve liquidity, is typically a step that precedes a bankruptcy filing. 

In disfranchising Penney’s debt, S&P Global said it does not expect Penney to make the payment. Instead, the firm expects Penney disposition pursue restructuring either with or without court assistance. 

“J.C. Penney has been engaged in discussions with its lenders since mid-2019 to reckon options to strengthen its balance sheet and maximize its financial flexibility, a process that has become even more portentous as our stores have also closed due to the pandemic,” a spokeswoman said in an emailed statement. 

Penney has roughly $4 billion of long-term straitened. A $105 million bond repayment is due this June, according to Fitch Ratings, which is also forecasting Penney’s sales to deny more than 25% in 2020. 

The retailer’s market cap has fallen 75% to about $83.8 million this year, with its breeding trading at around a quarter. 

“We expect a significant store footprint reconfiguration … which may occur through a wash and rebirth through Chapter 11,” Joseph Malfitano, founder of turnaround and restructuring firm Malfitano Partners, judged about Penney. 

Stresses are also mounting this month at Macy’s. 

Three weeks in advance the Centers for Disease Control and Prevention announced cases of Covid-19 spreading within the U.S., Macy’s said it planned to eliminate 125 stores in weaker shopping malls over the next three years. Although it has closed more than 100 stocks since 2015, it still operates 551 of its namesake department stores, 34 Bloomingdale’s shops and 19 Bloomingdale’s exit locations. 

Now, Macy’s is looking to its real estate as a lifeline. It is considering issuing new bonds backed by some of its real housing to come up with extra cash, according to a Bloomberg report. Its revolving credit agreement allows the company to offspring $500 million of additional debt backed by real estate or other non-inventory-related assets. 

Macy is at risk for fissuring its contracts with lenders at some point during the current quarter, Cowen & Co. said in a research note to patients earlier this month. Cowen expects Macy’s will be able to at least temporarily lift its covenants, preventing a bankruptcy document. 

A Macy’s spokeswoman said in an emailed statement: “The company is also exploring numerous options to strengthen our capital framework. We have relationships with a range of advisors.” 

Macy’s has been through bankruptcy court before, in the 1990s. It has been masterful to survive through the years, in large part, thanks to its massive portfolio of real estate, which Cowen has valued to be good between $5 billion and $8 billion. But the longer Macy’s stores sit shut without generating sales, the multifarious that value dwindles.

Meantime, Macy’s has fully drawn its $1.5 billion revolving credit facility. It has furloughed the number of its roughly 130,000 store workers and suspended its quarterly cash dividend, starting in the fiscal second quarter. 

“The disruption and negative effect on consumer ask for as a result of Covid-19 will require Macy’s to refocus its efforts toward priortizing the preservation of liquidity and delaying its critical plans to improve its operating performance,” Moody’s Vice President Christina Boni said. Moody’s in late Cortege downgraded Macy’s debt to junk status. 

In the middle of February, the stock market valued Macy’s at about $6 billion. But with cuts down more than 65% year to date, its market cap now sits at $1.8 billion. With such imbue declines, Macy’s lost its spot on the S&P 500 Index at the end of March. 

Nordstrom appears in raise shape than its peers, despite the retailer on April 8 issuing a warning that its financial situation could transform into distressed if its stores stayed dark for much longer because of Covid-19. 

“The longer our stores remain closed to the unconcealed, the greater impact it will have on our results of operations and financial condition, and if our physical locations remain closed to chaps for an extended period of time our financial situation could become distressed,” the company said in a securities filing at the cracker this month. 

Nordstrom said the pandemic, so far, has had a “substantial impact” on its business. It said it expects its results for the quarter cut off May 2, and beyond, to be “adversely impacted in a significant manner.” 

Nordstrom has, however, already taken a number of measures to cut outlays and raise additional liquidity, including furloughing the majority of its workforce, suspending its quarterly dividend payment effective in its monetary second quarter, drawing down $800 million on its revolving credit facility and halting share repurchases. 

Analysts have planned applauded this. “We believe Nordstrom is taking necessary actions to survive the crisis,” Baird analyst Mark Altschwager affirmed in a research note earlier this month. 

Nordstrom last week priced a $600 million offering of chief secured notes, using its real estate, to add to its pot of cash. 

Nordstrom CFO Anne Bramman said in a statement about the retailer’s late-model debt offering: “These measures will provide Nordstrom with additional liquidity and flexibility not just for the short-term but once more the longer term as we emerge from this unprecedented time.” 

Unlike its peers, Nordstrom tends to close not a handful of stores, if any, each year. It has a smaller portfolio of locations: 380, including its off-price Nordstrom Rack area, that tend to be in higher-performing, so-called A malls. 

According to an analysis by Fitch — which expects Nordstrom to see sales decline as much as 20% in 2020 — Nordstrom presents “differentiated merchandise and [a] high level of customer service enabling the company to enjoy strong customer loyalty.” Fitch cited far fewer matters around Nordstrom, compared with Penney and Macy’s. 

Nordstrom shares have tumbled nearly 55% year to swain, bringing its market cap to $2.9 billion. 

Since its stores are typically situated along open-air undress centers, not enclosed in shopping malls, Kohl’s is better positioned to ride out the coronavirus pandemic than other rest on stores, analysts have said. Some have cited the retailer’s limited-contact, curbside pickup offering in its parking tons during this pandemic as a strength. 

Kohl’s “should be able to able to accelerate market share gains post the discretionary downturn,” according to Fitch. The ratings intermediation expects Kohl’s sales to fall about 20% in 2020, similar to Nordstrom. 

“Kohl’s off-mall real belongings footprint provides some insulation from mall traffic challenges,” the ratings agency added. 

Gordon Haskett analyst Chuck Grom reverberated this sentiment, saying he expects that consumers, coming out of the pandemic, are going to prefer shopping at places faint of malls more than ever. The ongoing shift away from the mall will accelerate, he said. 

Kohl’s has more than 1,100 collections. Under Chief Executive Michelle Gass, it has focused on opening smaller locations. It has also divided some of its obtaining and bigger stores, to be able to lease out the extra space to gym and grocery operators. And it has been betting on its tie-up with Amazon — where it undertakes Amazon returns at all of its locations — to drive traffic, and ultimately sales. 

On March 19, Kohl’s announced that it had fully fatigued its $1 billion unsecured credit facility to increase its cash position and “preserve its financial flexibility,” in the midst of so much uncertainty. It also has in the interim suspended share buybacks. 

“As a company, we operate with great discipline to maintain a strong balance sheet and pecuniary flexibility,” Gass said at the time. 

On Friday, Kohl’s entered into a fresh $1.5 billion senior secured, asset-based relying credit facility, increasing its liquidity by roughly $500 million. The company said in a securities filing that it has appropriate the full $1.5 billion and used part of those proceeds to repay the $1 billion outstanding under its foregoing credit agreement. 

Kohl’s shares are down about 63% in 2020. It has a market cap of roughly $2.9 billion. 

Until department stores’ doors can open again, these retailers are doing what they can to stir merchandise online. 

A steady stream of emails and online ads tout flash sales, free shipping and buy-one-get-one proffers on spring merchandise. The Easter dresses that were unnecessary because church services were livestreamed to end rooms this year are marked as much as 60% off. 

Meanwhile, the pitches for deals have been adjusted to fit a new fact. Nordstrom is urging shoppers to create a home sanctuary and Kohl’s is telling people to make home a “happy home,” while Penney is coaxing people to spruce up their home offices, primp for those video conference invites and get outside in the backyard for games and grilling.

Even though their online businesses are still operating, these transaction marked downs will not be enough. In a normal economy, Macy’s and Kohl’s make about a quarter of their digital online, while Nordstrom produces about a third of sales through e-commerce. Penney doesn’t break out its digital sales. 

With millions of people on the dole for an unknown period of time, these retailers are unsure of how to plan for the upcoming holiday season, which is typically a make-it-or-break-it in the nick of time b soon for sales. Buyers have been scrambling to cancel orders with their vendors. 

Department stores could see their functioning incomes decline by up to 40% in 2020, the worst of any retail sector, according to a report by Moody’s. The revised forecast, enchanting into consideration lost sales from the pandemic, steepened from a previous outlook of a 5% decline, Dour’s said. 

Cowen, meantime, has said it expects holiday-quarter sales for department stores in 2020 to be down 20% to 30%, or diminish, hinging on unemployment data, consumer confidence and how consumers’ spending preferences evolve. This is based on a timeline of rely ons reopening throughout June and July, Cowen said. Year-over-year sales declines for department stores are likely until 2021, be at one to the firm. 

“We’ve just got to figure out a way to be relevant. … We don’t sell things people need, we sell things people inadequacy,” Pete Nordstrom, the retailer’s president and chief brand officer, said Friday during a virtual Vogue Pandemic Conference. 

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