As confirmed COVID-19 cases surpass the 1.1 million mark globally (source: John Hopkins), the economic impacts of the virus-induced economic shutdown are starting to become evident. Jobless claims in the United States surged by 10 million people over the last two weeks, an unprecedented number in a startlingly short timeframe. Workers in restaurant and food services, retail, and travel and tourism are among those most affected. Even after passage of the CARES Act on March 27, large retailers—including Macy’s, Kohl’s, and The Gap—have announced furloughs of about 900,000 people in just the past week (source: Bloomberg Analytics). While many of the newly unemployed will have access to expanded unemployment benefits, direct aid for large retail corporations is limited. Although stay-at-home orders exempt some retail shops that sell essential items, many retail shops are closed to customers. It is unknown how many of them will survive the indefinite period they are closed due to the crisis.
Before the onset of the coronavirus crisis, much of the retail sector already was in a difficult transition to online platforms to compete with Amazon. This “Brick and Mortar Retail Apocalypse” has steadily unfolded over the last several years as online retail has transformed how many people around the globe shop. In 2019, more than 9,300 store closings were announced in the U.S., well above the previous record of 6,955 in 2017. And that decline occurred with a relatively healthy economic backdrop. With nearly 2,000 retail closings through the first quarter of 2020, store closures already were on track for about 8,000 closures for 2020. Coronavirus will only accelerate this trend.
Some retail winners are emerging from a sea of losers. Surge in demand for low margin essential home and food items appears a boon for some retailers, particularly those already focused on online shopping. One near-term winner has been Blue Apron Holdings, a provider of mail-order meal-kits at a time when grocery stores face inventory challenges and consumers avoid leaving home. That said, they had major operational, financial, and leadership challenges before the crisis; success is far from certain. Chewy, an online pet food and supplies provider, has seen increased demand as traditional pet stores have closed and quarantines have caused a spike in demand of pet adoption and fostering. [Syntrinsic does not recommend purchasing or selling specific companies; we use them as examples for educational purposes.]
Still, even retailers selling essential items face tremendous headwinds. Demand for clothing and other higher profit margin products is down significantly. Costs for stores selling essential items have increased due to increased cleaning and sanitation efforts, requirements to social distance customers in stores, and delays in restocking essential items. Discretionary retail businesses that had embraced e-commerce have a substantial competitive leg-up over peers that have been reluctant to phase out their brick and mortar presence.
Slower discretionary spending affects other areas of the economy as well. Unable to sell current inventory, closed retailers such as Macy’s, Nordstrom, and TJ Maxx are canceling vendor orders. Ross Stores told suppliers it won’t place new orders until at least mid-June. These cancellations of vendor orders impact consumer goods manufacturing and production, much of which comes from overseas. This drop-off in demand has hampered China’s efforts to ramp up production over the past few weeks even as China has tried to move past the crisis. Similar issues impact consumer goods companies around the globe.
However, even with this “Brick and Mortar Retail Apocalypse,” most retailers entered the year with solid balance sheets and strong cash reserves. Furloughing workers and borrowing on lines of credit has allowed several of these large retailers to shore up cash reserves while the world shelters in place. In addition, the CARES Act earmarked $454 billion for the U.S. Treasury to back the U.S. Federal Reserve’s lending programs that can buy newly issued debt and/or make direct loans to companies. According to Treasury Secretary Mnuchin, this effort will effectively lever up to $4 trillion worth of credit. These facilities have provided liquidity to the fixed income market, so much so that even Carnival Cruises—which has been adversely affected by the coronavirus—was able to issue $4 billion of new debt this past week, albeit at 12%. The deal was oversubscribed. (Bloomberg)
This global pandemic will change the way we do business globally which is why it’s important to stay globally diversified via sectors and regions. We continue to analyze these complex global effects as we guide clients through this difficult time, recognizing there will be both opportunities and risks that evolve from this crisis.
In the meantime, we hope you, your family, and your colleagues remain safe and healthy.