Bankruptcy and Credit Problems Facing Retailers During the COVID-19 Crisis

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The retail industry is reeling from the fallout from the coronavirus outbreak and the social distancing protocol that has temporarily closed more than 47,000 chain stores while consumers stay at home.

While many closed stores have said they will stay open online, consumers are not buying non-essentials because they might fear for their jobs if this crisis continues. Neil Saunders, managing director of GlobalData Retail, said the retail landscape has gone from fairly normal to total disruption beyond what the industry has seen since WWII.

Moody’s predicts that nearly 80 million of the 153 million jobs in the US economy are at high or moderate risk. Mark Zandi, chief economist at Moody’s, said that doesn’t mean all of those jobs will be lost, but he expects 10 million affected workers to see their wages cut, through layoffs, time off or less hours. Zandi said the labor market was in free fall and companies had no choice but to cut the payroll.

Coresight Research predicts that there will be 10,000 to 12,000 permanent store closures by the end of the year. Matthew Shay, president of the National Retail Federation, said if Washington did not create a financial bridge, the situation would be dire for many retailers this year. Shay advocates for Federal Reserve bridging loans because what he says will jumpstart the economy and get people back to work.

“It’s not like in 2008, when there was bad behavior. Many retailers were running creditworthy businesses and through no fault of their own had to close their doors. They will have to downsize and some will have credit problems if something is not done, ”Shay said Tuesday.

Shay said he hopes the US Senate will soon pass a resolution that will provide roughly $ 2 trillion in help to consumers, large employers in need of stabilization, and other sectors like retail that are in need of stabilization. have been hit hard by the COVID-19 crisis. He said consumers are important to the equation and he applauds the package that will ensure help for every injured segment.

REALITY FOR MACY’S, DILLARD’S
Macy’s recently suspended its quarterly dividend and withdrew its outlook for 2020 given the uncertainty surrounding the crisis. Macy’s also accessed $ 1.5 billion from its creditors to help it get cash.

JCPenney recently surprised Wall Street with unexpected earnings and positive free cash flow in its fiscal fourth quarter, but that success will be short-lived if the shutdown continues. JCPenney held $ 386 million in cash and short-term investments in January. But with losses for the year standing at $ 257 million, analysts said the company will have to find a new source of funding for the foreseeable future or re-examine its debt.

Little Rock-based Dillard’s is not without its problems. Alpha research analyst Adam Levine-Weinberg said last week that due to the company’s low profit margin, the seasonality of its business and low e-commerce penetration, it will likely be harder hit by the growing COVID-19 pandemic than Macy’s. He said that Dillard’s biggest advantage over Macy’s is that he has less debt. At the end of fiscal 2019, Dillard’s had less than $ 300 million in net debt (excluding operating leases), compared to $ 3.5 billion for Macy’s. Even taking into account that Macy’s is about four times the size of Dillard, this is a significant difference in their leverage profiles.

He said Dillard’s real estate value is significantly lower than Macy’s and that if sales drop this spring, there could be working capital issues at Dillard given the company’s $ 892 million in debt in the past. start of last quarter compared to cash of $ 277 million.

Luxury retailer Neiman Marcus is in talks with lenders to file for bankruptcy as it struggles to keep up with its $ 4.3 billion in debt. The retailer has not made any public statements regarding the talks other than saying the COVID-19 closures are devastating for retailers.

GROCERY STORE, EXPANSION OF PHARMACY
While department store chains are closed, grocery stores and pharmacies have remained open and struggle to keep shelves stocked and healthy employees on the front lines of the COVID-19 outbreak.

Walmart announced on March 19 that it would hire an additional 150,000 employees in its stores and warehouses until the end of May. This represents an increase of about 10% of its current workforce, the company said. Walmart also cut store hours to give employees time to restock shelves and clean stores. The Bentonville-based retailer also announced bonuses for hourly workers.

Dollar General said it plans to hire 50,000 employees by the end of April, as it will nearly double its hiring rate to support increased demand for essential household items amid the COVID-19 pandemic. Most new hires are expected to be temporary. Dollar General operates 16,300 stores in 45 states.

CVS Health is also hiring 50,000 workers and offering bonuses to employees who have to work on site during the coronavirus pandemic.

Amazon said earlier this month that it plans to add 100,000 full-time and part-time jobs in the United States. Jobs can be found in distribution centers and delivery networks to meet increasing demand from people who rely on Amazon to practice social distancing.

Zandi, many of the new retail jobs will be temporary and will decline when the COVID-19 crisis passes. Shay praised retailers for creating jobs, but said it was imperative that the industry receive financial relief as the doors remain closed to customers but their creditors loom.

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