How COVID-19 Is Impacting Department Stores: Survival of the Fittest
It is not a surprise that before the pandemic hit department stores were in trouble. JC Penney has been working on a turnaround since it brought in Jill Soltau as CEO in 2018. Last year Barney’s New York filed for bankruptcy. Department stores represent 30% of retail space in the United States with 10% of space going to Sears and JC Penney alone. Add to that the fact that the United States is already overstored. The United States has the highest retail square footage per person in the world at 23 sq. ft. per person. In stark contrast, the United Kingdom has five sq. ft per person, Spain has four sq. ft per person and Germany has two sq. ft. per person.
Another challenge facing department stores is that they are stuck squarely in the middle, selling goods that aren’t priced too low or too high. But since the great recession consumers have become thriftier spending more money at discount retailers like Dollar General. On top of that what consumers spend their money on has changed considerably. In 1920 Americans spent 17% of their income on a department store staple, clothing. Today Americans spend a paltry 2.4% of their income on clothing. Morgan Stanley has said that the apparel market has “hit a ceiling” and is “going into structural decline.” Instead consumers are spending more money than ever on services and experiences.
In March, the first month where there were store closures in the United States due to COVID-19 retail sales in the United States were down by 8.7% versus the previous month and even worse sales of clothing were down by 50.5.% versus February 2020. It’s a harrowing decline since that number does not reflect a full month of store closures, meaning that department store sales will take a bigger hit in the month of April.
Another headwind facing department store retailers is the significant lead time between when orders are placed and when they show up in stores. Normally department stores place orders for the holiday season now. If they aren’t placing those orders due to their strained financial position, when stores are reopened there will be less inventory for consumers to buy, furthering their financial woes. What will retail look like on the other side of this? Fewer department stores and a lower store count for the department stores that remain.
The pandemic is only accelerating a shakeout in the department store sector that was already in progress. But which department stores are worse off?
Neiman Marcus
Neiman Marcus is seen as having the worst position and likely will file for bankruptcy within days. Part of this is due to its high debt levels. Neiman Marcus is laden with $4.8 billion in debt partly as result of a $6 billion leveraged buyout of Neiman Marcus that took place in 2013. Its high debt levels have required Neiman Marcus to service $300 million in annual interest payments making it challenging to generate a profit.
Even the before the coronavirus Neiman Marcus was struggling, with same store sales down 1.5% in the third quarter of 2019. Then in early March of this year before the coronavirus became widespread in the United States Neiman Marcus announced it was closing the majority of its 22 Last Call locations to focus on selling full priced luxury merchandise. The retailer still has 43 Neiman Marcus and two Bergdorf Goodman store locations but it’s anyone’s guess as to how many of those stores will exist next year.
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JC Penney
With eight consecutive quarters of declining sales and a net income loss of $268 million in 2019 JC Penney “has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet and maximize its financial flexibility, a process that has become even more important as our stores have also closed due to the pandemic” said a spokesperson for the retailer. JC Penney recently skipped a debt payment and is considering filing for bankruptcy in order to restructure its debt. JC Penny has 850 stores.
Lord & Taylor
Last year Hudson’s Bay in an effort to reduce expenses sold Lord & Taylor to Le Tote a clothing rental company for $100 million. Hudson’s Bay, including Lord & Taylor, has lost money since 2016. All members of the executive team including the President at Lord & Taylor were let go earlier this month. With its 38 stores now closed Lord & Taylor’s owners are considering filing for bankruptcy.
Which department stores are more likely to weather the storm? Nordstrom, Macy’s and Kohl’s.
Nordstrom
Nordstrom is often viewed as the healthiest of all department stores. Last year Nordstrom had net income of $496 million and $2.7 billion in debt, but that is a manageable amount of debt given the size of the retailer. Nordstrom like most retailers is not out of the deep waters. It has cancelled full price orders for June and July and extended the time for when it will pay its suppliers. Nordstrom has close to 400 stores and its healthy online business should also help it to weather the storm better than others.
Macy’s
With net income of $564 million in 2019 Macy’s is considered to be in a stronger financial position than most department stores. But it is still shoring up its balance sheet. It is believed that Macy’s is seeking up to $5 billion in new debt. Macy’s has 775 stores and owns Bloomingdales. Prior to the pandemic Macy’s planned to close 25% of its stores and cut 2,000 corporate jobs. Macy’s was also planning to exit underperforming malls and open small stores in strip malls. In February of this year before COVID-19 hit with full force Macy’s announced a turnaround plan and called 2020 a “transition year” where it expected same store sales to decline as it executed its plans.
In a recent statement Macy’s said: “as we have previously communicated, the coronavirus pandemic continues to take a toll on Macy’s business. While the digital business remains open, we have lost the majority of our sales due to our store closures.” “Macy’s has taken multiple actions to improve our position and improve financial flexibility, including suspending our quarterly dividend, deferring capital spend, drawing on our credit facility, reducing pay at most levels of management and furloughing the majority of our colleagues.”
Kohl’s
Kohl’s made $691 million in 2019 but has $6.1 billion in debt. Kohl’s recently received a $1.5 billion credit facility from Wells Fargo and quickly drew down the full amount. Many of Kohl’s more than 1,100 stores are located outside of malls enabling it to offer curbside pick for online orders during the pandemic.
While bankruptcy is on the horizon for several of these department stores proceedings may be delayed only because creditors do not want to kick off liquidation sales when there are no shoppers in stores to buy up inventory leaving creditors with even less.