With the U.S. becoming the new coronavirus epicenter, the economic impact that it will have on the economy is unprecedented. And, with stores closed and very slim chances of opening in the near future, America’s department stores are expected to be the biggest loser. However, unlike what many believe, a report from Cowen & Co. notes that many department stores have enough liquidity to weather the coronavirus crisis.
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According to Cowen analysts, some of the stores have enough liquidity to survive for more than five months, while for a few, the situation isn’t as good. However, the analysts did say that the overall situation is “better than feared.”
“An important point is that liquidity could be 'better than feared' at department stores despite store closures, given that we believe store closures will be less than 5 months – this could imply buying opportunities as visibility eventually improves with several caveats,” the report read.
To arrive at this conclusion, Cowen calculated the liquidity of several stores by including cash plus revolvers. On the other hand, the analysts took into account the cash outflows, such as rent, labor and promised dividend payments. On average, labor costs are about 10% of the annual sales and rent is about 3%.
Based on the liquidity and cash outflows, the analysts noted that J.C. Penney and Nordstrom have enough liquidity to last about eight months with their stores closed. For Kohl’s and Macy’s, the liquidity is about five months.
To calculate the liquidity positions, the analysts assumed that these department stores are generating zero revenue from their brick-and-mortar stores, which are mostly closed to prevent the spread of coronavirus.
Cowen analysts note that liquidity could become a “significant risk factor” if stores remain close for more than eight months. As of now, no one has any idea of when the stores will start operating at their full capacity again.
In a note (obtained by CNBC) to the employees last week, Macy’s CEO Jeff Gennette said that they initially planned to reopen the stores on April 1, but that is now highly unlikely.
“We have no way of knowing how long our stores will remain closed, but we believe it will be at least several weeks before we have a clear line of sight,” Gennette said, adding that they need to take “unusual measures to conserve cash throughout this crisis.”
Last week, Nordstrom also said that it is extending the department store shutdown closures through at least April 5.
Moreover, many stores have already announced drastic steps to cut costs, including postponing share buybacks and dividend payments. Starting April 5, Nordstrom will be furloughing some corporate employees for six weeks. Also, the company has said that it will pay its store workers until April 5, while the full benefits will carry on until the end of April.
Macy’s also announced that its employees that are directors and above, will undergo a pay cut effective April 1. This cut will continue for the duration of the crisis. Macy’s is also suspending the bonuses and 401(k) matches. Moreover, Macy’s has fully drawn its $1.5 billion credit facility to boost its cash position. As well, Kohl’s has drawn its $1 billion unsecured credit facility.
Additionally, to lower cash outflows, these retailers are canceling their orders and shipments to late June or July. They are assuming that during the crisis period, there won’t be much demand as buyers will be concerned about groceries and not about clothes and other non-essential things.
What do other analysts say about department store liquidity?
Other analysts have also acknowledged challenging times for the department stores and clothing retailers. Moody’s forecasts operating income for the department stores and clothing retailers to drop by 40%, “the worst of any retail sector by far.”
According to Moody’s, the department stores online businesses are only getting a fraction of in-store sales, which has been lost due to the outbreak. Moody’s notes that the stores will still need to make the rent payments, and that many are still paying the salaries despite the closures.
“These mounting pressures will all weigh heavily on the industry,” Moody’s notes.
Cowen, however, notes that many of the retailers are in talks with landlords over easing the rent burden at a time when stores are closed. “We believe retailers are analyzing each lease carefully to determine the nature of obligations as all parties negotiate during closures,” the report reads.
Bank of America analysts also believe that retailers are canceling their orders, but note that they might be too late to cancel the orders for the second quarter. The analysts say the companies may instead try to renegotiate their orders, but with the coronavirus impacting the entire supply chain, this could be a difficult thing to do.
Shares of Macy’s, Penney and Kohl’s have already dropped over 65% this year. Nordstrom’s stock is down more than 60%.
