Consumer discretionary spending isn’t expected to recover anytime soon, maybe not even in 2020, and that’s bad news for the retail sector.
Fitch Ratings managing director Monica Aggarwal confirmed this notion Thursday, describing “an increased likelihood of a downturn in discretionary spending into 2021” during an S&P webinar on U.S. department stores.
Last week, the credit ratings firm downgraded a number of retailers, including Macy’s Inc. and Dillard’s Inc. in the department store channel and Tapestry Inc. and Capri Holdings Ltd. in the specialty sector, after considering revenue trends and what a recovery might look like in 2021. The analysis includes estimates on some of the biggest unknowns facing retail, not the least of which is how long the coronavirus outbreak will infect the sector.
Fitch currently expects consumer discretionary spend at retail to “decline 40 to 50 percent for the first half, and it could go higher the longer stores stay closed,” Aggarwal said, adding that “consumer spending could be down 8 to 10 percent from 2019’s level for the first half in 2021.”
There is some light at the end of the tunnel, although it isn’t expected to break through the gloom until the latter part of 2021.
“Exiting 2021, we see revenue trends improving, with 2022 being a growth year,” Aggarwal said, noting that there’s still numerous uncertainties, namely, a timeframe for stores reopening and unemployment trends.
Just how bad will it get for retail?
To put it into context, Aggarwal said earnings before interest, taxes, depreciation and amortization, or EBITDA, reported by Macy’s and Nordstrom fell 30 percent in the Great Recession of 2007-2008, while Kohl’s was down 10 percent. It took the retailers three years, or in 2010, to get back to their 2007 EBITDA levels. This time around, because of store closures, she said EBITDA for retailers could fall as much as 70 percent in 2020, and EBITDA could still be 25 percent lower in 2022.
Because retailers have initiated cost-cutting moves, suspended dividend payments and stock buybacks and drawn down on revolving credit lines to boost cash reserves, David Silverman, a senior director at Fitch Ratings and a webinar speaker, expects that “most retailers can weather the challenges.”
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He did call out a few with possible liquidity issues that could spell refinancing risks ahead or a higher debt default potential.
One retailer is J. Crew, which Silverman said has “significant” debt maturities in 2021, and could result in a potential distressed debt exchange. An initial public offering of Madewell in mid-March, now delayed through the end of April, would fuel its liquidity but even that is likely difficult to execute with current volatility in the equity markets.
Silverman also cited Lands’ End, which has debt obligations coming due in 2021, and Ascena Retail Group and Tailored Brands, with 2022 maturities. J.C. Penney ended 2019 with $1.6 billion of liquidity, which Silverman said “seemed adequate at the time,” but in the current environment with stores closed, he expects “significant cash burn in 2020.” That is likely to put pressure on liquidity and the retailer’s ability to address its capital structure, Silverman said.
He did point out that as customers stay homebound, the e-commerce models of retailers who consider themselves omnichannel–like Macy’s, Target and Walmart, not Amazon or Wayfair–have seen a rise in curbside pickup and in-store pickup of online orders.
“This is a real kind of test, or a potential watershed moment for a lot of these models. It’s a benefit for companies who can flex their supply chain and customer offerings to be able to offer these methods,” Silverman said.