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Virtually Every Fashion Retailer Is Snatching Back its Guidance

First-quarter earnings aren’t going to be pretty.

As retail store closures sweep the nation, and world, and U.S. cases of coronavirus rise with new, drive-through testing capabilities coming online, it’s not clear yet if the shockwaves reverberating through the retail sector will resolve in the short term or keep brick-and-mortar dark for months.

And while online businesses largely remain up and running, no retailer should reasonably expect e-commerce sales to match a full-fledged omnichannel operation that includes brick-and-mortar. Consumers with disposable income might be more focused on food and necessities, while low-income, hourly store workers could find themselves without jobs as non-essential retailers go dark to curb the spread of the COVID-19 pandemic.

U.S. deaths from the disease officially totaled at least 100 as of Tuesday, according to CNN. Numbers from the Centers for Disease Control and Prevention show the country is battling at least 4,226 cases. All 50 states and the District of Colombia have confirmed cases.

And the pandemic’s chilling effects are being seen across sectors, too.

Jeffries analyst Janine Stichter points to U.S. OpenTable data showing year-over-year declines in seated diners, reflecting a consumer psyche already hunkering down and getting on board with social distancing. Sit-down restaurant visits plunged 35 percent for the week of March 13, in the lead up to health official-guided government directives that essentially forced many restaurants closed.

Most apparel retailers provided guidance earlier in the month, just as Milan—the epicenter for Europe’s crippling outbreak—was instituting partial lockdowns and subsequently country-wide restrictions.

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Given what is known now and the sweeping scope of rapidly changing events, those guidance estimates are “largely invalid,” Stichter said.

Italian researcher Silvia Merler tweeted a chart from March 10 that shows the U.S. outbreak trails Italy by about 16 days. The lifeblood of Europe’s luxury supply chain, Italy waited far too long to mandate containment protocols, she said, urging countries including the U.S. and United Kingdom, about 13 days behind Italy, to deploy aggressive measures now to contain the forestall the kind of devastation the European nation has seen. Cases there have topped 31,500, and more than 2,500 have died.

In the U.S., directives banning public gatherings of more than 10 people are taking effect.

AMC Theatres shut down locations nationwide. Virtually every major retailer of non-critical products is temporarily closing stores, while large mass chains are modifying hours to meet demand while ensuring stores meet sanitary standards. San Francisco led the way in ordering residents to shelter in place, keeping people indoors—and there’s talk that New York City, home to about 8.6 million people, could be next.

Retailers that initially informed customers of plans to ramp up cleaning and sanitization have now found their hands forced, and fallen in line with federal orders limiting how many people can publicly convene in the same place.

And along with the temporary shutdown on stores, many retail firms are throwing their previously issued guidance figures out the window, now that the health crisis has rendered those estimates obsolete.

Over the weekend, Abercrombie and Fitch Co. Inc. retracted guidance for fiscal year 2021, issued March 4. On Tuesday, online luxury marketplace consignment platform The RealReal followed suit, withdrawing its outlook for the first quarter and full year 2020 “as a result of the growing impact of the coronavirus” on its business.

“Given the near-term uncertainty about the duration of this closure and potential for the closure of our other facilities, we are unable to quantify the near-term impact to our business,” the company said.

Chico’s FAS Inc. pulled the same maneuver, cancelling guidance without offering an update. Ralph Lauren Corp., which is temporarily closing its North American stores from March 18 through April 1, plans to update first-quarter guidance and impact on Fiscal 2021 when it holds its fourth quarter fiscal 2020 earnings call, the company said Tuesday.

And L Brands, which has also paused operations at its Bath & Body Works, Victoria’s Secret and Pink stores in the U.S. and Canada, said Tuesday it drew down $950 million from its secured revolving credit facility. That will help the company ensure that employees will receive their paychecks and benefits during the period from March 17 through March 29 while the stores are temporarily closed.

“We see a near-term downside risk for most in the apparel-footwear group as the U.S. begins to experience a severe, and potentially prolonged, drop-off in discretionary spending, paralleling what has been experienced in China and now Europe,” Stichter said. “While a severe U.S. slowdown seemed potentially avoidable just a week ago, it now appears inevitable, with consumer attitudes towards COVID-19 shifting dramatically over the course of the past week, and retailers now beginning to voluntarily close stores.”

Randal J. Konik, Stichter’s retail analyst peer, doesn’t see online making up for lost brick-and-mortar sales, especially in a discretionary category like apparel. “With stores accounting for 75 percent of sales for most retailers, we anticipate massive [earnings per share] declines for [the first quarter], especially as most retailers appear to be paying employees during the two-week closures,” he said.

Prolonged store closures will only exacerbate the problem.

“Inventories will build on balance sheets, markdowns will rise precipitously and operating deleverage could be steep. Bottom line, [first quarter] is going to be rough, [second quarter] will not be good dealing with inventory imbalances and slowed demand, and [second half of 2020] at best will be ‘ok’,” Konik concluded.

As people cancel everything from weddings to business trips, the disruption to daily life will decrease confidence and “sap spending” on discretionary purchases such as footwear, apparel and handbags, Konik said. He expects more companies will begin drawing down on credit lines, mimicking L Brands’ actions Tuesday morning.

Wells Fargo analyst Ike Boruchow has cut his estimates for firms within his retail and apparel coverage, presuming mass retail closures through the end of March, as many have announced.

“We are aggressively cutting estimates across our coverage and feel it’s simply too early to be constructive with so much more bad news ahead,” he said, adding that as more stores announce closures and given the current government response, it seems “highly reasonable” to expect U.S. retail to struggle for the next one to two quarters.