Higher debt loads are hurting the department-store sector, even with the cash they’ve tapped from credit lines to build up their financial reserves.
Credit lines in the last few weeks were accessed to raise cash in the wake of temporary store shutdowns to curtail the spread of the coronavirus, or COVID-19, outbreak.
Macy’s Inc. accessed its entire $1.5 billion revolving credit line, while Kohl’s Corp. tapped its entire $1 billion line. Nordstrom Inc. also has drawn down the entire $800 million from its revolver. J.C. Penney Co. Inc. drew $1.25 billion–but left a small amount that it can still access–from its credit line, according to Dana Telsey, analyst at Telsey Advisory Group. She noted that Dillard’s Inc. has not accessed its revolving credit line.
By nameplate, Telsey said cash totals for those department stores that have accessed their credit lines are: Macy’s, $2.23 billion ($731 million of cash, $1.5 billion from revolver); Kohl’s, $1.72 billion ($723 million of cash, $1.0 billion from revolver); Nordstrom, $1.65 billion ($853 million of cash, $800 million from revolver); J.C. Penney, nearly $1.78 billion ($386 million of cash, $1.25 billion from revolver, and $141 million still available from its revolver).
While the cash balances are substantial, it’s nowhere near what the retailers need should COVID-19 require stores to stay closed for five months or longer. Telsey did a cash burnout analysis and determined that Macy’s has enough cash to last 4.8 months, Kohl’s at 5.3 months, and Nordstrom at 6.2 months. Penney’s has 9.1 months, but a $105 million debt payment lowers the cash burnout to 5.9 months. The debt payment is due in June, and it seems logical that it will be extended.
Telsey’s analysis do not reflect any adjustments to rent, payroll and dividend payments. Adjustments on that front could give them an extra month or so, but cash burnout on average is still between five to nine months, at most. Most retailers have suspended dividend payments, and have recently said they are furloughing most of their staff. Not much is known in connection to what their plans are for rent payments to landlords, although those payments are expected to be under review. And while there’s some income from e-commerce operations, online sales certainly can’t make up for the lost business from the brick-and-mortar component.
In contrast, The TJX Cos. Inc. in the off-price sector has a cash burnout of 6.4 months, Designer Brands Inc. in the footwear sector is at 8.2 months, and Vince and PVH from among the apparel firms are at 4.9 and 5.8 months, respectively.
Using a similar analysis, Oliver Chen at Cowen & Co. also concludes that the department sector, on average, has enough liquidity for five months to eight months.
“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 five months,” Chen said.
While there could be buying opportunities as visibility improves, Chen also noted that much would depend on consumer spending trends post COVID-19, vendor and inventory relationships and holiday performance.
“At the moment, we believe department stores are cutting all current orders and shipments until late June-July and will re-evaluate this decision as times goes on. Meanwhile, vendors are likely canceling as many orders as possible which will impair important back-to-school [and] fall deliveries,” Chen said. He added that retailers are analyzing each lease to determine obligations as parties re-negotiate terms during the closures.
“Cowen’s analysis highlights that department stores can withstand five to eight months of closures before liquidity becomes a significant risk factor,” Chen said. He said that Nordstrom and J.C. Penney are better positioned, with eight months of available liquidity. In contrast, Macy’s and Kohl’s could suffer if store closures continue beyond five months. He estimated that both Macy’s and Kohl’s each has about five months of available cash.
Because labor costs is about ten percent of sales, retailers furloughing staff and reducing pay could help to offset some liquidity pressures. Another is rent and if held back, that could have an immediate impact on second and third tier centers closing and on developers, he said.
Chen’s analysis includes an estimated $449 million in monthly e-commerce revenue for Macy’s, $346 million for Kohl’s, $350 million for Nordstrom and $175 million for J.C. Penney.