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How Low Can Promos Go? Experts See 70% Discounts When Stores Finally Reopen

Just exactly when retailers can reopen their stores will determine just how bad it will be for both the retail and wholesale communities.

Most apparel retailers have been temporarily closed since mid-March, and the stores are loaded with early spring merchandise that can’t be cleared out completely through the online platforms. Retailers have been canceling orders for late spring, summer and even some early fall deliveries. That has had wholesale vendors scrambling to cancel orders at the factory level, as well as inputs ordered for summer and fall seasons, but not yet cut or delivered.

“When stores do reopen, and even now through online channels, heavy promotions are starting and will accelerate the longer the time that stores are closed. With many stores having been closed since mid-March, there is going to be a mismatch of inventory in the stores with the seasonal needs at the time of reopening,” Dana Telsey, founder and CEO at Telsey Advisory Group, said on Wednesday.

Telsey expects the level of promotions, particularly for the apparel category, “may match the levels of the Great Recession in 2008-2009 of 70 percent-plus. Currently, orders for May and June are being canceled by many, Fall orders are being delayed and uncertainty exists as to holiday orders, which are typically discussed in May and June.”

Typically a significant driver for apparel, Easter is just days away and stores remain out of commission. “When stores reopen, it will be left with a lot of stuff that is out of season because we will have gone past Easter. We’ll be going into summer and maybe even back-to-school time,” Walter Loeb, former retail analyst and now consultant, said.

According to Loeb, if stores can reopen sometime in June, some of the spring and summer items might be salvageable because they can still be sold closer to season, even if they are getting somewhat stale. But the longer the stores are closed, the greater the discounts ahead.

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“Seventy percent is very likely. While the retailers and brands who have their own stores could pack up some of the goods for next year, the merchandise more likely will be blown out of the stores. Retailers need to clear out the space for new inventory and they need money coming in so they can spend on new merchandise,” Loeb said.

Apparel items that were on shelves before stores shuttered last month are now worth less than 50 percent of their original value. Once the Easter weekend passes, those goods will soon lose another 10 percent of its value. If stores can’t reopen until June, those items will risk becoming completely obsolete, he said.

Loeb also expects additional pressure on wholesale vendors ahead.

“There is no playbook for what how to handle this massive shutdown. If this ends at the end of April, it will look different from how it will look if this ends in June. No one knows right now,” Loeb said. “I expect vendors will be asked to push out payment terms. Usually it is 60 days, maybe 90. I think they will be asked to push it out for 120 days or more.”

Loeb believes suppliers “probably will be inclined to give additional time because when stores reopen, the priority will be about momentum in getting consumers back into the stores. You’ve got to get customers into the stores to buy stuff.”

And some retailers are starting to think about the what-ifs, as well.

Nordstrom Inc. warned that it’s impossible to estimate the duration or negative financial impact from COVID-19 on its business, but that it does “expect our results for the quarter ending May 2, 2020 and beyond will be adversely impacted in a significant manner,” according to a Wednesday regulatory filing with the Securities and Exchange Commission.

The filing updated some of the actions the department store has taken, such as a draw down of $800 million on its revolving credit facility and targeting reductions of more than $500 million in operating expenses and capital expenditures.

Nordstrom said it can’t “accurately predict the impact” from COVID-19 on its operations because of the uncertainties not just for when the disruptions will end but also governmental regulations imposed due to the pandemic. The retailer also is cognizant of potential changes in consumer behavior when stores reopen and warned of deterioration in economic conditions in North America, which in turn could affect consumer discretionary spending.

Separately, Nordstrom on Wednesday also said it has raised an additional $600 million, the aggregate principal amount, through the sale of 8.75 percent Senior Secured Notes due 2025. The company said the offering price is 100 percent of the principal amount and that net proceeds from the sale of the notes will be used for general corporate purposes, after deductions for fees and expenses connected to the offering.

The closing of the note offering is expected around April 16, 2020, and once closed will add $600 million to the retailer’s financial flexibility.