Apparel retailers grappling with severe coronavirus disruption are expected to see earnings plummet this year, and the prospects for 2021 aren’t much better, according to Moody’s Investors Service. And as working from home becomes the new normal, consumers are seen reining in spending on office attire in favor of comfortable clothes, challenging retailers known for their workplace-ready styles.
“U.S. apparel and footwear retailers are undergoing a sector-wide shock that will push weak players into default and reverberate into 2021,” said Raya Sokolyanska, vice president and senior analyst for the credit ratings firm, which expects next year’s earnings to fall below 2019 levels.
Mid-March coronavirus store closures choked off brick-and-mortar cash flows and while online sales have trended upward, digital sales cannot fully compensate for business done within the four walls. Highly leveraged retailers including J. Crew Group, Stage Stores Inc., Neiman Marcus Group and J.C. Penney Co. Inc. have come undone under pandemic pressure in an onslaught of bankruptcies aimed at restructuring their upside operations.
By contrast, fashion retailers on better financial footing have been able to access revolving credit lines to tide them over while they issued new debt and raised cash to build liquidity.
“For most apparel retailers, liquidity management will remain a key focus after stores reopen, as they contend with clearing inventory and weak consumer demand. We project earnings recovery in 2021 to a level 15 to 35 percent below pre-coronavirus 2019 results, reflecting still-weak discretionary spending and the resumption of deferred investment,” Sokolyanska said in Moody’s report titled “Companies will feel coronavirus disruption long after initial wave of defaults,” which presumes a phased U.S. store reopening in May, no second wave of infections and a 2021 economic recovery.
What’s more, Moody’s expects 2021’s revenue recovery would still be 5 percent to 10 percent off from 2019’s results.
But even as stores reopen, liquidity pressures are expected to continue if store traffic gets off to a slow start, retailers take to heavy discounting to clear out stale inventory in the second and third quarters and merchants pay a pile up of invoices from vendors after extending terms in the early days of the outbreak.
The recovery of spending in apparel is expected to remain sluggish through the critical fourth-quarter holiday period, with shoppers seen turning to less-profitable digital channels to stock up on gifts.
Moody’s believes retailers will speed up their store closures, with many never reopening from the pandemic pause amid profitability concerns. Retailers could shift their product investments to basics and seasonless styles, items that have a longer shelf life and can reduce their reliance on steep markdowns, according to the credit ratings firm.
Retailers have had mixed success in navigating the pandemic. Clothing chains such as Lands’ End, J.Jill, Talbots and Abercrombie & Fitch all have higher e-commerce penetration and therefore a better shot at navigating temporary store closures, while Foot Locker and Tailored Brands-owned Men’s Wearhouse could face issues. But over the near term through the end of the year, Abercrombie and Foot Locker were cited as having strong liquidity, while Lands’ Ends was comparably weak. Moody’s described Ascena Retail Group as adequate, as is footwear firm Caleres Inc., Cole Haan owner Calceus Acquisition, Men’s Wearhouse, Talbots and J.Jill. Gap’s liquidity profile, meanwhile, was rated as just good.
“Emerging from the 2020 recession, we expect companies with differentiated brands, strong balance sheets and well-developed e-commerce businesses to take share. However, the interim period of lower earnings and liquidity will hurt their credit profiles,” Moody’s said.
Moody’s also sees a shift in what consumers will be wearing. “Fashion casualization is another trend that will accelerate, as more relaxed ‘lockdown’ styles carry into the workplace. While the ‘athleisure’ trend could eventually be replaced by other fashions, the overall move away from traditional and dress attire to casual and comfort styles will likely continue,” the firm said. “This will hurt companies known for office wear, such as Men’s Wearhouse, Caleres’ Allen Edmonds brand and Ascena’s Ann Taylor brand.”