The shutdown in brick-and-mortar is setting retailers up for some challenging times—particularly those with high levels of distressed debt.
Even if e-commerce can bring in some sales during this pandemic prompted quiet period, it won’t make up for the shortfall from brick-and-mortar, which will prove a direct hit to retailers’ cash flow.
A report from credit ratings firm Moody’s Investors Service earlier this month said distressed debt is concentrated in six retail companies: J.C. Penney, Neiman Marcus, Rite Aid, J.Crew, Ascena and Academy Ltd., (operating under the nameplate Academy Sports + Outdoors).
Some of the retailers on the list, like J.C. Penney, Neiman Marcus and Ascena, have also been singled out for their status as potential bankruptcy candidates down the road. And there has been speculation about others, including J. Crew.
“Most retailers, but especially the ones with high debt, are facing tough times,” Walter Loeb, former retail analyst and now consultant, said. “I also think that no matter what, J.C. Penney somehow will get bailed out. Manufacturers don’t want their doors to be closed. They will extend more, whether that’s time or credit, to J.C. Penney than they will to Neiman Marcus.”
Loeb’s comments about Neiman Marcus aren’t a reflection of the company or its operations, but rather his belief about what consumers are likely to be shopping for when the shelter-in-place orders start to lift. There’s a much wider swath of consumers across the U.S. who are more likely to look for value in their purchases than luxury goods as they emerge from hibernation.
In the case of Neiman Marcus, the company opened its first Manhattan flagship in March 2019 at Hudson Yards and Loeb believes the store–as well as Hudson Yards in general–is still struggling to find its place in the luxury market now that tourism has been on the decline. Nordstrom executives, which last year opened their new women’s flagship in Manhattan further uptown on 57th Street, said in conference calls that they, too, considered the site but passed because they believed it would take about five years to turn a profit there.
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Ascena has already addressed bankruptcy rumors, noting that it has enough liquidity and that it was not considering a Chapter 11 filing. J.Crew was looking to do an initial public offering for its successful Madewell brand, with plans to use the proceeds from the IPO to pay down its debt load. Those plans are now on ice–stock market valuations have come way down, and the current environment isn’t well suited to a public offering, which is usually reserved for when times are good and the equity markets are trading up.
Moody’s believes the rough times ahead for retail will translate into an increase in refinancing risks, particularly in 2021, for companies with high distressed debt levels.
“This year, weaker balance sheets and relentless margin pressures will continue to push smaller, cash-starved retailers down the ratings scale and closer to default,” Mickey Chadha, senior credit officer and a vice president at Moody’s, said. “There is a sharpening divide between those who have the capacity to weather the challenging operating environment and those who do not. The majority of companies that defaulted in 2019 and year-to-date 2020, such as Charlotte Russe, David’s Bridal, 99 Cents and Pier 1, did not have the scale, the pricing power or the deep pockets that their competitors did.”
Moody’s expects most firms will resort to a distressed debt exchange as they continue to try staving off a bankruptcy filing. In 2019, 70 percent of the retail and apparel defaults were distressed exchanges, while 90 percent of the retail and apparel defaulters in the same year were private equity owned with unsustainable capital structures.
Neiman Marcus, which is private equity owned, is one of the retailers with an unsustainable capital structure and the company faces a high risk of distressed exchange, according to a Moody’s report. Moody’s outlook on Neiman for now, however, is “stable.” Ascena’s rating is “negative,” burdened by weak liquidity, unsustainable capital structure and high risk of distressed exchange.
J.C. Penney, in contrast, has a “stable” rating, but faces operational and execution issues. J.Crew’s rating in still in development, and it, too, faces operational and execution issues. Another specialty apparel firm on Moody’s most distressed list is Jill Acquisition LLC, which operates the J. Jill nameplate. Jill’s rating is “negative,” owed to operational and execution issues.
The bulk of the upcoming maturities through 2022 are concentrated in J.C. Penney, Academy, Ascena, Neiman Marcus and J.Crew, which is why Moody’s believes they face a higher refinancing risk in 2021.