Significant business interruptions brought on by the coronavirus is upending U.S. retail discretionary spending, which is projected to decline by 40%- 50% in the first half of 2020.
This prediction comes from Fitch Ratings, which also expects a slow rate of improvement through the summer from a current 80%-90% decline in sales, and only if stores start to open mid-May or early June. Sales decline is expected to continue into 2021 and to dip 8%-10% from 2019 levels.
However there is a light at the end of the tunnel. Fitch states “revenue trends could improve exiting 2021, given the typical four to six quarter duration of a consumer downturn, resulting in 2022 being a growth year.”
Yet Fitch already downgraded a number of department store and specialty retailers last week with Macy’s, Tapestry, Capri, and Dillard’s being lowered to non-investment grade.
“We anticipate many retailers in our coverage universe can weather the current challenges, given good market positions and sufficient liquidity stemming from operating and cash flow preservation initiatives, potentially emerging in stronger positions over time as weaker competitors go out of business,” Fitch said.
Notable exceptions, Fitch said, include J.C. Penney, given its expectation that “material cash burn in 2020 will significantly challenge its liquidity position with the potential for a debt restructuring in 2021 should our forecasts come to fruition.”
Additionally, Fitch predicts GNC could default in the coming months and that both J. Crew and Land’s End may be “challenged in addressing sizable maturities due 2021, increasing default risk including via a distressed debt exchange.”
“J. Crew’s plan to monetize its Madewell business through an IPO could be difficult to execute in the near term given equity market volatility,” Fitch noted. “Protracted weakness in sales and capital market conditions could also make it difficult for Tailored Brands, Ascena and Party City to address 2022 maturities.”