Retailers May Have to Strike a Grand Bargain

(Bloomberg Opinion) -- Closeageddon is how analysts at Jefferies are describing the retail store shutterings in the U.S.

With chains run by big names such as Nike Inc, Apple Inc and Hennes & Mauritz AB closing doors, and icons including Macy’s and Bloomingdale’s joining them, the challenge facing the sector is worsening.

Adidas AG warned last week that the suspension of store trading in China would cost it about $1 billion in lost sales. Add in closures across the U.S. and Europe, and multiply that by the number of household names retreating, and the bill to the retail industry may be astronomical.

Stacey Widlitz of SW Retail Advisors estimates first quarter revenue will be down by 50-70% on average for global retailers.

While sales are evaporating, overheads still need to be paid. This brings into focus the financial strength of parts of the global sector. Those that have been doing well for a long time, including Nike Inc. in the U.S. and Industria de Diseno Textil SA (Inditex) in Europe should have the resources to cope. H&M has little borrowing.

But many retailers were already struggling going into this crisis – think of some of the U.S. department stores. Those trying to implement turnarounds, such as Victoria’s Secret, which parent L Brands Inc. has agreed to partially sell, and Under Armour Inc. now face additional hurdles.

Gap Inc. has been trying to revive its namesake brand. At least its balance sheet is in decent shape. The same can’t be said for the likes of JC Penney Co Inc. and J Crew Group Inc., the private-equity owned clothing retailer that plans to spin off its Madewell unit to cut debts. With markets experiencing unprecedented volatility, there must be a question mark over this transaction, and maybe even the Victoria’s Secret deal.

Retailers would ideally want to stand by staff for as long as they can. It may be hard to imagine at present, but when the virus eventually recedes and activity picks up stores will need their workforces. Yet the pressures to cut back will be immense. The likely first move will be to reduce the temporary workforce.

Self-help measures are limited. Stock can in theory be moved from shuttered markets to those where there is still demand. The trouble is, with large swathes of Europe and increasing numbers of U.S. cities in lock-down, the regions where non-essential shopping is even permissible are dwindling.

Speaking to suppliers about delaying orders, or even cancelling them, particularly if Asian manufacturers are experiencing backlogs, may provide some respite.

Where businesses operate from leased sites, landlords will have a role to play. Struggling tenants and mall owners need to have a grown-up conversation about whether payments can be deferred or rents reduced. With demand shifting from physical stores to online for the past decade, landlords are already bruised. But they are in this crisis together with retailers. The mall owners can ill afford more vacant lets. It would be wise to take steps to prevent that now.

Such measures will only go so far. The case for targeted government support is pretty clear. One possibility is cheap state-backed loans, as the U.K. announced on Tuesday. In practice, such support may end up helping firms that were already uncompetitive. That may be the price to pay.

Tax breaks are another. Again, British retailers have long sought a reduction on property-based “business rates”, which they argue unfairly punishes chains with large bricks and mortar estates. They just got a 12-month holiday from the tax.

On both sides of the Atlantic, arrangements are needed so that suppliers can still insure themselves against retailers going bust before they have settled for ordered goods. That risk is elevated right now. If insurance companies pull cover, retailers may be forced to pay for stock up front, putting even more pressure on already strained cash flows. Government can help.

Retailers, landlords and lenders will have to come to some accord with each other. Even then, they will struggle to get through this on their own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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