Retail Apocalypse: Brick-and-mortar retailers, department store chains struggled to rebound in post-pandemic world
June 1-7, 2020
By Daily Record Staff
Although thousands of Arkansas workers have been pushed to the sidelines due to COVID-19 and ongoing social distancing policies, certain sectors are not expected to fully rebound once the world’s largest economy gears back into full production.
Most notably, due to the ongoing COVID-19-related changes in consumer behavior impacting retail spending, traditional brick-and-mortar department store chains and apparel merchandisers are struggling to stay afloat. At the same time, grocery store chains, warehouse clubs and ecommerce giants like Walmart, Costco, Trader Joe’s, Kroger’s, and Amazon continue to snap up market from the weaker retailers like JC Penney, Tuesday Evening and Bed, Bath and Beyond.
In April, retail sales dropped almost twice as much during as they did in March as the nation’s economy saw its first full month when most businesses were closed due to stay-at-home order and social distancing policies. In response to U.S. Census Bureau data showing overall retail sales down 16.4% in April from the previous month, National Retail Federation President and CEO Matthew Shay said the monthly sales umber were not a surprise “given the current state of affairs.”
“The vast majority of retail stores have been closed, we are in the midst of historic unemployment and when it comes to personal finances, discretionary spending takes a back seat to essentials. Prior to this pandemic, retail was setting records in year-over-year growth, employment and investment,” said Shay, head of the world’s largest trade group that represents over 52 million workers. “It is a resilient industry serving a smart consumer, and despite today’s report, we know it will be leading our nation’s economic recovery as this crisis recedes.”
Despite Shay’s optimism, Conference Board senior researcher Denise Dahlhoff recently noted that even though consumer confidence hovered at historic highs in early 2020, COVID-19 has still dealt U.S. retail businesses “a triple blow,” including “loss of foot traffic, less need for quarantined consumers to spend, and, with the economy at a standstill and unemployment soaring, far less propensity to spend.”
“The fallout from COVID-19, when the economy was humming, many retailers were grappling with changing shopper preferences and habits as well as with cutthroat competition,” wrote Dahlhoff in a recent research note. “The COVID-19 crisis has only magnified the pressure, with headlines suggesting a ‘survival of the fittest’ environment. From department stores and malls to iconic retailers and small local stores, the industry must brace for major upheaval in the coming months.”
Highlighting her case, Dahlhoff noted the financial struggles of popular apparel retailers such as J Crew and Neiman Marcus, the first major retailers to file for bankruptcy protection during the pandemic on May 3 and May 7, respectively. Since then, a growing list of traditional retailers such as Nordstrom, Victoria Secret’s and Kohl’s to Tuesday Morning and Bed, Bath and Beyond have announced a range of actions to remain in business, from scaled back reopening plans and layoffs to more drastic actions such as Chapter 11 restructuring and outright bankruptcy.
Dillard’s, JC Penney on different paths
Closer to home, JC Penney on May 15 voluntarily entered a Chapter 11 bankruptcy restructuring that will allow the Plano, Texas-based department store chain to reduce several billion dollars of debt by shuttering several retail locations and business officials nationwide. The Texas mall retailer has not announced whether it will close any of its 13 stores in Arkansas.
In early April, the iconic retailer temporarily furloughed most of its hourly associates and took several other steps to improve its cash position and financial flexibility during the pandemic. Some of those actions included cutting capital spending and relying on its credit facility, pausing hiring, and extending the terms for payment of goods and services to customers impacted by COVID-19.
In its bankruptcy filing, JC Penney said it still intends to reopen hundreds of locations across its nationwide footprint during its restructuring, as well as bulking up its online operations through its ecommerce site at JCP.com. JC Penney CEO Jill Soltau said the health and safety of associates, customers and communities remains a top priority during the pandemic as the company begins a phased reopening strategy that follows local and state social distancing orders.
“The Coronavirus pandemic has created unprecedented challenges for our families, our loved ones, our communities, and our country,” said Soltau. “As a result, the American retail industry has experienced a profoundly different new reality, requiring JCPenney to make difficult decisions in running our business to protect the safety of our associates and customers and the future of our company.
“Until this pandemic struck, we had made significant progress rebuilding our company under our Plan for Renewal strategy – and our efforts had already begun to pay off. While we had been working in parallel on options to strengthen our balance sheet and extend our financial runway, the closure of our stores due to the pandemic necessitated a more fulsome review to include the elimination of outstanding debt,” said Soltau, who took over as JC Penney’s chief executive in October 2018.
According to recent Securities and Exchanges Commission (SEC) filings, JC Penney has approximately $500 million in cash on hand and has received commitments for $900 million in debtor-in-possession (“DIP”) financing from its existing first lien lenders, including $450 million of new funding. Following court approval of its Chapter 11 restructuring, JC Penney said its DIP financing and cash flow generated by ongoing sales will be sufficient to meet the company’s operational and restructuring needs.
“Implementing the financial restructuring will allow JCPenney to accelerate its store optimization strategy. As part of its ongoing transformation, JCPenney will reduce its store footprint to better align its business with the current operating environment,” the SEC filing states. “Stores will close in phases throughout the Chapter 11 process – and the first phase of closures, including specific store details and timing, will be disclosed in the coming weeks.”
Under its restructuring plan with the U.S. Bankruptcy Court for the Southern District of Texas in Corpus Christi, JC Penney will close approximately 29% of its 846 stores over the next year, or 242 locations. After the closings, the company will have 604 locations, although the exact number of stores that will remain “continues to evolve” SEC filings show.
As JC Penney works through its restructuring, which includes the retailer’s long-held delisting from the New York Stock Exchange and speculation of a possible acquisition by ecommerce giant Amazon, Little Rock-based Dillard’s Inc. is also struggling financially after shuttering most of its stores in late March.
After reporting a second quarter loss of $160 million, Dillard’s CEO William Dillard II also chose to forego his salary and executed a temporary 20% salary reduction for all salaried associates. The reduction is will remain in effect through May 30, although the company said it may consider extension of the salary reduction based upon financial conditions.
According to the company’s recent quarterly financial report, all Dillard’s 285 store locations were temporarily closed by April 9. Over the next several weeks, Dillard’s officials plan to reopen a total of 241 Dillard’s stores and 29 clearance centers open.
“COVID-19 has impacted every aspect of our business. The mall business in general and department stores, specifically, have been particularly hard hit. While our balance sheet was already strong, we took decisive, sometimes difficult, actions to preserve liquidity and ensure our long-term viability,” said Dillard.
Since the pandemic hit in late March, Dillard’s said it has continued to pay its associates across 29 states. At the peak of store closures, approximately 90% of Dillard’s 38,000 associates were furloughed. In early May, most associates were invited back to Dillard’s as stores re-open have returned, although approximately 65% of Dillard’s associates remain on furlough.
Dillard’s said it has worked to educate furloughed associates regarding the unemployment benefits available to them under the $2.2 trillion Coronavirus Aid, Recovery and Economic Security (CARES) Act. Unemployment benefits normally expire after 13 to 26 weeks, as defined by each state. Among other things, the $2.2 trillion CARES Act approved by President Donald Trump on March 17 allows unemployed workers to receive an extra benefit of $600 per week for an additional 13 weeks.
As noted, Dillard’s reported a net loss of $162 million, or $6.94 per share, compared to a profit of $78.6 million, or $2.99 per share, a year ago. The Little Rock department store operator said it expects to be in a net operating loss position for the remainder of fiscal year 2020 even though CARES Act provisions allow for net operating loss carryback before the 35% corporate tax rate was overhauled in 2018.
Besides ongoing financial losses for some time, Dillard’s said reduced consumer demand combined with mandatory store closures also necessitated extraordinary measures to address excess inventory. In late March, the retailer began aggressively discounting merchandise to clear product by offering an additional 40% off permanently marked down merchandise through early April.
This was immediately followed up by an additional 50% off permanently marked down merchandise which was in effect most of April and extended through May 12. Utilizing its ship-from-store capabilities from its online store, Dillard’s said it was able to generate sales from closed store that decreased inventory by 14% compared to year ago.
“The Company significantly reduced merchandise purchases as the pandemic progressed in March and April, producing a 33% decline in purchases for the first quarter compared to the prior year first quarter,” said the Arkansas retailer. “As stores re-open, management’s insight into consumer behavior will dictate merchandise purchasing decisions with the continual goal of aligning purchases with sales.”
Unlike some of its department store competitors and retail rivals, Dillard’s management team believes the Arkansas company is “uniquely positioned … to weather the COVID-19 pandemic primarily because of its strong balance sheet and available liquidity.” Today, Dillard’s rent obligations are small compared to the rest of industry as the Arkansas retailer owns 90% of its retail store space and 100% of its corporate headquarters and supply chain operations.
Financially, Dillard’s long-term debt is also minor with the next payment of $45 million not due until January 2023. By comparison, Dillard’s debt-to-equity position is an industry-leading 0.38%, compared 5.6% and 6.6% for rivals J.C. Penney and Nordstrom that each have long-term debt obligations of more than $4.5 billion.
“As we re-open stores, we see positive things happening. We believe people are ready to get out and shop. We are hoping this is the start of better times,” said Mr. Dillard.
PHOTO CAPTION: (Photo provided)
Traditional mall storefronts, department store retailers face new virtual realities in the post-pandemic economy.