As a reader of The Robin Report, you are a knowledgeable and Important participant of the retail and related industries, and many of you are major leaders, or you would not be reading this publication. And we truly appreciate your support. However, this is not a one-way street. We either deliver valuable content, full of strategic insights particularly relevant to your specific business or we will not deserve your support.
Accordingly, during this historically unprecedented, business crushing period, we have requested of all our writers to focus on providing their expert perspectives on the impact of the coronavirus on the industries and businesses within their market sectors: current status, issues and challenges; short-term survival tactics; post-virus forecasting and planning, including de-scaling and consideration of major strategic and structural changes to the current strategic business models.
My article today is guidance for retailers on the immediate need for liquidity–the urgency of NOW!
Cash Is King! No, It’s Actually Lifeline #1, NOW
COVID-19 attacks the United States. And poof, overnight, some 150 retailers across the country either closed all, or part of their fleets voluntarily or by government ordered shutdowns. Consumers en masse retreated, locked down in their homes, and cut back drastically on spending, buying only food and essentials, all mostly online. This abrupt smack in the head hit all consumer facing industries which rely on consumers’ discretionary spending for profitable growth. As a reminder, roughly 70 percent of our GDP is driven by consumption.
The economic stimulus packages that are being considered must address the concerns of all different kinds and sizes of retail business, including their suppliers. While some retail businesses may be considered essential and may be able to remain open, many will not.
Worse, this comes on the heels of a way over-stored retail industry that has been over-leveraged, struggling for top and bottom-line growth and losing foot traffic to e-commerce for over two decades, before the word COVID-19 was even uttered. By the second week of March, U.S. retail traffic was down more than 30 percent year over year, according to data from Cowen analysts. And many of the major mainstream retail brands that were on the brink of bankruptcy pre-virus will likely be wiped out before the virus is stopped and consumers feel safe enough to return to socializing and shopping.
So, the urgency to simply stay afloat for a huge swath of retailers is NOW, and the number-one tool is liquidity, meaning they must find as much cash as they can, as fast as they can, to weather this storm over a length of time that is totally unpredictable. The depth of the economic collapse wrought by the global pandemic is equally unpredictable, to say nothing of how long it will take to return to a pre-virus economy. The $2.2 trillion stimulus package (framed as a “bridge” not a “bailout”) will send money directly to consumers and is intended to prop up small businesses and giant corporations just to keep the economy above water.
However, our economy is so integrated and inter-dependent — plus complex with complicated international supply chains. We are at risk of a massive “domino effect” triggered by one link that fails, and then the whole economic system could plunge us into a depression. The New York Times recently reported, “The result will be a domino effect. It begins with just the stores that are closed and their employees, which then hurts the brands whose clothes they sell – in fact, many are already hurting from canceled wholesale orders. Then come the factories that produce the clothes for those brands, and the mills that spin the fabric, and even the farmers that produce the raw materials. Spillover includes the ads that will be pulled from glossy magazines, the landlords without tenants, logistics companies and transporters who will lose their clients.”
Manny Chirico, CEO of giant PVH corporation (owner of Tommy Hilfiger and Calvin Klein), laid it out in another way in the same article. He said, “The formula has always been you create inventory, borrow against the inventory and then sell the inventory. But when you can’t sell the inventory because no shops are open and no one is buying, the whole chain falls apart.” He went on to say that his stores had already accepted their spring apparel – which is now sitting in darkened rooms. “It will come to a point where there will be pressure on cash flow even for a company of our size, with what I thought was a fortress balance sheet,” he said.
From the perspective, of another industry leader, John Idol, CEO of Capri Holdings, which owns Michael Kors, Jimmy Choo and Versace and has 9,000 employees in the United States, said that, “of the scenarios his company had examined, a realistic, not alarmist industry assessment still saw north of 10 million people who will be unemployed. Taking China as a model, it’s likely nothing will reopen until between 30 to 60 days from now. It will be approximately a year before business gets somewhat back to normal – and it won’t be the normal we are used to; it will be a new normal. Many companies won’t make it through.”
Stephen Smith, CEO of L.L. Bean said, “…we had modeled out countless different scenarios until the company ultimately settled on bad, worse and worst.” And by the way, just as a reminder about the scary liquidity monster, most of corporate America has been very lax about saving “for a rainy day,” given the Fed’s fire hosing “free” money (ultra-low interest rates) for decades.
To name a few major retailers and brands who have been profit and growth challenged as well as operating under stressful debt levels: JC Penney, Ascena, L Brands, Gap Inc., Neiman Marcus (considering bankruptcy), Sears (its time is up). Macy’s and Kohl’s are not as debt-stressed, but their businesses have been struggling.
Cowen analysts said that retailers may cut their dividends to shareholders, draw on their revolvers and pull back on investments. Macy’s recently announced that it was pulling all three of those levers. CEO Jeff Gennette said, “We are now operating in an environment with a high degree of uncertainty. The actions we are announcing today give us additional financial flexibility to address the disruption we are seeing in our business, which we anticipate will continue into the foreseeable future.”
Cowen, who follows JC Penney, Gap, Macy’s and Kohl’s, among several others, said they could see 50 percent of their earnings for the entire year wiped out from massive sales declines in March and April, as the industry locks up its shops.
So, most major retailers — as well as the small independently owned retailers — are trying to make the invisible visible, to determine how much cash they will need to survive until a new normal emerges.” How long and how big is the cash bridge needed to get to the end of the crisis?
- How long will COVID-19 last?
- How much will e-commerce sales offset the store losses?
- How will retail leaders hold their organizations together?
- How will organizations decide on layoffs, furloughs compensation cuts, etc.?
- How will they deal with vendors and continue to pay down debts they already have?
- How will they pay the rent?
- What IT and other investment plans and costs can be cut?
- When the shutdown lifts, will the economy be in a recession, or worse and how can they plan for that?
- Can they hit up the banks for enough money? Perhaps the “bridge” stimulus has a back-up plan.
In short, how much cash will they need to just stay afloat until this mess passes, assuming the overall economy doesn’t totally collapse? And finally, how much of the $2.2 trillion “bridge” financing will be allocated to which non-essential retail sectors? What will be the deciding factors as to which retailers will be eligible and for how much? And who will decide on the allocations?
OMG!!!! The industry may want to run, but it can’t hide from this oncoming monster.
Is the Cavalry Really Coming?
The liquidity panic and the realization that most of the noise in Washington has been focused on saving the airline and cruise ship industries, restaurants and hotels, the mainstream retail industry woke up and decided to force its way into the $2.2 trillion allocation discussion. After all, the retail industry and associated industries represent 52 million jobs (25 percent of all workers), and account for $4 trillion of GDP, according to the NRF.
So, the CFDA, along with the AAFA, called on Tory Burch, co-CEO of her eponymous brand, to lead an effort to frame an allocation proposal for the “bridge” funding. She put a task force together, calling on over 20 executives from Ralph Lauren, Nordstrom, Tom Ford International, and Saks, to name a few. The NRF also joined the group. They agreed to request three major initiatives, and Burch said that without immediate relief “our industry will fail.”
- Financing loans for real estate companies so they can either lower or waive the rents for retailers and brands.
- Grants to cover at least 80 percent of employee salaries who were kept on payroll.
- Tariff and duty relief for the next 12 months.
Burch as well as Anna Wintour, the artistic director of Conde Nast, have been in touch with the appropriate decisionmakers in Washington: Steven Mnuchin, the secretary of the Treasury, and Kevin McCarthy, the House minority leader; New York Senators Kirsten Gillibrand and Chuck Schumer; and House Speaker Nancy Pelosi.
To what effect this initiative will lead is anybody’s guess. Kirsten Gillibrand did send an email, to major players who can act on her message. She said, “These industries support millions of workers across the country and in New York. This economic package must put these workers first, providing them with paid sick and family leave, expanded unemployment insurance and strong protections. Doing so will strengthen workers in every state across the country.” Words count, but without action, they are just that – words.
About 90 different trade and retail organizations sent a letter to President Trump which emphasized the urgency of the situation, and the potential immediate losses and their belief that “the biggest single issue facing the industry right now is liquidity.” It also expressed their concerns that this industry was being overlooked.
They wrote, “The economic stimulus packages that are being considered must address the concerns of all different kinds and sizes of retail business, including their suppliers. While some retail businesses may be considered ‘essential’ and may be able to remain open, many will not.”
And therein lies the question, “For whom the bell tolls?” So, to repeat my question: how much of the $2.2 trillion “bridge” financing will be allocated to which non-essential retail sectors? What will be the deciding factors as to which retailers will be eligible and for how much? And, who will decide on the allocation?
In other words, who lives and who dies?