Coronavirus puts department stores and clothing chains in peril

The coronavirus outbreak will do very few retailers any favors, but department stores and clothing chains stand to lose more than their peers.

This past weekend saw seemingly contradictory events play out: long lines were a constant at stores like Walmart, Costco, and Target as shoppers continued to stock up on household essentials and food. Target CEO Brian Cornell said on Monday the company continues to see a “sustained surge in shopping.”

But many other retailers, such as Abercrombie & Fitch, Nike, R.E.I., and Under Armour said they were closing stores for an extended period, while others like Gap Inc. Announced reduced store hours. (On Monday, Kohl’s and Nordstrom also said they were cutting some store hours.) The key difference? Selling essentials consumers need versus selling discretionary items like clothing or home furnishings that people want but can get by without replacing.

“That’s the first area people will cut back on,” Neil Saunders, managing director of GlobalData Retail tells Coins2Day. “A lot of consumers are diverting their discretionary spending for stocking up.” There are already echoes of 2009’s Great Recession when spending on anything but necessities plummeted, punishing companies like Macy’s, J.C. Penney, and clothing chains like the Gap with sales declines almost in the double-digits on a percentage basis.

Research firm Customer Growth Partners last month forecast retail sales would rise 4.1% this year. Now it thinks that increase could be as modest as 1% if the crisis lasts into early summer.

What could aggravate things for the department stores and clothing chains is if state, county, or city authorities close malls where such retailers typically operate, or reduce hours. Last week, Simon Property Group‘s King of Prussia Mall—outside Philadelphia—told tenants the county government expected non-essential retailers in the mall to close. Simon announced a big financing on Monday, while Macerich, a major mall operator, cut its dividend because of the “uncertain and rapidly changing environment.” That most likely includes more distressed tenants asking for rent concessions.

Retailers like Target, Walmart, and Kroger are well positioned to take market share from department stores and clothing stores because of the breadth of their staples plus stock.

“That’s the benefit of Target and Walmart: they have pharmacy and they have grocery,” says Forrester researcher Sucharita Kodali. And that extra shopper traffic will help them in other categories, like clothes and home goods. “They’re not going to put a moat around the electronics or clothing sections of their stores so they’ll get some extra business.” (Last week Dollar General said it expected a sales boost from the current uncertainty as people are expected to stick closer to the area near their home.)

Walmart, Kroger, and especially Target, have ramped up their clothing and home goods selections in the last two years, meaning they should continue to take market share from department stores: Target’s apparel sales grew at a healthy clip during the holiday season, while Macy’s and Kohl’s sales were on par with the prior Christmas period.

(Best Buy so far also seems to be a winner too, as parents facing the prospect of working from home for weeks with kids out of school race to improve their home internet capabilities and buy new devices like iPads.)

Even if the coronavirus crisis eases in a few months, its impact on some retailers could be long lasting. Department stores and apparel chains typically order merchandise for the holiday season right about now. But they are doing so in a climate of high uncertainty about levels of consumer confidence and spending power in eight months, increasing the risk of over-ordering, which would lead to margin-killing discounting, or under-ordering, which means lost sales.

Another thing that can hurt some of these retailers and perhaps take some of them out if this goes on for too long: many have weak balance sheets and high debt loads, meaning any drop in sales could be catastrophic. That includes the likes of J.C. Penney (which is struggling to prevent being delisted from the New York Stock Exchange and reported awful fourth quarter results), Neiman Marcus, and J.Crew. (J.Crew has been banking on spinning off its Madewell business, but in this environment—the Dow Jones Industrial Average fell 13% on Monday—a listing is unlikely.)

“If you don’t have a good balance sheet going into this you are not in a position to weather this storm at all,” says Saunders.