Hardest Hit: Who Is Still at Risk After Last Year’s Retail Tribulations?

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Ben Unglesbee|Senior Reporter
Source: www.retaildive.com, April 2021

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Party City, Nordstrom, Macy’s, GameStop and others still have weak scores on measures of financial health, according to RapidRatings data.

You would be hard pressed to find a retailer that, for better or worse, was unaffected by COVID-19.

While some thrived, the pandemic brought financial strains if not outright turmoil to many companies. In 2020, Retail Dive tracked 30 major retailers that filed for bankruptcy.

Others, meanwhile, are searching for their footing in a retail environment undergoing continual change. The rollout of the COVID-19 vaccine has given both Americans in general and retailers reason for hope. Even so, foot traffic and sales to many discretionary retailers remain below 2019 levels.

That has made previously healthy businesses seem more wobbly than they did in 2019, and heavily indebted or weaker operators are even more vulnerable.

For those hit hardest financially from the pandemic, it can be an endurance contest to stay afloat until the world returns to some kind of normal.

“The pandemic is not over. We will see change during the course of 2021 in the way people are buying, where they’re buying, how much money they have to spend, and what they want to spend it on,” RapidRatings Chairman and CEO James Gellert said in an interview. “But that doesn’t mean that all of the retailers just bounce back, because retailers have been hit so hard.”

Key to staying afloat during the months ahead is access to cash sources. With the Federal Reserve propping up the corporate bond market and financial markets more generally, many retailers that might have been forced into bankruptcy have been able to raise capital or refinance. But that might not be the case forever. Gellert compares it to a game of musical chairs.

“When you’ve got this much access to capital, there are kind of enough chairs that everyone can keep sitting and getting up and moving, and sitting and getting up and moving,” Gellert said. “But those chairs are going to start getting taken away … and a lot of retailers are going to be left standing.”

To track companies that are still in weak financial positions after last year’s struggles, RapidRatings compiled a list for Retail Dive of 10 publicly traded companies with low scores in the firm’s Financial Health Ratings. Those are a measure of short-term resiliency and default risk based on liquidity, leverage, earnings and other metrics.

“This is a mix of retailers that are weak enough … that they need to be watched very carefully,” Gellert said. “And watching them carefully means being able to see what moves management makes to continue weathering the storm.”

Here’s a closer look at the companies on the list:

Party City

COVID-19 hit right at the heart of Party City’s business, with graduations, birthday parties and other celebrations canceled or downsized as even extended family members avoided gatherings across much of the country. In the first quarter of 2020, the company racked up a loss that topped half a billion dollars.

Total revenue declined 11.4% to $648.2 million in the fourth quarter, which includes the important Halloween period for Party City. The company’s debt load, a legacy partly of a private equity buyout years ago, constrains Party City’s margin for error and ability to invest. Still, it is rolling out new capabilities and a new store format that analysts have lauded for being easier to shop. The company is currently looking to raise more than $700 million in new bonds that would help it dodge a major term loan maturity coming due next year.

The Children’s Place

Less than five years ago, The Children’s Place was a retail turnaround poster child. The children’s apparel company, led by Jane Elfers, engineered sales growth and a shift to profitable, digital-minded retail while others struggled. The company’s trajectory change was highlighted by the bankruptcy of its peer, Gymboree, which eventually liquidated. (The Children’s Place picked up Gymboree’s brand property in the latter’s second bankruptcy.)

But mall travails, and then the arrival of COVID-19 and attendant school closures, have pressured Children’s Place. Sales have fallen for the past two fiscal years. In 2020, amid pandemic disruption, Children’s Place posted a loss from operations of about $200 million, after years of operating in the black. All that said, the retailer beat earnings estimates for Q4 2020. Analysts with Telsey Advisory Group wrote in March that they expect “momentum to continue” as schools reopen and Children’s Place laps its dismal spring 2020, when its stores temporarily closed.

Nordstrom

In the years of the “retail apocalypse” Nordstrom was the exception to the rule: a department store with a solid sales and customer base. True, it’s sales had slipped in 2019, ahead of the pandemic, but it was still a solid performer in a troubled sector, and solidly in the black.

COVID-19 changed all that in a dramatic way, knocking nearly $5 billion off Nordstrom’s top line in 2020. That in turn led to a $690 million loss, after posting nearly half a billion dollars in net income the previous year. Also during the year, the retailer saw its debt rating fall to junk territory for the first time, a reportedly jarring turn for the Nordstrom family.

Earlier in April, Nordstrom closed on $675 million in new unsecured bonds that free property it put up as collateral for last year and cut some of its interest expense.

Express

In January, as Express Inc. shares were getting bid up in the same retail investing frenzy that sent GameStop soaring, Wedbush analysts threw some cold water onto the excitement. They wrote that the clothing seller was “hemorrhaging cash” as consumers still avoided dressier apparel during the pandemic.

Express posted $352.2 million in net losses and $251.6 million in negative cash flows through October, and in December announced a 10% cut to its corporate workforce, its second round of layoffs in 2020. The company boosted its liquidity and capital through a term loan with Sycamore Partners, whose private equity arm owns a handful of retailers and apparel sellers.

Rite Aid 

Along with other drugstores, Rite Aid’s revenue rose last year thanks to the retailer’s “essential” status during spring 2020 and as customers consolidated shopping trips. But the company still operated at a loss as of November, in part because of new operating expenses taken on because of the pandemic, as well as its debt load and interest expense.

Rite Aid has long struggled financially, in part because it lacks the scale to compete with larger rivals Walgreens and CVS. Last year, it bought itself some time through a bond offer that pushed out maturity dates.

Gellert noted that Rite Aid’s longer-term financial health scores are better than its short-term rating. “So capital for Rite Aid can prop it up for a longer period of time, hopefully giving it the chance to change and improve from a longer term perspective,” Gellert said. “But even so, relative to its peers in its sub-industry it is still weak, both short and long term.”

Macy’s

Macy’s posted a loss of nearly $4 billion for 2020, which tells you pretty much everything you need to know about the department store chain’s year. A company that is used to being in the black, the pandemic shredded its sales and, with them, its bottom line.

Customers both stayed away from indoor malls and pulled back on apparel spending as they avoided work and social gatherings. While liquidity concerns surrounded the company in the early weeks of the COVID-19 crisis, Macy’s raised billions in cash from new debt and now has ample liquidity. But there’s no telling yet when sales will return to 2019 levels or grow past them. Executives said this year they have “updated and accelerated” the department store’s turnaround strategy, which would overhaul its supply chain, digital, brick-and-mortar and merchandising operations.