“Very few are likely to survive”


Department stores in the United States, once omnipotent malls that anchored malls and main streets across the country, have been dealt with time after time in the past decade. J.C. Penney and Sears have been overwhelmed by hedge funds. Macy’s has closed stores and downsized. Barneys New York filed for bankruptcy last year.

But nothing compares to the shock that the weakened industry has suffered from the coronavirus pandemic. Sales of clothing and accessories fell by more than half in March, a trend that is expected to worsen in April. The entire Lord & Taylor management team was laid off this month. Nordstrom has canceled orders and postponed payment from its suppliers. The Neiman Marcus group, the most sparkling of the American department store chains, should declare bankruptcy in the coming days, the first large distributor fell during the current crisis.

It’s probably not the last.

“Department stores, which have been failing slowly for a very long time, really don’t recover,” said Mark A. Cohen, director of business studies at Columbia University Business School. “The genre is a toast and looking on the other side, there are very few that are likely to survive. “

At a time when retailers are expected to place orders for the very important holiday shopping season, stores are taking in tens of thousands of company and store workers, raising money and desperately planning how to survive this crisis. The spectrum of mass defect is discussed not only behind closed doors but in future analyst models. If that happens, no one doubts that the upheaval caused by the pandemic will permanently change both the retail landscape and the brands’ relationships with the stores that sell them.

At the very least, there should be a huge reduction in the number of stores in each chain, which once stretched across the Americas as a pack of multi-headed hydras.

Department store chains account for about 30% of the total area of ​​shopping malls in the United States, including 10% of Sears and J.C. Penney, according to a January report from Green Street Advisors, a real estate research company. Even before the pandemic, the company planned to close about half of the department stores in shopping malls in the next five years.

While they have worked to transform themselves for e-commerce with apps, websites and in-store exchanges, the epidemic has shown how dependent department stores have remained on their physical outposts. Macy’s said on March 30 that after closing its stores for almost two weeks, it had lost the majority of its sales.

The Commerce Department’s retail sales report for March released last week was disastrous. Overall retail sales figures for this month are likely to be even worse, as some stores have been open for at least part of March.

Retailers have started to take extreme measures in an attempt to survive. The Tote, a subscription clothing company that acquired Lord & Taylor last year from Hudson’s Bay, said in a memo on April 2 that the chain’s entire management team, including the CEO, would be immediately released. He also suspended payments to suppliers for goods for at least 90 days, citing “immense pressure on our liquidity position”.

Macy’s, who also owns Bloomingdale’s, has extended payment for goods and services from 120 days to 60 days and, according to Reuters, has hired Lazard bankers to explore new financing. Jeff Gennette, the managing director, waives all compensation for the duration of the crisis. The company was removed from the S&P 500 last month due to its valuation.

JCPenney has hired Lazard, law firm Kirkland & Ellis and consulting firm AlixPartners to explore restructuring options, according to two people familiar with the matter, and has confirmed that it had skipped an interest payment on his debt last week. He is expected to make a decision on what to do, including filing for bankruptcy in a few weeks, said one of the people.

But none of them was in as dire a situation as Neiman Marcus, who has both a huge debt burden – around $ 4.8 billion, in part thanks to a leveraged buyout in 2013 by the owners Ares Management and the Canada Pension Plan Investment Board – and a raft of expensive rents in the hottest shopping destinations, signed in boom times.

At the end of March, Neiman stopped accepting new goods and laid off a large part of its approximately 14,000 employees when rumors of bankruptcy began to swirl. Its managing director, Geoffroy van Raemdonck, has announced that he will give up his salary for April. The brand denied sellers and its own employees at its sister brand Bergdorf Goodman that it was hiring counsel to study a bankruptcy case, but on April 14, S&P downgraded Neiman’s credit rating. Last week, the retailer failed to pay interest due on April 15, which angered bondholders and fueled suspicion that bankruptcy was imminent. A spokesperson for Neiman Marcus declined to comment.

Even Nordstrom, widely regarded as the healthiest department store, said this month that it could face “distress” if its physical locations closed to customers for “an extended period of time.” Erik and Pete Nordstrom, CEO and brand manager, receive no base salary for at least six months. The chain has amazed some suppliers with last-minute email cancellations in recent days.

In all chains, the prices of new goods sold via electronic commerce have already been reduced by 40% in some cases. Order cancellations for the pre-fall season – which would normally have started being delivered next month – have increased. Some brands said that deliveries were even refused when delivered to warehouses, and that extended payment terms cascaded to suppliers, who were then forced to negotiate with their own manufacturers, marketing agencies, centers distribution and owners.

“I have had a showroom for over 30 years and we have always used the word” partnership “to talk about our relationship with department stores,” said Betsee Isenberg, of 10Eleven showroom, which represents many brands such as Vince. and ATM. “From 9/11 to 2008, we worked hand in hand with our retailers. This is the first time that brands have been held accountable – many of which lose millions and millions of dollars due to canceled orders. It’s just not fair that it’s the survival of the fittest. McKinsey calls the situation “global Darwinism” in a new report.

The resort season has been entirely canceled and fall orders have been suspended, raising questions about the inventory that will remain if and when stores reopen and consumers return to stores.

“No one knows what the fourth quarter will look like, but you need to start ordering now,” said Sucharita Kodali, retail analyst at Forrester, about the holiday season, normally the most lucrative time of the year. year for chains. “Some people don’t even have the money to place orders in the fourth quarter and may have to cancel orders in the fourth quarter anyway, and that’s a mess. There has never been so much uncertainty. “

Robert Burke, the eponymous founder of a luxury consultancy, said he expected brands to move away from the wholesale business, focusing on direct sales to a model with large stores where they control their own space and inventory.

Shares of JCPenney, which temporarily closed more than 800 stores, closed at 23 cents a dollar last Wednesday after the retailer said it had not paid $ 12 million in interest owed today. the. Brooke Buchanan, a representative, said it was a “strategic decision” to take advantage of a 30-day grace period before being considered in default.

Buchanan said J.C. Penney had “started discussions with its lenders since mid-2019 to assess options for strengthening its balance sheet, a process that has become even more important as our stores have also closed due to the pandemic. “

The cash position of all the department stores has dropped sharply. In a April 13 note, Cowen analysts estimated four months of liquidity at Macy’s, six months at Kohl’s and seven months for J.C. Penney. Nordstrom, they predicted, could withstand the store closings for 12 months.

“The nature of the mall is that if you lose a big anchor like a Macy’s, you have colocation problems and you have more pressure on the mall traffic, which was already a big problem,” said Oliver Chen, analyst at Cowen. Co-location clauses generally allow other tenants to demand rent reductions if certain key chains leave. Chen said it could accelerate the current divide between leading malls and second or third choice malls in some areas.

Department stores were more likely than any other consumer industry to default on debt next year, according to a report released this month by S&P Global Market Intelligence. He estimated the probability at 42%.

In its April 2 memo, management at Le Tote and Lord & Taylor said that only “key employees” were retained to keep the business going. A representative for Lord & Taylor and Le Tote declined to comment or disclose the number of employees on leave and layoff.

“There seems to be near certainty that Lord & Taylor will wind up its business in the near future, whether or not it is bankrupt,” said James Van Horn, partner at Barnes & Thornburg and a specialist in retail bankruptcy. “They were already one of the worst-tested department stores before the coronavirus pandemic, and when the majority of the management team leaves, the vast majority of employees are laid off and a minority of employees are on leave. seems to be no other strategy but to liquidate the inventory. “

Van Horn said he expected other chains to strategically use the Chapter 11 reorganizations to legally close the stores, lowering their rent.

“It will probably be a domino that falls,” he said. “Whether it is the first or the 10th, we do not know. “

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