While experts debate how long the economy will be shut down, some major department stores and apparel retailers have as little as one month’s worth of funds to tough it out.
Major department stores like Kohl’s, Nordstrom and Macy’s could run out of capital within a month, according to a liquidity “stress test” published Thursday by Goldman Sachs. Other retailers like PVH (the parent company of Calvin Klein and Tommy Hilfiger), Gap and Victoria’s Secret parent company L Brands fared only a little better under the investment bank’s most extreme scenarios, with two months’ worth of liquidity available.
Retailers going under would have major implications for their landlords. Many retail real estate owners are already seeking relief on their mortgage payments.
“Based on our hypothetical analysis, the retailers with elevated liquidity risk in the event of prolonged disruption are predominantly department stores, specialty retailers, and certain apparel and accessories vendors,” wrote the Goldman analysts who authored the report. “We believe it is likely for retailers to experience more rapid declines in sales from recent closures, and more rapid recoveries once traffic returns, while wholesale led brands may be slightly more cushioned in the near term but take longer to recover.”
Goldman’s stress test looked at the balance sheets of major retailers under four different scenarios, ranging from their ability to simply cover operating expenses and debt payments to how they’d fare if they slashed inventory purchases and capital expenditures.
Some retailers performed better than others under the hypothetical cutbacks. Canada Goose, for example, could weather nine months of falling consumer demand, a figure that could be bumped up to a full year if the popular outerwear seller took large cost-cutting measures.
For Kohl’s, Nordstrom and Macy’s, however, the most extreme cutbacks only buy them another month, at most.
Making matters worse, several retailers recently received the ignominious designation of “fallen angels,” or companies whose credit ratings have slipped from investment-grade to junk bond status.
Fitch Ratings downgraded its ratings on Macy’s and the parent companies of Coach and Michael Kors.
Contact Rich Bockmann at rb@therealdeal.com or 908-415-5229.