If only it were as easy as unlocking the doors.
With states gradually lifting restrictions on businesses and residents put in place in response to the COVID-19 pandemic, the retailers that moved to shut down their store fleets in March have been gradually opening back up, in phases, often with traffic restrictions and other new health protocols. But there was no precedent for the closures and the public health crisis surrounding them, and so there can be no certainty, or anything close to it, around recovery either.
Credit Suisse analyst Michael Binetti said in an emailed client note in May that his team expected "widely-varying results as stores start to open." While there was "real evidence of strong sales & pent up demand" in some categories on reopening, he also noted those trends "could change quickly," given that stores were reopening into a recessionary economy and risks from the coronavirus remain.
National Retail Federation Chief Economist Jack Kleinhenz said in a press release this week that predictions are "even more challenging than usual" and "uncertainty abounds."
The difficulty in predicting demand over the coming weeks and months makes stocking stores and understanding financial positions a confounding challenge.
Liquidity is (still) key
After store revenues zeroed out for many retailers during the closure weeks, an open door at least makes it possible for cash to come in. But there's no guarantee that retailers will make enough in sales from their open stores to cover their costs, as consumers may remain wary about shopping for some time.
Getting and maintaining liquidity was of chief importance during the closures. With revenue cratering, retailers furloughed employees, tapped their revolvers, skipped rent, stretched their vendor payment terms and cut investor payouts — spreading the pain around their stakeholders, in other words.
Maintaining cash is no less important now as stores reopen. "Liquidity will be key to navigating the crisis, as companies will likely generate cash flow deficits for the first two to three quarters of this year," said Moody's analysts in a May report, noting that most apparel retailers they cover have fully drawn their revolvers to increase cash reserves. The analysts estimate that sales will remain down and EBITDA depressed into 2021 for the apparel retail world specifically.
The moves retailers have taken to shore up their liquidity positions have already proven important. Morgan Stanley analysts led by Kimberly Greenberger found in a May analysis that retailers that previously were to be most at risk of liquidity shortfalls — namely L Brands, Gap Inc., PVH, Capri Holdings, Hudson Group and Chico's — were able to strengthen their positions, helping them manage pressure on cash flows. Among the retailers covered by Greenberger, only Macy's still faces potential shortfalls this year, according to the analysts' estimates.
Retailers have "tons of uncertainty" around their margins, as well as some around costs as they take extra precautions in their stores, through extra cleaning and foot traffic limits, and so forth, Christa Hart, a senior managing director with FTI Consulting, said in an interview. It's the uncertainty around demand, though, that boggles the mind and complicates cash flow projections.
"I'm running some models right now and it's like, are we going to be flattish? Down 10[%], down 20[%], down 30[%]? Worse? You can't even comprehend," Hart said. "You're normally arguing about, 'Well, are comp sales going to be flat or down one [percent]?' Now you're talking about potentially huge swings that could have immense effects on your cash flow."
With that uncertainty, and the potential to wreak havoc on cash flow, "you have to expect people are not going to be where they think they are, and there's going to be people who lose out on the demand side, Hart added. "And that impact on liquidity is unforeseen in ways we've never even thought about."
'We have no data in our systems'
That same uncertainty is also being felt in retailers' supply chains as they try to plan inventory buying for the rest of the year.
John Bonno, a managing director with AlixPartners' retail practice, notes that the phased nature of store reopenings across geographies makes supplying stores difficult, as retailers with national footprints have to stock some stores in some areas and not others, based on local restrictions. That makes the questions of, "What do I resupply, and in what quantities?" all the more difficult, Bonno said in an interview.
It also makes running operations for those stores more difficult. Bonno pointed to South Carolina, one of the first states to allow department stores and other discretionary retailers to reopen. In places like that, national retailers were struggling with decisions like, "How do I support six stores in one state if none of the other states are open around it?" Bonno said. Decisions about reactivating regional and district managers are not straightforward in that context.
In addition, retailers reopening stores have to restart their planning systems for stocking merchandise, which rely on various data streams. The problem? "We have no data in our systems today," said Matt Garfield, a managing director with FTI Consulting, in an interview.
Another wrinkle with supplying stores: Many retailers saw their e-commerce orders increase with the shutdowns. "Retailers are really figuring out now, 'How do I reconfigure my network, reconfigure my distribution centers, while my online ordering volumes may not necessarily equal what we've seen in the last few weeks but will definitely not decline to the level of the weeks before the shutdown," Bonno said.
Of course, demand across channels is extraordinarily difficult to predict right now, in a global health crisis without precedent in modern history. For one, businesses have to figure out to what extent customers will come out to stores — and keep coming out to stores, after what could be an initial jaunt back into the world to pick up deferred purchases and just get out of the house.
"A lot of companies are struggling today with what is the demand forecast going forward," Bonno said. "That is an area of huge concern. You don't want to over-order and get stuck with a glut of inventory."
Purchases could also be shaped by the economy and the nature of the pandemic and its social effects. For example, Garfield said FTI survey data show that business apparel appears to be shifting downward, with consumers embracing casual clothing as many work from home more often, perhaps for the foreseeable future.
For apparel and fashion retailers in particular, things get complicated. Bonno, who works frequently with hardline retailers, said that many clients can sell through much of their inventory without complications as stores reopen. The same, with few exceptions, doesn't apply to apparel retailers.
Even apparel that can still be sold might be challenged by numerous canceled orders during the closure period, Hart notes. "What resulted is a bit fragmented," she said. "They have to work through the assortment and [determine], 'OK, how do I make this look more cohesive?'"
As retailers work through gluts of inventory, they may repeat trends from this spring next year, Garfield said. But most, Hart noted, probably won't mothball their inventory for the next year's seasons, except for those like L.L. Bean that are heavy on basics that get re-surfaced every year as part of its apparel.
Strained relationships
The canceled orders could have another side effect: weakened relationships with vendors. As Retail Dive reported in April, retail suppliers have borne the brunt of the closures too, their phones and inboxes filling with canceled orders and requests or demands for longer payment terms. All of that put stress on suppliers, many of whom have had to furlough staff and make other sacrifices to survive, as retailers have.
As one example, Macy's disclosed in a May regulatory filing that it has had to, and may continue to, "change its plan for inventory receipts." The department store giant said that this could in turn "negatively impact relationships with brand partners or adversely impact their financial performance and position."
Credit Suisse's Binetti said in a client note that his team has found evidence of "growing frustration among brands selling into Macy's."
It's been a rough two and a half months for the entire industry. Macy's disclosure was a reminder that the ripple effects are broad, and how retailers managed the crisis in the thick of it could have an impact on businesses after the reopening, too.
As Binetti said, "We fear this will cause the brands to mix business away from Macy's (and broader [department store] channel) even more aggressively."
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