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Consumer spending fell 7.5% in March, prompting further
concerns about the impact of the coronavirus pandemic on the economy.
Here’s why consumer spending is so important and how it can signal if
the country is heading toward a recession.
Like many companies right now, J.Crew is facing a difficult financial situation.
The beloved New York-based label — which has become a wardrobe staple for celebrities including Michelle Obama, Kate Middleton and Meghan Markle — is preparing to file for bankruptcy as early as this weekend, CNBC reports, citing “people familiar with the matter.”
Though the source says plans are not
finalized, the privately held company is currently “working to secure
$400 million in financing to fund operations in bankruptcy,” according
to CNBC.
The news comes after reports that the
retailer (which operates the denim-driven label Madewell, in addition to
its namesake brand) has been struggling with a heavy debt load for
years. According to CNBC, the economic downfall caused by the novel coronavirus (COVID-19) “exacerbated” the problem.
Unlike the younger and trendier Madewell, J.Crew has also faced a
decline in sales, with many criticizing the label for maintaining a high
price point and an idealized aesthetic that feels out of touch, prompting loyal customers to walk away.
In recent years, J.Crew has lost both retail executive Mickey Drexler and longtime creative director, Jenna Lyons.
Lyons became somewhat of a fashion icon
during her 26 years at J.Crew, thanks to her signature thick-rimmed
glasses and affinity for colorful prints. She is also largely
responsible for revamping the brand using neon, sequins and statement
accessories— and shaping the way American men and women dressed in the
2010s.
The company has been grappling with competition from online firms such as Amazon.com Inc (AMZN.O) that have been eating into traditional retailers’ market share.
Shuttered flagships. Empty malls.
Canceled orders. Risks of bankruptcy. The coronavirus has hit the
behemoths of the retail world.
Neiman Marcus has stopped accepting new merchandise.Credit...Karsten Moran for The New York Times
Retailers have begun taking extreme measures to try to survive. Le 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 executive team,
including the chief executive, would be let go immediately. It also
suspended payments of goods to vendors for at least 90 days, citing
“immense pressure on our liquidity position.”
Macy’s, which also owns Bloomingdale’s, extended payment for goods and services to 120 days from 60 days and, according to Reuters,
has hired bankers from Lazard to explore new financing. Jeff Gennette,
the chief executive, is forgoing any compensation for the duration of
the crisis. The company was dropped from the S&P 500 last month
based on its valuation.
J.C.
Penney has hired Lazard, the law firm Kirkland & Ellis and the
consultancy AlixPartners to explore restructuring options, according to
two people familiar with the matter, and confirmed that it skipped an
interest payment on its debt last week. It is expected to make a
decision on what to do, including potentially filing for bankruptcy,
within a few weeks, one of the people said.
But
none of them were in as immediate dire straits as Neiman Marcus, which
has both an enormous debt burden — about $4.8 billion, thanks in part 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
most high-profile shopping destinations, signed during boom times.
In
late March, Neiman stopped accepting new merchandise and furloughed a
large portion of its approximately 14,000 employees as the rumors of
bankruptcy began to swirl. Its chief executive, Geoffroy van Raemdonck,
announced that he was waiving his salary for April. The brand denied to
vendors and its own employees at its sister brand Bergdorf Goodman that
it was engaging advisers to explore a bankruptcy filing, but on April
14, S&P downgraded Neiman’s credit rating. Last week, the retailer
did not make an interest payment that was due on April 15, angering bondholders and further fueling suspicions that a bankruptcy filing was imminent. A spokesperson for Neiman Marcus declined to comment.
Barneys offered steep discounts after declaring bankruptcy last year.Credit...Stephen Speranza for The New York Times
Even
Nordstrom, widely considered the healthiest department store, said this
month that it could be facing a “distressed” situation if its physical
locations closed to customers for “an extended period of time.” Erik and
Pete Nordstrom, chief executive and chief brand officer, are both
receiving no base salary for at least six months. The chain has stunned
some vendors with last-minute cancellations via email in recent days.
Across
chains, prices for new merchandise sold via e-commerce have already
been slashed by 40 percent in some cases. Order cancellations for the
pre-fall season — which would normally have started delivering next
month — have been increasing. Some brands said shipments have even been
turned away upon delivery to warehouses, and extensions of payment terms
are cascading through vendors, who are then forced to negotiate with
their own manufacturers, marketing agencies, fulfillment centers and
landlords.
“I’ve had a
showroom for over 30 years, and we have always used the word
‘partnership,’ when talking about our relationship with the department
stores,” said Betsee Isenberg of the showroom 10Eleven, which represents
numerous brands such as Vince and ATM. “Through 9/11, through 2008, we
worked hand in hand with our retailers. This is the first time the onus
has been on the brands — many of which are losing millions and millions
of dollars because of the canceled orders. It is just not fair that it
is survival of the fittest.” In a new report, McKinsey refers to the
situation as “wholesale Darwinism.”
The
resort season has been canceled entirely, and fall orders have been put
on hold, raising questions about what inventory will be left if and
when shops reopen and consumers return to store.
The Neiman Marcus store at Hudson Yards in Manhattan. With stores closed, retailers have seen sales plummet.Credit...Mark Wickens for The New York Times
“Nobody
knows what Q4 will be like, but you have to start putting the orders in
now,” Sucharita Kodali, a retail analyst at Forrester, said of the
holiday season, normally the most lucrative time of the year for the
chains. “Some people don’t even have the money to put in Q4 orders, and
may have to cancel Q4 orders anyway, and it’s a mess. There’s never been
this much uncertainty.”
Robert
Burke, the eponymous founder of a luxury consultancy, said he expected
brands to move further away from a wholesale business, focusing on
direct-to-consumer and a model with department stores where they control
their own space and inventory.
Shares
of J.C. Penney, which has temporarily shut its more than 800 stores,
closed at 23 cents on the dollar last Wednesday after the retailer said
it did not make a $12 million interest payment due that day. Brooke
Buchanan, a representative, said it was a “strategic decision” in order
to take advantage of a 30-day grace period before it was considered in
default.
Normally bustling stores like Saks Fifth Avenue are now empty.Credit...Haruka Sakaguchi for The New York Times
Ms.
Buchanan said J.C. Penney had “been engaged in discussions with its
lenders since mid-2019 to evaluate options to strengthen its balance
sheet, a process that has become even more important as our stores have
also closed due to the pandemic.”
Cash
flow for all department stores has dropped sharply. In a note on April
13, analysts at Cowen 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 store closings for 12 months.
“The
nature of the mall is if you lose a big anchor like a Macy’s, you have
co-tenancy issues and you have more pressure on the mall traffic, which
was already a big issue,” said Oliver Chen, an analyst at Cowen.
Co-tenancy clauses typically allow other tenants to demand rent
reductions if certain key chains depart. Mr. Chen said that could
accelerate the ongoing divide between top-tier malls and the second- or third-choice malls in certain areas.
According
to a report this month from S&P Global Market Intelligence,
department stores were more likely than any other consumer industry to
default on their debt in the next year. It estimated the probability at
42 percent.
Nordstrom’s new store in Manhattan. Analysts predicted that it had enough cash to withstand 12 months of stores closures.Credit...Karsten Moran for The New York Times
In
its April 2 memo, the management of Le Tote and Lord & Taylor said
only “key employees” were being retained to preserve the business. A
representative for Lord & Taylor and Le Tote declined to comment or
disclose the number of employees who were furloughed and laid off.
“It
appears to be a virtual certainty that Lord & Taylor will liquidate
its business in the near future, either in or out of bankruptcy,” said
James Van Horn, a partner at Barnes & Thornburg and a specialist in
retail bankruptcy. “They were already one of the most challenged
department stores prior to the coronavirus pandemic, and when the
majority of the management team is leaving, the vast majority of
employees are laid off and a minority of employees furloughed, there
does not seem to be any other strategy but to liquidate the inventory.”
Mr.
Van Horn said he expected that other chains might strategically employ
Chapter 11 reorganizations to legally shed stores, lightening their rent
burden.
“It will likely be a domino that falls,” he said. “Whether it is first or 10th, we don’t know.”
