Apparel sales have been under pressure for a while now, for a few reasons. Consumers, free to wear more casual attire at work and special events, have less need for it. And even with the economy humming, many opted to spend discretionary funds on other things, looking for discounts on apparel when they bought it at all.
The COVID-19 pandemic has exacerbated all of that. Working from home has further weakened or even eliminated workplace dress codes, and there are no special events to speak of. Meanwhile, massive layoffs and rising fears about the near-term state of the economy have depressed spending.
The government's March retail sales report told the story: apparel sales suffered the most that month, dropping more than 50%. And that was a month only partially affected by widescale shutdowns of physical stores. All of this is impacting the three major apparel retail segments — department stores, specialty stores and off-price stores — in different ways.
Department stores, which a hundred years ago sold a wide variety of merchandise, now sell mostly clothing and accessories. Dismantling electronics, home goods and other departments may have seemed like a good move in the late 20th century when apparel margins were robust. But for several years into the 21st century, department stores have consistently lost apparel customers, sales and margins to off-price retailers like TJX and mass merchants like Target.
The ebbing growth in apparel, worsened by the outbreak, is hitting department stores especially hard. Credit Suisse analysts last month deemed them the "worst positioned" in retail to ride out the pandemic, due to their high debt levels and scant wiggle room for cutting costs.
Mall-based retailers' "dependence on apparel" is a liability, especially for their department store anchors, and the pandemic is accelerating their demise, according to Vince Tibone, retail specialist at property research firm Green Street Advisors. "We're now expecting about a little more than half of all mall-based department stores to close by the end of 2021," he said during an April 29 webinar. "We previously thought this would take five or six years to play out."
That's hurting the brands sold at department stores, too, notes Wells Fargo. In comments emailed April 14, Senior Analyst Ike Boruchow wrote, "Department stores in particular have very little cushion to absorb any further negative shocks, which could result in a slower recovery for wholesalers (relative to retailers)."
Expectations for department stores have deteriorated since their locations were temporarily forced to shut. Macy's, for example, has garnered a series of downgrades, halted its just-devised turnaround plan and lost its CFO. Instead of executing a rebound, the retailer has scrambled to right its finances through a variety of maneuvers, including furloughing most of its workforce and taking on new debt. Kohl's, already dealing with slow sales despite its agreement to take Amazon's returns, was downgraded on expectations for declines in profit and cash flow due to the coronavirus. As was Nordstrom, one of the most innovative players in the segment.
Others seem to be crashing: J.C. Penney, Lord & Taylor and Neiman Marcus are expected to declare bankruptcy very soon. Even those that can hang on, however, are likely to end up permanently closing some locations, analysts say.
Furthermore, the segment, which once catered to a healthy middle class, is especially vulnerable to consumer sentiment weakened by the pandemic. Even as the disease crisis resolves, many economists believe a recession will linger. With the middle class already shrinking, that threatens to worsen the wealth gap and further undermine the spending ability of many working people.
Despite their focus on a segment with deteriorating sales, a few specialty apparel retailers are in decent financial shape. But with stores temporarily closed — and even those with strong e-commerce gaining maybe a quarter to a third of their sales from digital — they have been forced to tap their financial stockpiles, when they have them.
B. Riley FBR analysts led by Susan Anderson last month noted that Abercrombie & Fitch, American Eagle and Urban Outfitters are sitting on the best money cushions. A month later, American Eagle took on new debt in the form of $400 million in convertible senior notes due in 2025, and replaced its CFO. Just before that, Urban Outfitters was among the first retailers to declare that it wouldn't be paying April rent.
Those are the healthy ones. Gap Inc. and Ascena, both already hampered by declining legacy brands in their stables, have turned to new avenues for cash. Ascena took what it could from a credit facility — $230 million — in order "to increase its cash position and preserve financial flexibility in light of the current uncertainty in the global financial markets from the COVID-19 outbreak."
Gap Inc., which says it's still paying off expenses related to its now abandoned plan to spin off its discount Old Navy brand, also seems in dire straits. Last week the retailer announced the offer of almost $2.3 billion in bonds, just hours after the company said it was in negotiations with landlords for rent relief. Some stores won't ever reopen, the company also warned, saying aloud what many analysts have said will be true for several apparel retailers running too many stores in sub-par malls.
That includes Victoria's Secret, whose parent, L Brands, is fighting in court to hang on to a deal with private equity firm Sycamore. The firm in February had agreed to take a 55% majority stake in the lingerie brand for about $525 million, but says that, by shutting Victoria's Secret stores, furloughing workers and making other moves to stabilize during the pandemic (as most retail chains have done), L Brands failed to conduct business as dictated by their agreement.
These retailers are also grappling with mounting inventory as their apparel goes unsold. To stave that off, Gap Inc., Levi's and PVH, which runs Tommy Hilfiger and Calvin Klein, among others, have either turned away orders or set new merchandise aside to sell next year instead, or both.
The idea is to avoid heavy price slashing, including pawning off excess inventory to off-price retailers at steep discounts. But the practice of "packing and holding" holds its own risks, including whether consumers will be okay with last year's styles.
"Do they ship to an off-pricer immediately, try to get it through their own channels as soon as they can, or save it?" Simeon Siegel, managing director at BMO Capital Markets, told Retail Dive by phone earlier this month. "All three are less than optimal options — it's about what's the least bad."
The off-price segment has long been a bright spot in apparel retail, but the pandemic is challenging them, too.
Until now, players like Ross, TJX (which runs T.J. Maxx, Marshalls and other banners) and Burlington have thrived in economies good and bad, attracting apparel shoppers of all income levels who flock to stores for good deals on name-brand clothes. These retailers more recently have benefited from the high level of returns at apparel pure-plays, giving them yet another pipeline of discounted merchandise.
"I think perhaps the restaurants and bars will be the first to recover. We will all be craving a bit of entertainment, and I just don't think that apparel will have anything to do with it."
Professor of Luxury Marketing & Branding, New York University's Stern School of Business
It's a mixed bag, however. Off-pricers may be licking their chops at the prospect of loads of new merchandise that may be coming their way, thanks to the inventory troubles at both department stores and specialty retailers. Credit Suisse analyst Michael Binetti in several notes in recent weeks says he expects "the best off-price inventory buying environment in a decade" due to the outbreak.
But their tactic of downplaying e-commerce in order to foster their store-based treasure hunt atmosphere may haunt them at a time when stores have been temporarily shut down. The chief executives of both Burlington and Ross have commented that selling apparel online is neither profitable nor fun, and both companies have eschewed the channel completely as a result — with Burlington dropping online sales just this year. TJX's Marshalls added e-commerce only last year, with its T.J. Maxx banner online since 2013.
At the moment, however, nobody can hunt any kind of treasure in stores. To the extent that people are buying apparel, or any discretionary goods, they are finding it online. The pressure has meant that off-price retailers haven't been spared the rash of downgrades meted out to the industry in recent weeks.
Furthermore, it's unclear what reopening retail looks like, as many consumers are likely to remain wary of congregating in stores unnecessarily. And, while there may be some pent-up demand for new things, that may not include new clothes, according to Thomai Serdari, a professor of luxury marketing and branding at New York University's Stern School of Business.
"If there is some income still coming in, many people will be thinking, 'Isn't it wonderful, to have that money and allocate it to something bigger.' Maybe travel when it's safe again, rather than spending it on superficial things," she said in an interview. "The social distancing and deprivation is really intense, and I think perhaps the restaurants and bars will be the first to recover. We will all be craving a bit of entertainment, and I just don't think that apparel will have anything to do with it."