Dive Brief:

• Joann Stores is among the latest retailers to get a credit downgrade on concerns surrounding the effects the spread of coronavirus will have on its business.
• S&P Global dropped Joann's issuer rating to CCC from B- last week, with analysts citing "unprecedented headwinds amid the COVID-19 pandemic," according to an emailed press release.
• The ratings firm gave the crafting retailer a negative outlook, indicating possible further downgrades. S&P analysts said that "a sharp decline in revenues caused by the COVID-19 pandemic will likely hurt Jo-Ann's long-term viability."

Dive Insight:

Joann joined Party City last week in receiving a downgrade into C-territory from S&P, in part on COVID-19 concerns.

S&P analysts Pasha Azadmard and Diya Iyer said they expect pressure on Joann's revenue for at least a full quarter, given that the retailer has already been forced by various government orders to close more than 45 of its stores. 

"At stores that remain open, we expect steep traffic declines in the double-digit percent area in the coming weeks as consumers practice social distancing," the analysts said. "The business is already strained by tariff-related cost pressures, as well as competitive forces. A small 10%-12% online presence is not enough to withstand this pressure, in our view."

Joann and Party City are sobering reminders of how quickly retailers can slip from relative financial health into distress during market swings. Granted, the coronavirus pandemic is an unprecedented market event, but both retailers had already shown signs of weakening financial and competitive positions, as their previous low B-level ratings indicated.

Joann, like its peer Michaels Stores, has faced a surge in competition from online retailers and mass merchants — a common struggle for single-category retailers trying to hold on to their market positions. For companies with leveraged balance sheets, a string of sales declines can spiral into a financial crisis. Even companies with healthy balance sheets can be thrown into distress, and bankruptcy, if sales hits are long and deep enough. Pier 1 is the latest and one of the most vivid cases.

Even after the disruption from the pandemic settles, Joann, which has gone through a leveraged buyout, could be in for a "protracted return to normalcy, which could jeopardize the company's ability to meet its financial commitments," S&P analysts said. That could lead it to try to restructure its debt in the next 12 months.

But with credit markets strained from the gathering economic downturn, there is much uncertainty around refinancing. Declining and distressed retailers could be in for a yet rougher time as the country navigates a mounting public health crisis.

S&P analysts led by Sarah Wyeth said in a report Friday that coronavirus "dramatically increases risk" for the retailer sector, which has already been under stress from structural changes.