- Credit downgrades on retail companies have accelerated this week as the industry weathers unprecedented store closures and a precarious economy caused by the spread of COVID-19.
- In the course of one day on Thursday, S&P Global downgraded four retail companies: Michaels (to a B rating), At Home Group (to CCC+), The Container Store (to B-) and Spectrum Brands (to B), according to emailed press releases. The pandemic was mentioned in all four press releases.
- Also on Thursday, Moody's downgraded Gap's senior unsecured bond rating to Ba1 — junk territory — on disruption caused by the pandemic.
The downgrades are coming fast as retail goes through a massive, unprecedented upheaval. More than 100 retailers have closed tens of thousands of stores temporarily or reduced hours. And nobody can know with any certainty when it will be safe to re-open those stores and whether customers will return and spend at pre-crisis levels. The virus and concerns around it may well linger, and recession looms.
Retailers trying to manage through the closures are drawing from their credit lines, furloughing staff and cutting costs — including potentially supplier payments and rents — as they try to stay as liquid as possible.
The situation could get nasty, quickly, for retailers in distress and those on the brink of distress. "We anticipate that some of the retailers that have recently announced temporary store closures — including some well-known names — will never reopen their doors," Coresight Research CEO Deborah Weinswig said in a report released earlier this week.
Coresight estimates bankruptcies could increase and 15,000 stores could close permanently in the U.S. this year, with ongoing downsizing and coronavirus both playing a role. That number would dwarf last year's record 9,548 closures.
As Sarah Wyeth, sector lead for S&P Global's retail and restaurant coverage, told Retail Dive earlier this month, "As the secular headwinds retail is facing accelerate, this could be the nail in the coffin of some of these brick-and-mortar retailers."
She noted that the pandemic could hit those retailers with tight liquidity and in need of debt refinancing the hardest, but the entire retail world is at risk of stress. "I think downgrades are a reasonable expectation up and down the scale at this point, but those at the weaker end are more likely to deteriorate faster," Wyeth said.
Retailers like Michaels, which has struggled with competitive issues, could see their fates change swiftly depending on how the coming weeks and months play out.
S&P analysts said in a release that the craft retailer "faces [an] extraordinarily challenging environment amid the COVID-19 outbreak," and it's online operations are not strong enough to offset the threat to its stores. They added that "[o]nce the pandemic subsides, we expect a protracted return of transaction volumes, likely to be weakened as a result of a deteriorating economy."