9 make-or-break retail turnarounds to watch in 2021
2020.Nov.12 Retail dive
Companies in transformation and survival mode may be looking for normalcy. But the year ahead holds plenty of unknowns.
Much if not most of the retail world will be in turnaround mode in 2021.
Sales declines, profit losses, catching up to changing consumers — anyone who is not an essential retailer, or plays in the few categories that rose with the pandemic, can likely check those boxes.
Next year will be even more critical for those who were already trying to execute a turnaround before the COVID-19 pandemic upended the industry. And those that can't raise their revenue could end up in bankruptcy court. "Turnarounds aren't complete until the revenue line goes up," said Matthew Katz, managing partner with advisory firm SSA & Company. "That's the backdrop by which all of these are going to be judged."
The dramatic turns of 2020, and the question marks hanging over the year ahead, will complicate any turnaround, and even how retailers measure and define the process. Barring another nationwide shutdown or some other major calamity, many discretionary retailers will perform better in 2021 than in the first half of 2020. That throws a wrench into year-over-year and comparable sales measures, by which many turnarounds are judged.
"2020 as we know has been a really terrible year, especially the first part of the year," said Neil Saunders, managing director with GlobalData Retail. "So really, 2021 should be the time when retailers try to get back to normal." That makes comparisons against 2019 the key indicator for retailers in turnaround mode, and "any retailer that posts a decline in 2021 over 2020 is in real trouble," Saunders said.
But even 2019 sales could be a high bar. "For a lot of retailers, if they saw a significant drop in sales I'm going to look for them to get back a portion of it, but not get it back entirely to 2019 [levels]," said Dennis Cantalupo, CEO of Pulse Ratings. With apparel retailers, which saw some of the largest sales drops in 2020, Cantalupo said, "We're going to see some pretty significant positive same-store sales for most players in that category."
Using 2019 as a benchmark for a turnaround in some ways assumes that the retail industry will return someday to its pre-COVID-19 state — normality, in other words.
"You've had a decade of evolution in the last eight months. And so the look back into the rearview mirror in my mind isn't the healthiest way to think about this," said Katz, adding that retailers should focus on flexibility and a business model to meet the moment, and measure performance month over month and quarter over quarter. "In 2019 you were 85% store-based retail, a lot of it was in malls, Amazon was $100 billion smaller," Katz said. "We're in a totally different environment."
In some ways, it's not that different from the pre-2020 environment for retail, but the pandemic has sped up an already accelerated pace of change in the industry. "Almost every retailer is in a perpetual state of transformation, and that's actually a good thing," said Greg Portell, lead partner in Kearney's global consumer practice. "Because if you think about the speed with which consumers are changing, to keep up a retailer has to operate as if they're in transformation mode no matter their financial position."
A turnaround could mean something different when it comes to those retailers selling in categories that got a bump from the pandemic. "For the success stories coming out of 2020, the question in 2021 is going to be: Did they consolidate those gains?" Portell said. "Now that I have that threshold of volume, or now that I have that activity, or I was able to build up that capability, am I continuing to use it and develop it in a way that's going to produce results?"
It's also worth remembering that the change in the calendar year is only that. Many unknowns will carry forward into 2021. Will there be another stimulus package? Will the pandemic get under control? Will the economy come out of recession? Will consumer habits continue to change?
"The idea that 2021 is suddenly this year when everything clicks back into place — and we all breathe a sigh of relief and say, ‘Well, everything's gone back to normal,' — it's just very fanciful," Saunders said. "It's not going to happen like that at all, especially during the start of the year. There's a lot of potential disruption that we have yet to come, which I think makes retail planning very, very difficult. "
Against that backdrop, here's a look at some of the retailers working on critical turnarounds over the next year
Macy's rang in 2020 by posting sales declines during the holiday period as well as shrinking profit. For the second time since 2017, it vowed to do better and revamp its business for a customer that seemed to be leaving it, and the entire department store sector, behind.
And then a pandemic landed on the industry like a meteor strike. Retailers closed stores and did everything they could to preserve cash — furlough employees, draw on their credit revolvers, skip rent and cut investor dividends, among other things. Early in the crisis some analysts pointed to a potential liquidity shortfall at Macy's. In April, the retailer reportedly hired debt advisors, including the law firm Kirkland & Ellis.
Ultimately, the company raised more cash on the bond market and re-opened its stores, putting to rest liquidity concerns for now. But the road ahead is still long and full of uncertainty. The combination of declining mall traffic and economic downturn during the COVID-19 era has hurt department stores especially, Saunders said.
"Of course, a lot of them as well have very, very unfavorable economics. They operate large stores, they're very expensive to run because they have to be staffed, and they have a lot of exposure to inventory because they have to fill those stores," he said.
"It's the same story that's been playing out, which is how do you stay relevant with the consumer and provide that consumer with choice availability and service?" Katz said.
When analysis firm RapidRatings ran a "stress test" on the retail sector this summer, to look at how various retailers would perform under projected conditions, Nordstrom showed one of the largest potential drops in risk assessment and financial health under a protracted revenue decline. S&P, meanwhile, has downgraded Nordstrom twice since the pandemic crisis began, most recently to BB+.
Like Macy's, Nordstrom was able to manage through the closures this spring by raising cash from its revolver and issuing new bonds. Moody's Vice President Christina Boni said at the time that the additional leverage on the company and commitment of assets to back the new debt reduced its financial flexibility.
Also like Macy's, Nordstrom has a difficult path back to normalcy, given its sector and its heavy dependence on fashion and formal apparel. "Nordstrom doesn't really have great exposure to many of the categories that are growing," Saunders said. "The homewares and furniture departments at most Nordstrom stores are tiny. It's a really small part of the offer. No one really thinks to go to Nordstrom for home. So they're not positioned in a growth area of the market."
That means Nordstrom's customers spend their money on home goods at other retailers, such as Williams-Sonoma and Crate & Barrel. "Nordstrom should try to get a slice of that action," Saunders said. "It desperately needs to do it now because fashion is not going to recover quickly, it's going to be one of the more sluggish-performing segments — not just this year but even into next year and maybe the year beyond, especially in formal and occasionwear."
The luxury department store has advantages, though. As Cantalupo points out, affluent shoppers tend to be the last group affected by economic downturns and the first to recover. Nordstrom also has made investments in its digital and omnichannel capabilities over the years.
"They to do a fair amount digitally, they have the full-line Nordstrom stores and they have Rack," Cantalupo said. "So they are kind of hitting it from three different directions."
Really, you could put the entire department store sector in the "needs to improve majorly" category. That includes Kohl's, which has historically outperformed its mall-bound, higher-priced peers. But COVID-19 hit it hard, after Kohl's was already struggling with stagnating sales in 2019. During Q1 of 2020, which included weeks of store closures, Kohl's racked up a loss of more than half a billion dollars. By Q2, profit was positive again but sales were still down 23.1%.
The discount department store's situation is by no means dire, but COVID-19 compounded the challenges for the chain, which has struggled to drive sales even with traffic-luring measures like handling Amazon returns, revamping its loyalty program and numerous brand partnerships. The retailer is hoping to gain momentum through a new apparel strategy including the addition of a private athleisure label and a partnership with footwear brand Cole Haan.
"It has an OK proposition, but it's not a brilliant proposition like, say, Target," Saunders said. "Kohl's also has a proposition that is more attuned to what consumers want, and that's probably more by chance than great planning. But they are more casual-based; they've done a lot with sports and athleisure, which is a growth area; they have relatively good homewares departments that they always have had; and they have a nice selection of what you would call quite contemporary products, which draws people in and which can drive some trade for them."
Brooks Brothers belongs to a 2020 class of retailers that survived Chapter 11 and will be closely watched going into next year. Most of these retailers had sales and financial issues exacerbated by the pandemic, and were given a chance to reduce debt and their store base in bankruptcy.
Brooks Brothers filed for Chapter 11 in July, amid a rush of retail companies into bankruptcy court after being hammered by the closure period. Prior to filing, Simon Property Group sued the storied men's brand for $8.7 million in unpaid rent. Over the course of the bankruptcy, Simon would become one of Brooks Brothers' new owners along with Authentic Brands Group through their "Sparc Group" joint venture, which bought Brooks Brothers for $325 million and with a pledge to keep at least 125 stores open.
Those stores will operate in a sector that is likely to face protracted declines, with millions of workers still laboring from their homes rather than suiting up for offices and conferences.
"Brooks Brothers I think has an opportunity because it has always had a casual element" in its apparel offer, Saunders said. "It can pivot. It's obviously got new ownership, which is going to help, especially with things like property costs. So there is an opportunity, I think, for Brooks Brothers to reinvent itself."
Gap Inc. has more financial cushion than its distressed peers in the apparel space, but the brand has operated in uncertainty for years. Declines at Banana Republic and Gap's flagship banner have persisted, while Old Navy's enduring popularity has helped keep the company stable and Athleta has provided growth.
Last year brought organizational turmoil beginning when then-CEO Art Peck announced a plan to spin off Old Navy into a separate company, after years of talking about the benefits of Gap and Old Navy being together under one house. Many analysts remained skeptical.
In short order, Peck left the company abruptly last fall and the spin-off plan was officially called off in January of this year. Add a pandemic and global recession into the mix, and that leaves a lot of question marks hanging over Gap, which has never had a clear path out of the doldrums for its underperforming brands. It has already announced plans to close more than 200 Gap and Banana Republic stores, including the flagship store of its namesake brand, and indicated that there are more closures to come.
"Gap — which has defined itself on efficiency and consistency — the question going into a turnaround or transformation there is: What's the end goal?" Portell said. "If you're going to define yourself by being able to be on the cutting edge of fashion, that's a very different organization than if you're trying to become a reliable source of basics."
Apparel icon J. Crew was a bankruptcy risk for years leading up to 2020, when the pandemic and ensuing store closures finally tipped it into Chapter 11. Things in bankruptcy went about as smoothly as they can, with the retailer emerging from the process months later with reduced debt and new owners.
A healthy balance sheet was probably a prerequisite to a turnaround for J. Crew, but it does not guarantee it, especially in an environment that is continually tough on apparel sales and only made worse by COVID-19's disruption to office work and other factors.
After emerging from bankruptcy, S&P gave J. Crew a B- rating with a negative outlook. S&P analysts said at the time that J. Crew "operating performance will remain weak in the next 12 to 18 months amid economic uncertainty, industry headwinds, and company-specific operational challenges despite its improved capital structure."