Hardest hit: Who is still at risk after last year's retail tribulations?
Party City, Nordstrom, Macy's, GameStop and others still have weak scores on measures of financial health, according to RapidRatings data.
You would be hard pressed to find a retailer that, for better or worse, was unaffected by COVID-19. While some thrived, the pandemic brought financial strains if not outright turmoil to many companies. In 2020, Retail Dive tracked 30 major retailers that filed for bankruptcy. Others, meanwhile, are searching for their footing in a retail environment undergoing continual change. The rollout of the COVID-19 vaccine has given both Americans in general and retailers reason for hope. Even so, foot traffic and sales to many discretionary retailers remain below 2019 levels. That has made previously healthy businesses seem more wobbly than they did in 2019, and heavily indebted or weaker operators are even more vulnerable. For those hit hardest financially from the pandemic, it can be an endurance contest to stay afloat until the world returns to some kind of normal.
"The pandemic is not over. We will see change during the course of 2021 in the way people are buying, where they're buying, how much money they have to spend, and what they want to spend it on," RapidRatings Chairman and CEO James Gellert said in an interview. "But that doesn't mean that all of the retailers just bounce back, because retailers have been hit so hard." Key to staying afloat during the months ahead is access to cash sources. With the Federal Reserve propping up the corporate bond market and financial markets more generally, many retailers that might have been forced into bankruptcy have been able to raise capital or refinance. But that might not be the case forever. Gellert compares it to a game of musical chairs.
"When you've got this much access to capital, there are kind of enough chairs that everyone can keep sitting and getting up and moving, and sitting and getting up and moving," Gellert said. "But those chairs are going to start getting taken away … and a lot of retailers are going to be left standing." To track companies that are still in weak financial positions after last year's struggles, RapidRatings compiled a list for Retail Dive of 10 publicly traded companies with low scores in the firm's Financial Health Ratings. Those are a measure of short-term resiliency and default risk based on liquidity, leverage, earnings and other metrics.
Financially weak retail companies CompanyFinancial Health Rating (1-100)Risk levelParty City17Very high riskThe Children's Place21High riskNordstrom23High riskExpress Inc.25High riskRite Aid27High riskMacy's29High riskFarfetch30High riskGameStop32High riskBurlington Stores38High riskThe RealReal39High riskSource: RapidRatings "This is a mix of retailers that are weak enough … that they need to be watched very carefully," Gellert said. "And watching them carefully means being able to see what moves management makes to continue weathering the storm." Here's a closer look at the companies on the list:
Party City COVID-19 hit right at the heart of Party City's business, with graduations, birthday parties and other celebrations canceled or downsized as even extended family members avoided gatherings across much of the country. In the first quarter of 2020, the company racked up a loss that topped half a billion dollars. Total revenue declined 11.4% to $648.2 million in the fourth quarter, which includes the important Halloween period for Party City. The company's debt load, a legacy partly of a private equity buyout years ago, constrains Party City's margin for error and ability to invest. Still, it is rolling out new capabilities and a new store format that analysts have lauded for being easier to shop. The company is currently looking to raise more than $700 million in new bonds that would help it dodge a major term loan maturity coming due next year.
The Children's Place Less than five years ago, The Children's Place was a retail turnaround poster child. The children's apparel company, led by Jane Elfers, engineered sales growth and a shift to profitable, digital-minded retail while others struggled. The company's trajectory change was highlighted by the bankruptcy of its peer, Gymboree, which eventually liquidated. (The Children's Place picked up Gymboree's brand property in the latter's second bankruptcy.) But mall travails, and then the arrival of COVID-19 and attendant school closures, have pressured Children's Place. Sales have fallen for the past two fiscal years. In 2020, amid pandemic disruption, Children's Place posted a loss from operations of about $200 million, after years of operating in the black. All that said, the retailer beat earnings estimates for Q4 2020. Analysts with Telsey Advisory Group wrote in March that they expect "momentum to continue" as schools reopen and Children's Place laps its dismal spring 2020, when its stores temporarily closed.
Nordstrom In the years of the "retail apocalypse" Nordstrom was the exception to the rule: a department store with a solid sales and customer base. True, it's sales had slipped in 2019, ahead of the pandemic, but it was still a solid performer in a troubled sector, and solidly in the black. COVID-19 changed all that in a dramatic way, knocking nearly $5 billion off Nordstrom's top line in 2020. That in turn led to a $690 million loss, after posting nearly half a billion dollars in net income the previous year. Also during the year, the retailer saw its debt rating fall to junk territory for the first time, a reportedly jarring turn for the Nordstrom family. Earlier in April, Nordstrom closed on $675 million in new unsecured bonds that free property it put up as collateral for last year and cut some of its interest expense.
Express In January, as Express Inc. shares were getting bid up in the same retail investing frenzy that sent GameStop soaring, Wedbush analysts threw some cold water onto the excitement. They wrote that the clothing seller was "hemorrhaging cash" as consumers still avoided dressier apparel during the pandemic. Express posted $352.2 million in net losses and $251.6 million in negative cash flows through October, and in December announced a 10% cut to its corporate workforce, its second round of layoffs in 2020. The company boosted its liquidity and capital through a term loan with Sycamore Partners, whose private equity arm owns a handful of retailers and apparel sellers.
Rite Aid Along with other drugstores, Rite Aid's revenue rose last year thanks to the retailer's "essential" status during spring 2020 and as customers consolidated shopping trips. But the company still operated at a loss as of November, in part because of new operating expenses taken on because of the pandemic, as well as its debt load and interest expense. Rite Aid has long struggled financially, in part because it lacks the scale to compete with larger rivals Walgreens and CVS. Last year, it bought itself some time through a bond offer that pushed out maturity dates. Gellert noted that Rite Aid's longer-term financial health scores are better than its short-term rating. "So capital for Rite Aid can prop it up for a longer period of time, hopefully giving it the chance to change and improve from a longer term perspective," Gellert said. "But even so, relative to its peers in its sub-industry it is still weak, both short and long term."
Macy's Macy's posted a loss of nearly $4 billion for 2020, which tells you pretty much everything you need to know about the department store chain's year. A company that is used to being in the black, the pandemic shredded its sales and, with them, its bottom line. Customers both stayed away from indoor malls and pulled back on apparel spending as they avoided work and social gatherings. While liquidity concerns surrounded the company in the early weeks of the COVID-19 crisis, Macy's raised billions in cash from new debt and now has ample liquidity. But there's no telling yet when sales will return to 2019 levels or grow past them. Executives said this year they have "updated and accelerated" the department store's turnaround strategy, which would overhaul its supply chain, digital, brick-and-mortar and merchandising operations.
Farfetch As luxury marketplace Farfetch's revenues have grown, so have its losses. Revenue in 2020 hit nearly $1.7 billion. At the same time, operating losses grew by more than 50% year over year, coming in at $619.8 million. With Farfetch's online model are the steep costs of acquiring and retaining customers. The company expresses it fairly succinctly itself when it notes to investors, "We have experienced losses in the past, and we may experience losses in the future." Generating higher sales and new tech developments are both key to reaching profitability. Even with its losses, the fast-growing luxury darling has drawn in more than $1 billion in investments from Alibaba and other industry players.
GameStop There was a time not long ago when investors treated GameStop like a dead retailer walking. A Blockbuster Video-like collapse and obsoletion was priced into a stock that traded at just a few dollars for much of the past two years. Its 2019 sales fell dramatically, and then the pandemic year was likewise hard on GameStop, forcing it to close its stores for several weeks during the spring. Losses and doubt in the investment world gave way to euphoria for reasons that go well beyond GameStop's operating trends. Beyond its Reddit-driven stock explosion, the retailer has welcomed in activist investor Ryan Cohen, founder and former CEO of Chewy, who is spearheading from the board a transformation of GameStop toward e-commerce and other digital plays. But so far, GameStop has disclosed very little about its intended path to transformation. "The GameStop story is all about their ability to change from bricks and mortar," Gellert said. "And it should be discouraging to everyone that in their last earnings call, they basically avoided the question of how they're planning on doing that." Burlington Stores For more than a decade off-price has been one of the most reliably expanding sectors in retail. The pandemic, however, had an outsized impact on sales in the sector, which has historically resisted shifts to e-commerce thanks to its model. Just a couple weeks before retailers started shuttering their footprints en masse to fight the spread of COVID-19, Burlington announced it was shutting down its online business to focus on store sales. The vaccine rollout will likely help the sector along, but the pandemic has already taken a toll on Burlington, which lacks the scale of TJX Cos. and Ross Stores in the space. Burlington's sales fell 21% in 2020 as it swung to a $216 million loss.
The RealReal The pandemic complicated the market and operations for consignment retailers and resellers. Luxury-focused The RealReal lost millions off its top line in 2020, after experiencing tremendous growth the year before. As its sales fell, operating losses ballooned to $172.8 million — tough for a company still trying to reach profitability after past years of losses. CEO Julie Wainwright said in February after the company's Q4 that it exited the year with "momentum" and was "optimistic about the year ahead." Along with the pandemic, The RealReal suffered a reputational hit in 2019 when some media exposed cracks in its much-touted authentication program. (The company took issue with the characterization of its program in a CNBC report.)