It’s only May, but retailers are fretting about Christmas
Even with the U.S. economy expected to reopen in coming months, investors should be prepared for this holiday shopping season to be filled with lumps of coal.
In a best-case scenario, retailers who shuttered their locations to slow the spread of the novel coronavirus would start operating them again this month and in June.
However, many chains in hardhit discretionary categories, such as apparel, still will see sales fall 5 to 10 percent during the holiday shopping season from a year ago, the ratings company Fitch projects.
The reasons are many. Unemployment will remain high because lots of furloughed workers won’t be brought back as companies cut costs or don’t reopen. A downturn in consumer psychology will boost an already high savings rate. And the risk of a second outbreak of the virus in the fall will hang over everything.
“We’re assuming the customer is pretty slow to come back to all these stores,” said David Silverman, an analyst for Fitch, which recently downgraded several chains. “Things might not be completely fine until there is a vaccine, and that could take a year or more.”
There’s also a big question over whether chains will have enough goods in stock for Christmas. Virus-triggered shutdowns upended supply chains and weakened the industry’s finances. Retailers also upset vendors after canceling orders and now will need them to ship again.
This doesn’t bode well for an industry that long has been troubled. When state governments ordered the temporary closing of stores not deemed essential, it served as a blow to some of the weakest parts of discretionary retail, such as department stores and clothing chains.
Even with essential retailers such as Walmart Inc. and Home Depot Inc. remaining open, U.S. store visits fell 98 percent in April, according to Prodco.
Despite the boom in e-commerce, U.S. brick-and-mortar locations still generate about 80 percent of the retail industry’s sales during Christmas shopping, researcher Customer Growth Partners says.
That raises questions about what happens to an event such as Black Friday, the season’s unofficial kickoff in late November, when chains draw crowds with deals on televisions and kitchen knives.
All that foot traffic drives lots of lucrative spur-of-the-moment purchases that e-commerce hasn’t replicated nearly as well. For many chains, those in-person impulse buys are what make their business model work.
Given the concerns about the virus and the added hassle of shopping with social-distancing measures such as capacity limits, retailers also will have to work extra hard to entice customers to stores, according to Rich Honiball,
a former J.C. Penney Co. executive who now is the global chief merchandising and marketing officer for Navy Exchange Service Command, a chain of stores for service members with $2 billion in sales that’s remained open during the pandemic.
That means doing more than offering the biggest discounts, Honiball said. Chains will have to increase engagement with shoppers through marketing and merchandise — a skill in short supply at many troubled companies.
“There is an optimistic view that we survive this, the stimulus works and people bounce back,” Honiball said. “The skeptical view is people are afraid to go into crowds or want to save their money and don’t want to overspend.”
The U.S. consumer has continually showed an ability to bounce back, such as after 9/11, according to Craig Johnson, president of Customer Growth Partners.
The firm expects overall retail sales during the holidays to increase about 1 percent. And some chains might post better samestore sales than expected because they’ll opt to keep some of their worst-performing locations closed.
“We’re cautiously optimistic,” Johnson said. “Americans are very resilient.”
But it’s not just consumers who could doom Christmas.
Big chains also are pulling back on their own because of how sporadic the reopening of the economy may be.
Department store chain Macy’s Inc., which is exploring rescue financing to shore up liquidity, isn’t going to be “as aggressive” about the holiday as it once planned, CEO Jeff Gennette said.
Meanwhile, Tapestry Inc., owner of Coach and Kate Spade, has canceled orders for late summer and early fall to save cash.