It’s only May, but holiday season already in doubt
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 coronavirus would start operating them again in May and June.
But many chains in hardhit discretionary categories, like apparel, would still see sales fall 5% to 10% during the holiday shopping season from a year ago, according to Fitch, the ratings company.
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 chains such as Victoria’s Secret owner L Brands Inc.
There’s also a big question over whether chains will have enough goods in stock for Christmas. Virustriggered shutdowns upended supply chains and weakened the industry’s finances. Retailers also upset vendors after canceling orders and will now need them to ship again.
This doesn’t bode well for an industry that has long 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% in April, according to Prodco.
Despite the boom in ecommerce, U.S. brick-andmortar locations still generate about 80% of the retail industry’s sales during Christmas shopping, according to researcher Customer Growth Partners.
That raises questions about what happens to an event like 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 chains, those impulse buys are what makes their business model work.
Given the concerns about the virus and the hassle of shopping with social-distancing measures like capacity limits, retailers will also 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.
“The skeptical view is people are afraid to go into crowds or want to save their money and don’t want to overspend.”
That means doing more than offering the biggest discounts, Honiball said.