The retail sector is a total mess. It was on shaky ground before the coronavirus shut down the economy and now it is on life support.
It is possible that we end up seeing a record 15,000 store closings in 2020.
During the month of March, the number of bankruptcies double from the year before to 4. This is the start of something that is likely bigger.
Landlords are already in trouble. Simon Properties, the largest owner of mall space in the U.S., closed all its properties in the face of the virus. This is affecting retailers who are now without revenues.
It is a vicious cycle. Mall owners need the rents from tenant to make their mortgage payments. Tenants are not willing (or are unable) to pay since they have no revenues. This puts landlords in a cash crunch which will roll over to the mortgage companies. At some point, the landlords are going to stop sending in the mortgage payments.
Bankruptcy is often a way for companies to manage their affairs while they are reorganizing. The challenge here is that, with everything closed down, what is the point. Why would a company incur the expense of bankruptcy if there are no revenues coming in.
Retailers were quick to layoff staff. There were hundreds of thousands of retail workers who were let go. Many are likely to find the jobs they had never to return.
Before this crisis, many were aware of that the retail industry was broken. Malls were seeing less foot traffic which resulted in lower sales. Each year, the percentage of online sales kept increasing. Amazon was the first to push things to the forefront. This caused companies like Wal-Mart and Target to invest heavily in their online presence. Those that were late to the game are only falling further behind.
That said, the problem with this situation is there is so much uncertainty. Without a clear path of how things will unfold, the entire retail sector is stuck in a holding pattern. Companies such as J.C. Penny and Macy's are going to start feeling a lot more heat as time passes.
It is far easier to fix structural problems as compared to cashflow. In the form, which we saw with the airlines post 9-11, contracts were reworked and debt cleared which allowed them to emerge stronger companies.
With this situation, a lack of cashflow is a kiss of death. There is no way to restructure when there is little to no money coming in.
If recessions are a clearing out of weak hands, the retail sector is going to see a firehose going through it. Last year was a rough year with over 9,000 store closures. We could see that number increase significantly in 2020.
The news out of the retail world keeps coming and none of it is good.
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