With consumers’ heightened awareness of the danger of being in confined places with strangers, it is highly unlikely they will flock to stores and malls even once they reopen. Anxiety and a healthy paranoia are likely to linger – possibly for a long time.

Ever since March 14, America has been effectively closed for business. That was when the Trump administration declared a state of emergency and called on Americans to practice social distancing to slow the spread of the coronavirus.

As a result, retail establishments classified as “non-essential” either voluntarily or were forced to close, leaving only those retailers providing “essential” life-sustaining products open, including grocery and hardware stores, pharmacies and drug stores, and mass merchants like Walmart, Target, and Costco that sell such essentials.

At first, the retail closures were only slated to extend through the end of March, but on March 29, the Federal social distancing guidelines were extended until April 30. However, depending upon conditions on the ground, it is likely that some states and localities will be forced to extend closures even longer.

Neil Saunders of GlobalData Retail estimates more than 190,000 stores have been closed, accounting for nearly 50 percent of U.S. retail square footage. That effectively closes down the nation’s roughly 1,200 malls and most stores in strip shopping centers and on America’s Main Streets.

With little or no revenues coming in for these non-essential retailers – traditional department stores, fashion, and luxury retailers being the most profoundly affected – many of the most prominent mall-based retailers, which have been struggling for years from falling sales and weighted down by too much debt, are teetering on the brink.

Retail Bankruptcy Watch List Is Growing

Already this year, Papyrus, Lucky’s Market, Earth Fare, Mynd Spa (formerly Elizabeth Arden Red Door) Pier 1, and Modell’s Sporting Goods joined the list of filers and Reuters reports that Neiman Marcus is edging closer to a filing. However, Pier 1 and Modell’s plans are in limbo because stores can’t be open for liquidation and J. Crew’s plans to spin off Madewell in an IPO are on hold.

In addition, S&P Global Market Intelligence recently compiled a list of public retailers most at risk of defaulting over the next two years. Topping the list are:

• Christopher & Banks
• RTW Retailwinds (NY & Company)
• Destination XL Group (DXL Men’s Apparel)
• L Brands (Victoria’s Secret)
• Francesca’s Holdings
• Ascena Retail Group (Ann Taylor, Loft, Lane Bryant, among others)
• Tailored Brands (Men’s Wearhouse, JoS. A. Bank)

L Brands had the unfortunate distinction of appearing on another troubled retailer list, this one from credit ratings agency Fitch, which just downgraded nine major retail brands:

• Capri Holdings (Michael Kors, Versace, Jimmy Choo)
• Dillard’s
• J.C. Penney
• Kohl’s
• Levi Strauss
• Macy’s
• Nordstrom
• Signet (Kay Jewelers, Zales, Jared, Piercing Pagoda)
• Tapestry (Coach, Kate Spade, Stuart Weitzman)

Fitch’s downgrade model assumed these nine retailers would not open until mid-May and that revenues would fall by a drastic 90 percent, with only a small share of sales shifting to digital channels. The credit agency’s model also calculated these retailers’ sales would be down double-digits in 2021.

In addition, this past week S&P downgraded L Brands (Victoria’s Secret) and Gap. And to add insult to injury, S&P moved Macy’s from its stellar S&P 500 to S&P SmallCap 600 list.

Note to Retailers: Online Sales Won’t Save You

While consumers are hunkered down, sheltering in place, and with little to distract them except streaming video services, retailers were counting on online sales to at least help them keep the lights on. But data compiled by SEMrush suggests otherwise.

It found search volume for many of the big names on Fitch’s downgrade list also experienced a precipitated drop in online search volume. Kohl’s search volume declined 63 percent in the last three months, J.C. Penney by 55 percent, Macy’s off 46 percent, with Gap and Nordstrom down 45 percent.

Coresight Research confirms these findings with nearly 50 percent of shoppers surveyed on April 1 reporting they are spending less in discretionary categories, most notably in clothing, footwear, fashion accessories, and jewelry. Beauty products, cosmetics and fragrances, furniture and furnishings and electronics and appliances also dominate the spending-less categories, while essentials, like food, personal hygiene and household supplies including cleaning products, tissues and toilet paper, were on the spending-more list.

While Coresight’s survey suggests some shoppers are transferring some discretionary purchases online, the report states, “This appears to fall far short of what is needed to offset the impact of store closures.”

And with consumers’ heightened awareness of the danger of being in confined places with strangers, it is highly unlikely they will flock to stores and malls even once they reopen.

“Anxiety and a healthy paranoia are likely to linger – possibly for a long time,”says Michael Baer, Ipsos senior vice president and managing director U.S. Ipsos Affluent Intelligence, who offers learning from its affluent consumer surveys 2009-2011 during the last recession’s recovery.

“Any expectation that things will return to ‘normal’ quickly post-crisis can be disposed of out of hand,” he warns. “The key takeaway is to recognize that consumers are going through anxiety – which will in turn lead to behavioral shifts – and this won’t likely snap back to pre-crisis norms post-crisis.”

Retailers’ Day of Reckoning Coming

For years, we’ve been talking about – and widely disputing – the “retail apocalypse.” I say we can forget the apocalypse narrative now and instead call it what it is: Retail’s Armaggedon. Since church is canceled, here is a brief Sunday School lesson.

In the Book of Revelations, the apocalypse is the series of prophetic events that lead up to the final battle between good and evil. That’s Armaggedon, which many prophets say will take place in the city of Meggido, Israel.

In effect, the at-risk retailers on the S&P death-watch and Fitch’s downgrade list ignored the prophetic warnings of the retail apocalypse and now face the final battle that will occur in the nation’s 1,200 malls which is retail’s Meggido.

To get a clear vision of what lies ahead for the most at-risk retailers, I spoke to David Berliner, BDO Advisory’s partner in bankruptcy and restructuring and co-author of BDO’s “Retail in the Red” bi-annual report, the latest of which was just released in March and reported retail bankruptcies in the second half of 2019 though the first two months of 2020.

“For quite a while, we have seen department stores that anchor malls struggling, which has hurt a lot of specialty apparel and shoe retailers that fill malls,” Berliner says. “Now with COVID-19 in the mix, it is really going to accelerate the trends with more store closures and ultimate failures,” he adds.

During the retail apocalypse, too many retailers ignored the obvious: that they had too many stores and weren’t properly leveraging e-commerce to reduce their exposure in malls.

“We simply have too many stores in the U.S. compared to other industrialized Western countries,” Berliner shares. “Many retailers haven’t taken the necessary steps to right-size their operations because of long-term leases that made it too expensive to close stores.”

However, in the near term, Berliner doesn’t see retailers filing for bankruptcy immediately, though for many on the list, it will be soon.

“In a perverse way, we aren’t going to see many filings during the COVID-19 crisis. They are going to have to wait for a better time to liquidate,” he says, likening the strain on lenders to process massive bankruptcy filings as the present need to flatten the curve of the disease spread to avoid overburdening limited health care resources.

“Just like hospitals, lenders will want to flatten the curve to not be overwhelmed and only deal with the ones where there is nothing that’s going to help them,” Berliner says. “A lot of lenders may not want to force liquidation, so they will give loan extensions and kick the problem down the road because they can’t handle that many distressed companies at once.”

But he foresees liquidation, rather than reorganization or restructuring, is going to be the most likely end game of the bankruptcy filings that ultimately result.

“Based on the recent trends with retail bankruptcy filings, I suspect we will see an increase in liquidations and few reorganizations,” he says. “I also think there will be more asset sales, where pieces of failing retailers, which may only be certain good store locations and the intellectual property assets, are sold in Bankruptcy code section 363 asset sales.”

Consumers Will Cast The Final Ballots

Troubled retailers went into this crisis burdened by too many stores with hefty lease obligations and too much debt. So too are American consumers stretched thin, Berliner says “We are seeing some very distressing trends regarding consumer borrowing,” Berliner warns, as the Federal Reserve reports Americans have increased borrowing for the 22nd straight quarter, so that by the end of 2019, household debt exceeded $14 trillion for the first time, “Household debt is now $1.5 trillion over its previous peak in 2008,” he reports. “We all remember what happened after that.”

With consumers’ credit cards maxed out, as they live paycheck-to-paycheck and with little savings to fall back on, prospects for a return to normal spending levels are dim, especially considering that 701,000 Americans lost their jobs in March.

“Now we are in this climate where people are losing their jobs and hunkering down. Consumer confidence plummeted in March, as expected. Consumer behavior is going to be a real wildcard,” he cautions. “I don’t know if they will go back to the way they shopped before COVID-19, or even if they will be able to.”

Consumers are going to feel the financial impact of the coronavirus crisis long after the threat to their health fades.

Looking back to the last time consumers’ took such a profound financial hit, the 2008-2009 Great Recession, Ipsos’ Baer reports that consumers’ feelings of financial anxiety persisted long after the recession’s recovery.

In 2009, some 75 percent of affluents surveyed were “very worried” about the state of the economy. That only dropped by 10 percentage points by 2011, when 65 percent remained in a very worried state. Since the global financial ramifications of coronavirus have yet to be realized, it is expected to be worse than that experienced in the 2008-2009 financial meltdown with no country, not even China, immune.

Further, consumers’ financial worries post-recession played out in prolonged changes in their discretionary purchase behavior as well, though their attitudes didn’t change overnight, but continued to decline even while the recovery was well on its way.

For example, 58 percent of affluents surveyed in 2009 said being well-dressed was important to them, but by 2011 that percentage declined to 49 percent. Further, their feelings about fashion as a form of self-expression declined as well, from 56% who said fashion represents who they are as a person in 2009 to 43 percent in 2011.

“This suggests that early on in the crisis, consumers were still clinging to their attitudes – but the economic context then caused them to change behaviors,” Baer shares. “And those behaviors stayed changed even as the economy came back.”
With the threat of a global recession mounting by the day, BDO’s Berliner believes the pending impact to retailers on the bankruptcy watch list, many of which never fully recovered from the last downturn, will be devastating. The strong retailers, like Walmart, Target and Costco, will get stronger, while the weak will get weaker, if they can survive at all.

“Bottom line, I expect there will be fewer retail chains surviving post-COVID-19 and the surviving chains, particularly apparel and other mall-based specialty stores, will reduce the number of brick-and-mortar store locations,” he concludes.

Note: The article first appeared in The Robin Report