To understand the extreme financial impact that COVID-19 has had on even healthy retail companies, consider Macy's.
The department store giant stumbled into 2020, posting sales declines and unveiling yet another turnaround plan that called for store closures. Even so, in a disappointing year last year, it still made nearly $1 billion in operating income and carried modest leverage on its balance sheet.
March happened, and everything changed. Macy's closed all of its stores, and kept them closed for nearly two months, as COVID-19 spread through the U.S. At the outset, there were questions about whether Macy's had enough liquidity to get through a protracted crisis. The company reportedly hired the consultancy Lazard and law firm Kirkland & Ellis, both restructuring experts that ring bankruptcy alarms for investors and suppliers. For the first quarter, Macy's racked up a staggering $4 billion operating loss.
Questions around the company's liquidity have been put to rest for now. Macy's drew $1.5 billion from its credit facility, nixed its shareholder dividend and raised $1.3 billion by issuing new bonds tied to some of its real estate assets. With COVID-19 still spreading, "Macy's, Inc. will be a smaller, more leveraged company for the foreseeable future," CEO Jeff Gennette said earlier in July.
Those moves saved Macy's, but they also altered it. "Their trajectory has been a concern, but they had a strong balance sheet," Dennis Cantalupo, CEO of Pulse Ratings, said of Macy's before the COVID-19 crisis. "They had plenty of unencumbered assets that they could tap into to bolster liquidity, which they did [i.e., during the closures]. That bought them some time, but it also eliminated some of the levers they could have pulled in the future. They were forced to use those cards now."
Macy's is just one of dozens of retaailers that has lost financial cushion since the pandemic began. "It comes back to the malls," Sarah Wyeth, sector lead for S&P Global's retail and restaurant coverage, said in an interview. Those retailers tied to enclosed malls, she added, "have the most to lose."
Wyeth noted that S&P's credit rating for Macy's has dropped four notches this year, standing today at B+, just a couple slots above the riskiest C-level ratings. Again, the department store is not alone. Ratings across the industry have dropped. Wyeth named a handful of mall-based retailers that have been downgraded and have lost financial ground since the closures began, including L Brands, Nordstrom and Gap Inc., along with Macy's.
Cantalupo also points to Kohl's and Nordstrom as having been forced to trade financial cushion for near-term survival, pledging unencumbered assets and taking on new debt to boost their liquidity. Bed Bath & Beyond, too, had time to work on its turnaround but also had to pledge new assets to wrangle a larger credit facility. "What is getting overlooked a lot is, what does that do to the capital structure?" Cantalupo said.