As Companies Draw Down Cash, Analyst Sees Retailers Operating for ‘Months’
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As the coronavirus continues to wreak havoc upon the global economy, consumer discretionary companies — led by the auto industry, hotels and fashion apparel — are drawing down cash to stay liquid.
According to a report by S&P Global Market Intelligence, drawdowns in March were $154.79 billion with consumer discretionary companies representing 63.9 percent of the total. The report follows news of major companies furloughing workers and cash-strapped retailers asking landlords for rent relief.
The S&P report expects corporate borrowing to surge as companies “shore up cash.” The report noted that General Motors Co. “drew down about $16 billion from its revolving credit facilities, while rival Ford Motor Co. also borrowing $15.4 billion against two lines of credit.” In the tourism and hospitality industry, “Carnival Corp. & plc borrowed $3 billion under its revolving facility, marking the largest withdrawal among these companies.”
In fashion apparel and retail, the firm said L Brands Inc., Foot Locker Inc., Guess Inc. and The TJX Cos. Inc. “have also tapped their credit lines.” The report did not detail the exact amounts drawn down by these companies.
In a separate report by financial management consultancy firm, The Lamy Group, COVID-19 is triggering an overwhelming number of calls by retailers asking landlords for rent relief.
Kenneth S. Lamy, founder, president and chief executive officer of The Lamy Group, said landlords are “stretched thin with this unprecedented influx of rent relief requests, and are reaching out to retail real estate specialty consultants who provide a methodology and process to support evaluating and processing them.”
Lamy said landlords “realize steps must be taken now to proactively work with their tenant partners, but also be mindful of the impacts of reducing the revenues needed for mortgage and utility payments, along with security and ongoing maintenance expenses.”
Retail cash flow is also on the minds of retail analysts. In a report today from Telsey Advisory Group, Dana Telsey, chief research officer, said many consumer companies are taking “dramatic actions to manage their business and cash flow. These efforts to reduce costs across the organization include cutting executive salaries, adjusting store payroll, furloughing employees, negotiating with landlords to reduce/pause rents, suspending dividends and share repurchases, delaying/reducing receipts of inventory, drawing down revolving credit facilities, and reducing capital expenditures.”
Telsey said, overall, “this is an unprecedented time in retail.”
In response, Telsey and her team created a screening model to look at and assess the cash positions of companies in the firm’s coverage area. “This analysis is essentially a worst-case scenario and assumes zero incoming revenues,” Telsey said adding that the firm expects “companies with a higher e-commerce penetration” to have cash coming in. This includes retailers such as Kohl’s Corp., Nordstrom Inc. and Macy’s Inc., among others. That said, Telsey quickly noted that “there has been dramatic declines in e-commerce activity particularly for discretionary goods as consumers are more focused on buying essentials.”
Telsey’s cash burnout model positions companies such as PVH Corp. and Vince Holding Corp. at the low end of the liquidity threshold, which means it would take PVH about six months to burn through its cash and about five months for Vince Holding. Companies “toward the high end include Delta Apparel (37 months) and G-III (18 months),” she said.
Telsey said department stores are in the most challenging position. She said in the report that retailers in this segment “are extending payment terms, canceling orders and placing any fall orders on hold.”
“In our view, department stores will promote aggressively over the next few months at the expense of margins in order to exit this period of distress in as clean an inventory position as possible,” Telsey explained. “Department stores have tapped their revolvers, furloughed employees and are dramatically reducing expenses in order to manage through this time period of minimal sales at best. Based on our analysis, department stores have enough cash for at least the next five to nine months.”
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