Is The Coronavirus An 'Existential Threat' For Retailers?

Jayson Derrick

The coronavirus pandemic represents an "existential threat" to the entire retail sector and there will be a "fundamental changes" to the longer-term business model, Steve Sadove, former chairman and CEO of Saks, said in a Thursday CNBC "Squawk Box" interview

E-Commerce Doesn't Offset Loss Of Foot Traffic, Sadove Says

It is nearly impossible to sustain a business with zero revenue, and foot traffic in malls is down as much as 97% year-over-year, Sadove said.

For those that can sell online, e-commerce revenue is falling far short of offsetting lost sales in stores, he said. 

Hghly leveraged retailers with a debt-to-EBITDA ratio of four or five times will find it more difficult to survive, the former CEO said. Some of the companies in this category include Neiman Marcus, J. Crew, and "potentially" J C Penney Company Inc (NYSE: JCP), he said. 

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Pace Of Economic Recovery In Question

At the best of times, many retailers were struggling to gain any footing with customers, but now it is even more difficult to survive, Sadove said. 

Even those that fared better "can't survive this forever," he said. 

The main challenge for retailers is figuring out how to survive and make it through to "the other side" of the pandemic, Sadove said.

At that point, those with liquidity need to worry about the pace of recovery, as it is unclear if it will be a "V-shaped" or "U-shaped" recovery, he said. 

It is equally as plausible that retail sales in the fourth quarter will be down 30% year-over-year or more compared to 2019, Sadove said.

Bentz: Retail Was Already In An Existential Crisis

Many companies in the retail sector were already in an existential crisis prior to the coronavirus outbreak, KB Advisory Group President Kristin Bentz told Benzinga in an e-mail.

These companies were guilty of not reacting fast enough to address the shift in consumer buying behavior toward online, she said. 

The coronavirus could prove to be a death blow to those that were "already on life support" or "idling in irrelevance" for too long, such as J C Penney Company Inc (NYSE: JCP), Bentz said. 

On the other hand, companies in the retail sector that can continue operating from a position of strength include Walmart Inc (NYSE: WMT), which can leverage its large physical footprint to steal market share away from Amazon.com, Inc. (NASDAQ: AMZN), in her view. 

As an added catalyst, Walmart's health care arm should "take off substantially" in a post-coronavirus world and cement the "stickiness of their brand ecosystem," Bentz said. 

Off-price retailers like TJX Companies Inc (NYSE: TJX) "could be interesting" to investors, as the company can descend on struggling merchants looking to get rid of their idle stock "like a pack of locusts," she said. 

The high-end luxury customer "never really goes away" the KB Group president said.

They may buy less during uncertain times or return later when the time is right, but high-end buyers are just as likely to take advantage of "inevitable" sales within the luxury business, she said. 

"My thesis is that the lux consumer will suffer from a bit of revenge buying and pent up demand, [and] thus the inflection point for retail will start with them, especially the Chinese consumer, from a global perspective." 

In the retail group, those with notable exposure to the Chinese market should perform well, Bentz said, giving the example of Nike Inc (NYSE: NKE), which she said "brilliantly" leveraged its online and mobile business to the point where digital sales in China were up 30% in the recent quarter. Nike can also duplicate its "very effective playbook" to other countries, she said. 

"No one knows the psyche of their consumer better than Nike," Bentz said. "Flawless execution here under duress."

RH (NYSE: RH) is an "under-the-radar" stock pick in the high-end segment, she said.

Consumers with disposable cash who are stuck at home browsing the RH catalog are likely to invest in their home offices, playrooms and patios, Bentz said. 

Finally, Etsy Inc (NASDAQ: ETSY) represents a "curve ball" stock play, as consumers stuck at home may embrace the e-commerce marketplace by selling crafts or "stay sane" by attempting to profit from a new hobby, she said. 

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