9 fashion icons trying to survive the pandemic
The shockwaves of the global pandemic have hit every sector in some way, but there are few that have been as thoroughly disrupted by the virus as the fashion industry. Garment production facilities around the world were temporarily shuttered earlier this year, throwing a wrench into the supply chain; large and small retailers alike have closed up shop, leaving customers without the ability to see items firsthand or try them on. Consumers are less likely to spend money on high-fashion purchases when they’re stuck at home with no one to show off to, while simultaneously staring down the barrel of a recession. With half of 2020 done and questions arising about the all-important upcoming holiday shopping season, how are some of the biggest fashion names and retail stocks faring?
Tailored Brands (ticker: TLRD)
The parent company of Men’s Wearhouse and Jos. A. Bank has struggled over the last few years as fashion in offices around the country shifts toward business casual, and its bottom line has suffered as well. Nowadays no one wants to wear a full suit while working from home, as made clear by a preview of Tailored Brands’ latest quarterly results: fiscal-first-quarter net sales are predicted to decline more than 60% year over year thanks to countrywide store closures, and e-commerce sales fell nearly 32%. Tailored Brands has also identified up to 500 stores that may be closed permanently and is eliminating 20% of its corporate positions in a bid to shore up its finances. Unfortunately, it could be too late, and TLRD may be one of the retail stocks destroyed by the pandemic — and casual Fridays.
Ascena Retail Group (ASNA)
Bankruptcy looms over plenty of retailers these days, but its shadow has fallen upon Ascena Retail Group. The parent company of Ann Taylor and Lane Bryant filed for Chapter 11 bankruptcy on July 23 after struggling against changing trends much like Tailored Brands has, except Ascena’s difficulties largely arose from the trend of consumers shifting to e-commerce. Ascena locations are staples of malls across the country, but with malls shuttered for the majority of the company’s fiscal third quarter, the preliminary results are dire: Total revenue has declined 45% year over year, and while the company has scraped together $439 million in cash and cash equivalents, it’s faced with more than $1.1 billion in debt. According to its filing, Ascena will close more than half of its 2,800 locations, including all of its Catherines stores.
The EXPRESSway Forward is a cost-cutting initiative that would have saved Express $80 million over the next three years under the guidance of a new CEO and leadership team. But in March stores around the country were forced to close, and Express, with its focus on clothes that can make the jump from an office to a night out, found itself faced with customers who couldn’t participate in either activity. Though the result was a 53% decrease in first-quarter net sales, things could’ve been far worse — Express had begun its cost-cutting early in the first quarter, and had reduced inventory levels and selling, general and administrative expenses before the pandemic had really begun. Whether that was foresight or sheer luck, Express now has no debt, fewer expenses and enough cash to weather the storm.
Over the last few years, the family of brands under the Gap umbrella has allowed it to address a multitude of markets and fashion sensibilities, diversity that’s paying dividends these days. Athleta in particular was by far Gap’s strongest segment in its first-quarter earnings report, even though overall company sales still plunged 43%. There were some bright spots in the report, like online sales increasing 13% year over year — an area that went on to post blockbuster 100% year-over-year growth in May. The one issue investors should pay attention to is Gap’s debt, which has only increased this year as the company drew down its credit line — but now that stores around the country are reopening, the wide appeal and affordability of Gap’s products should allow the company to survive, and ultimately thrive.
Macy’s has spent the last few years reckoning with the fact that department stores aren’t the cash-generating retail stocks they once were. The company’s playbook has been to take advantage of its huge retail footprint by creating stores within stores, such as its discount brand Macy’s Backstage. Unfortunately, people weren’t coming to Macy’s in the first place. The pandemic is a stark reminder that the business needs to figure out its next move sooner rather than later, which is precisely what the company is doing: it will save roughly $630 million this year by permanently closing 125 locations and cutting its corporate headcount by 3,900. With plenty of cash to cover its growing debt pile, Macy’s isn’t in immediate danger of following JC Penny into bankruptcy, but it is in danger of slowly but surely fading into irrelevance.
While Nordstrom’s mall-based department stores struggled these last few months as customers stayed home, that isn’t really anything new for Nordstrom. That’s why the company has been investing heavily in its two other main segments: e-commerce and Nordstrom Rack. The investments Nordstrom has made in improving its online shopping experience are paying off now, with e-commerce sales growing 5% last quarter — and more than 50% of online shoppers were new Nordstrom customers. As for its off-price Nordstrom Rack locations, the treasure-hunting aspect of bargain shopping has never been more compelling for consumers who want to shop their woes away. Even as Nordstrom closes 16 of its 116 department stores, its 247 Nordstrom Rack locations remain untouched and will likely provide the company with the growth it needs to emerge from this pandemic.
TJX Cos. (TJX)
The king of bargain hunting — TJX is the parent company of TJ Maxx and Marshalls, among others — seems well-positioned to profit off “revenge shopping” from cooped-up customers, as early indications from reopened locations suggest. Plus, TJ Maxx directly benefits from other retailers going bankrupt, which gives the company plenty of newly discounted items to hang on its racks, and even competitors that stay alive will be looking to offload inventory for cheap. That’s all great news for a company that has been burning cash throughout the pandemic, spending nearly $3.2 billion last quarter just to watch sales plummet 52%. Management is confident that it has enough liquidity to see the year through, but TJ Maxx needs some sales from its on-sale items soon.
Nike has missed a step this year thanks to the combination of shuttered production facilities, lower discretionary spending among consumers, and a worldwide lack of sports. Luckily for Nike, there were some bright spots, like a strong e-commerce presence contributing to a 75% increase in online sales during the fourth quarter, part of a 46% increase in digital sales during the entire fiscal year. But that wasn’t enough to offset worldwide store closures, and the result was a 4% decline in sales and a 36% decline in diluted earnings per share for the fiscal year. It seems likely that Nike will be able to shake that off, and a strong global brand combined with a healthy balance sheet will be more than enough to help NKE bounce back from a rare loss last quarter.
Lululemon Athletica (LULU)
Lululemon’s recent acquisition of fitness startup Mirror makes perfect sense; even with gyms closed, consumers still want to stay fit, and if they don’t feel like hopping on a Peloton, they can simply work out in front of a Mirror. The acquisition is part of Lululemon’s attempt to pivot out of the gym and toward home fitness, and while the athleisure company has focused more on leisure than athletics, that seems to work just fine for consumers who aren’t leaving their houses anyway; Lululemon’s e-commerce revenue rose 65% year over year in the fiscal first quarter. Online sales matter more than ever to retailers like Lululemon — in fact, online sales accounted for 54% of total net revenue last quarter, compared with 21% in the same quarter last year. If Lululemon can maintain that online presence even after stores reopen, it’ll be well-positioned for customers buying clothing for home or gym workouts.
9 retail stocks trying to survive the pandemic:
— Tailored Brands (TLRD)
— Ascena Retail Group (ASNA)
— Express (EXPR)
— Gap (GPS)
— Macy’s (M)
— Nordstrom (JWN)
— TJX Companies (TJX)
— Nike (NKE)
— Lululemon Athletica (LULU)
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