E Deeper Diagnosis Of Department Store's Survival

The stocks of department stores have wreaked havoc, tumbling almost 60-70% on average in YTD terms, although, supported by some bargain hunting and renewed optimism of store re-openings lifting the stocks from their all-time lows. The fall, although accelerated by the unprecedented spread of COVID-19 pandemic across the world and especially in the US, coincided with the sector's continued weakness observed due to declining footfalls, lower same-store sales growth and significant competition, particularly from online e-commerce retailers, the likes of Amazon.

Given Trump's push on reopening the economy in a phased manner in the coming weeks, however, it remains to be seen how much of that translates into footfalls for the apparel retailers as shoppers are likely to be wary of the continued rise in the number of cases. At the department stores, covenant breaches are possible if the EBITDA declines by around a third, in which case lenders may have the option to force a default. We take a deeper look at the company's liquidity and solvency as well as possible covenant breaches that could impact the company's refinancing needs.

Chart

Data by YCharts

Holiday Season

Most of the departmental stores announced the closing of stores in the week beginning March 16, 2020, which implies the Q1 would primarily have a marginal impact as it is affected by just ~2 weeks, the major impact would be felt in Q2. The sector has been grappling to ensure they have sufficient financial flexibility by furloughing employees, cutting non-essential expenses and utilizing the revolver facilities. Department stores generate roughly 23% of their revenue in Q2, EBITDA contribution in Q2 is around 19%, on average which would likely see a severe erosion due to the store closures. It's interesting to understand Dillard's could be among the least affected as the EBITDA contribution is the lowest in Q2. The Holiday Season of 2020 would be of utmost importance as the retailers generate most of the EBITDA (40%) in Q4 with Macy's being the highest at 50%. Also, upcoming maturity of $500 million coming in for Macy's in Jan-21, if it coincides with poor holiday sales and a choppy high yield market could cause challenges for the company to re-finance.

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FinoSight 2 months ago Member's comment

Thanks for the amazing read. I wonder #Macy's $M could face some pressure but with its substantial real asset base could provide a floor to the stock price. What levels do you think should be appropriate to enter and in particular which stocks look attractive, not just with respect to solvency but valuation and moat?

FinoSight 2 months ago Member's comment

Also each of the department store's stock prices have plummeted around 6-8%. Maybe a good time to enter?

PennyWiser 2 months ago Author's comment

Thanks for your appreciation. I have not covered the majority of the stocks except $M. You can check out my post on it over here: talkmarkets.com/.../macys-whats-next-after-the-doom

I reckon a $5 level would be a good entry point in M to enter. As for the rest of the companies, you would need to watch out as I write about that.

FinoSight 2 months ago Member's comment

Thanks. I'll give that a read and look forward to seeing your take on others too.

Adam Reynolds 2 months ago Member's comment

Thanks PennyWiser. When will you write more about other companies?

PennyWiser 2 months ago Author's comment

Also, $M jumped over 20% over my recommended price.

Adam Reynolds 2 months ago Member's comment

Nice!

PennyWiser 2 months ago Author's comment

Hi Adam, Thank you. I have some articles in the pipeline and would keep them posting as and when the time is right. Feel free to follow me on twitter to get regular updates as well ( Pennywiser14)

Kurt Benson 2 months ago Member's comment

Good read.