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Will Macy's Be the Post-Coronavirus Department Store Model?

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On March 18, department store giant Macy’s (M - Free Report) temporarily closed all of their stores to help curb the spread of the coronavirus.

Macy’s is just one of many retailers to have done so, and the financial impact has been enormous.

As these chains start reopening their stores, a big question remains: how will these retailers operate in a post-coronavirus world?

Post-Coronavirus Plan

On Thursday, Macy’s announced a plan to reopen their roughly 775 store locations over the next six weeks, should COVID-19 infection rates start to decline and states begin easing coronavirus-related restrictions.

68 locations are scheduled to reopen on May 4, with a second wave of reopenings on May 11.

But the shopping experience will look different.

The company said it will take precautions like enforcing social distancing in order to make its workers and customers feel safe. Employees will also be required to take their temperatures before coming in for a shift, and will have to wear masks.

Few fitting rooms will be open, and any product tried on by a customer will be held for 24 hours before being put back on the racks.

In a virtual conference call, CEO Jeff Gennette addressed Macy’s time frame for reopening stores, but also confirmed many investors’ thoughts: the chain will not be as big as it once was before the pandemic took hold.

Macy’s was already planning on shuttering 125 of its stores over the next three years, but that initial plan, announced back in February, could potentially change in the coming months.

"We're going to emerge out of this as a smaller company," said Gennette, and at this point, the company doesn’t “quite know what the ramp back looks like."

Even though stores will start to reopen, it remains unclear when people will feel comfortable enough to shop at a mall again. On top of that, consumers are as cautious as ever with their money right now, limiting their spending to groceries and other essential items, not new clothes.

Financial Strain

Things were not rosy for Macy’s even before the mandated stay-at-home orders took place, and it’s going to take strength and innovative business strategies to help the company pull through.

The surge of online shopping, coupled with changing consumer habits and the rise of direct-to-consumer brands, has taken a toll on Macy’s and other retail mainstays over the past few years. (AMZN - Free Report) has, ultimately, been the biggest factor in their decline, establishing the necessity for free, two-day shipping and an efficient digital shopping platform.

But Macy’s, along with competitors Nordstrom (JWN - Free Report) , Dillard’s (DDS - Free Report) , and J.C. Penney JCP, pushed back, rolling out different initiatives aimed at bringing customers back to its stores.

Macy’s has transformed its digital presence, improved its product mix, remodeled older, outdated stores, and even launched a smaller-format store model called Market by Macy’s.

These targeted initiatives were exactly what the company needed to do, but because of the pandemic and deep financial strain, it’s unlikely these actions will make a big enough dent.

Looking at its core business, the company pulled in $24.5 billion last year, but was only able to turn $1.7 billion of that into reportable operating income because of expenses and debt payments.

Macy’s recently drew down all of its $1.5 billion credit facility in order to stay afloat, and this is in addition to the $3.6 billion of long-term debt the company reported at the end of fiscal 2019. The company also has a nearly $1 billion debt payment due before early 2022.

Refinancing may not be an easy option either. Fitch Ratings downgraded Macy’s bonds to BB+ at the beginning of April, officially putting it in the junk bond category.

Unsurprisingly, shares have taken a beating.

Macy’s is trading down over 70% this year so far, and was recently dropped from the S&P 500 index; the stock is now a part of the small-cap S&P 600. In February, Macy’s market cap was about $6 billion. Today, it’s only $1.5 billion.

Check out Macy’s performance compared to other retail peers:

While it looks bleak for Macy’s, they aren’t alone. All of retail, apart from big box staples like Walmart (WMT - Free Report) and Costco (COST - Free Report) , grocers, and pharmacies, are set to face a new, tough normal.

Bottom Line

The so-called “retail apocalypse” has not been a quick event, but a slow burning unraveling of how things once were, and the coronavirus outbreak is turning out to be a make-or-break moment for some of the biggest retail chains.

A “smaller” Macy’s could end up being the department store model for the post-pandemic world. Fewer stores mean fewer overhead expenses, and with growing debt loads, companies like Macy’s will surely be looking to cut costs.

But like many things now and in the future, any successful retail model depends on the consumer, their spending habits, and their optimism. We just need to be patient until the uncertainty starts to wane.

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