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Upcoming Earnings a Litmus Test for Retailers Amid Coronavirus

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Coronavirus or COVID-19 has jeopardized the global economy, not sparing a single sector. The retail sector, in particular, remains under pressure due to major supply-chain bottlenecks, reduced traffic, an increasing number of store closures and limited hours of working. Challenges related to the coronavirus are likely to impact the upcoming earnings cycle.

In fact, per sources, retailers’ back-to-school and holiday season numbers are also expected to reflect the adverse impacts of the virus outbreak. Incidentally, several retailers have chosen to withdraw their guidance, not knowing the possible impact of the deadly virus on their performance. Further, a number of retail players have witnessed a downtrend in their earnings estimates for the current quarter over the past month.

Coronavirus Hurting Retailers’ Performance

The coronavirus, which originated in China, has spread enormously to the extent that cases and deaths outside the nation have exceeded the number in China, per a World Health Organization (WHO) report. Sadly, the global pandemic has infected more than 160,000 people worldwide and the death toll has crossed 6,000.

COVID-19 has disrupted the supply chain, especially for retailers sourcing materials from China, wherein the virus outbreak led to factory closures and compelled workers to stay at home. Moreover, global travel has been largely restricted, again marring production and shipping. Notably, retailers like Steve Madden, Best Buy (BBY - Free Report) and Dollar Tree source more than 40% of their goods from China, per media reports. The percentage is close to 20 for bellwethers like NIKE (NKE - Free Report) , Gap and Kohl’s (KSS - Free Report) , to name a few. Under Armour (UAA - Free Report) , lululemon (LULU - Free Report) and Dollar General (DG - Free Report) also source a small fraction of their products from China. These retailers are likely to witness supply-chain hiccups.

Apart from this, retailers are encountering sluggish traffic as the outbreak has caused customers in most cities to stay indoors. This along with efforts to take precautionary measures has compelled a host of retailers to announce brick-and-mortar store closures or limit working hours. This will not only hurt sales and productivity but is also likely to escalate these companies’ cost burden as many retailers said that they will continue to give full payments and benefits to their employees during the temporary closure.

In this regard, Guess? and Nordstrom are the most recent evidence. The companies announced temporary store closures in the United States and Canada. While Guess is closing its retail stores from today till Mar 27, Nordstrom will shut its Nordstrom full-line, Nordstrom Rack, Trunk Club clubhouses and Jeffrey stores for two weeks, starting today. Some other retailers who have recently adopted similar plans include Columbia Sportswear, lululemon athletica, Abercrombie & Fitch, Under Armour, NIKE, Urban Outfitters and Ralph Lauren (RL - Free Report) .

A Sigh of Relief Really?

At a juncture where COVID-19 has significantly disrupted the global market, the Federal Reserve is taking all possible steps to safeguard the economy. Incidentally, it announced a massive $700-billion quantitative easing program and slashed the benchmark interest rate to a range of 0-0.25% to stimulate the economy.

However, the coronavirus-led damage has been done and the situation is getting worse. Hence, investors must remain watchful of retailers’ outcome this earnings season.

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