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Are Retailers Crunching the Right Sums to Fight Coronavirus?

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The continuous rise in coronavirus-infected cases and deaths around the globe is taking a toll on the economy. In the face of the pandemic, the retail sector is witnessing significantly lower revenues on prolonged store closures, supply-chain disruptions, lower traffic trends and limited store operating hours. The rising macroeconomic uncertainties as well as bare minimum revenue prospects have led companies to pull back their guidance.

The Backdrop

What is seen as a temporary blow to revenues and productivity due to the outbreak may have long-term implications. It is really difficult to gauge the impacts of prolonged store closures on retailers’ financials. In the past few weeks, we have largely seen companies suspending dividends and share repurchase programs in the wake of revenue losses incurred due to the pandemic.

Meanwhile, retail companies are looking to cut non-essential operating costs and curtailing capital expenditures. However, retailers are likely to endure costs related to investments in pay and benefits. Also, increased distribution and transportation related to the spike in the demand for consumables as well as extra caution to follow cleaning protocols in stores, distribution centers and its support centers is likely to add to the cost burdens.

To maintain financial stability, many companies have drawn on their revolving credit facilities. In fact, we have seen some retailers fully draw upon their revolving credit capacities to stay afloat. However, analysts pointed out that exhausting of all cash resources may not be a good idea if the situation worsens.

Given the extended impacts of the COVID-19 outbreak, we believe that retailers are at risk of draining their cash as stores remain closed and chances of revenue generation are slim. Nevertheless, companies that show promise, with little or no drawings on their credit facilities and maintain liquidity for the future might have better chances of navigating through this rough weather.

A Few Instances

We have seen Gap (GPS - Free Report) fully draw upon its $500-million revolving credit facility. Here, it is to be noted that the company has already been witnessing soft revenue trends due to weakness in its namesake brand. Nonetheless, to keep things under control it has deferred first-quarter fiscal 2020 dividend payout of 24.25 cents per share. It also suspended dividend payouts and share repurchases through the rest of fiscal 2020.

Similarly, Macy’s (M - Free Report) drew the entire $1.5 billion on its credit lines. The coronavirus outbreak has disrupted the company’s business activities, compelling management to suspend future dividend payouts, close down stores temporarily and furlough employees. It is also reviewing all non-essential operating costs and has lowered the capital expenditure plan for fiscal 2020.

However, we have Dollar Tree (DLTR - Free Report) , which still stands strong on the finance front. As of Mar 30, 2020, it had $1.9 billion of cash and investments, including $750 million drawn on its revolving credit facility. It currently has $1.25 billion in revolving line of credit. We believe that the company’s strong balance sheet, with ample liquidity, and a flexible business model will cushion its financial position and extend the required support to steer through the uncertain environment.

Moreover, Costco Wholesale (COST - Free Report) , which operates membership warehouse, stands to gain from its cash and cash equivalents, and short-term investments of $8,715 million as of Feb 16, 2020. Further, as of Feb 16, it had a borrowing capacity of $875 million, including a $400-million revolving line of credit under its bank credit facilities, which remained undrawn. This provides ample liquidity to sail through tough times.

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Dollar Tree, Inc. (DLTR) - free report >>

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Macys, Inc. (M) - free report >>