Corporate credit will erode over the next few months. In March 2020, many businesses took on significant debt to their increase cash positions. The second order impact will come from reduced revenues and increased leverage over the summer and winter.
Even with low interest rates, leverage will cripple balance sheets across the board. If your company didn’t have a flexible cost structure pre-Covid, investors can anticipate poor earnings for the rest of 2020.
For example, Disney raised +$11 billion in debt during the pandemic to prepare for the crisis. But major Disney theme parks are still closed across the world. Even with a strong cash position, Disney will face heavy losses from cuts in film production and theme park revenue. Fortunately the company launched Disney+ in late 2019 and will continue to own its main content distribution channel. Not everybody was this fortunate.
The first set of casualties are in the restaurant industry. Dine-in restaurants lost up to 100% of their revenue during the peak periods of the pandemic. Without a proper online system, companies like California Pizza Kitchen and Dean & Deluca filed bankruptcy months after the pandemic peaked.
The big box apparel industry was struggling well before this crisis with its high cost structure. Fast fashion is a direct threat to retailers like Lord & Taylor, Neiman Marcus, and Brooks Brothers who all filed bankruptcy this year as well. More of these retailers will need to restructure and change business models to survive post-Covid.
The third biggest casualty was the in-person fitness industry. Right now, you can work outside in most of America because of the hot weather but wont be enough. 24-hour fitness, Gold’s Gym, and Modell’s were the first of the fitness industry to file bankruptcy from this pandemic.
The challenges with brick and mortar stores is the high fixed cost structure. Restaurants and retailers need to operate for 20 days, or 60% of the month in order to break even. Many have higher break even points, depending on their delivery models.
There will be no substitute for in-person venues until a vaccine is available for everyone. Another challenge will arise when the fall season begins and outdoor seating is no longer available. Most mom and pop businesses rely on cash flow to survive. Even with the government stimulus plans, businesses will run out of cash if they cannot normalize sales.
Before the summer ends, I think we’ll see several large brand names go bankrupt to restructure before the holiday season. This list may include Macy's, Nordstrom, and maybe even Best Buy. Macy’s is a large anchor tenant in major American malls. The retailer doesn’t have a unique offering to compete with fast fashion online.
As for travel, Boeing has already mentioned one major airliner is bankrupt from the pandemic. Travel is at a minimum since airlines were the least prepared for the Covid health restrictions.
Retailers may be suffering but online businesses are hitting all-time highs. Last 3 months between record online sales and e-commerce delivered 3 years of accelerated growth in 3 months.
Now there are companies like Uber, Doordash, and GrubHub that are taking advantage of the online food delivery business. Unlike the dine-in restaurants who were not prepared to go fully online before the pandemic and will most likely lose sales.
Over the weekend, Simon Property Group, the largest owner of malls in America, is now working with Amazon to create new fulfillment centers. Malls need anchor tenants and heavy foot traffic for all of its tenants to be profitable. Let's see how Amazon takes advantages of mall real estate while foot traffic remains low in local cities.
Debt has been on the mind’s of Americans since the Great Recession. Only ten years ago investors experienced significant losses from over leveraged balance sheets related to the mortgage crisis. Now we will see a wave of bankruptcies and stagnant growth for a large portion of the middle market companies in America.
Brick and mortar are out of fashion. The commercial real estate market is being flipped upside down with the recent flight to safety. Tourists aren’t traveling and remote work is the safest way to get work done. For example, in New York City, the subways are only seeing 10% of the regular foot traffic for commuters.
Online businesses will continue to shine. With the lack of sales, physical retailers will not be able to prepare for the holiday season. I predict e-commerce will see accelerated growth even the recent spike in online sales. While brick and mortar pause operations to stop the bleeding, many online businesses will become new market leaders.
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