How The Economic Shutdown Will Affect Retail Stocks

For industries that were already struggling prior to 2020, the COVID-19 pandemic is going to be a catastrophic blow. That includes companies like Macy's Inc M and Nordstrom Inc JWN, both of whose shares got hammered in March.

The part of the retail industry that is not involved in selling groceries or consumer staples has very little cash coming in. Labor costs are usually a retailer's biggest expense and instant measures will relate to this business segment. Many jobs will be lost as Macy's already announced that the cuts would affect most of their 125,000 workers, while Gap Inc GPS is planning to furlough nearly 80,000 store employees. Similar actions are expected by other name-brand chains whose products are considered nonessential.

In addition, not only the sales personnel will be impacted but also the back-office forces. Nordstrom announced that they would furlough a portion of corporate employees on April 5 for six weeks. Cutting mainly part-time, nonunion workers may be the easiest cost-savings move for retailers. And by granting this sort of absence to employees instead of laying them off, they could potentially speed up their return to normal once things restart. So there is at least a small glimpse of hope for a rebound.

Target

Target TGT is the neighborhood superstore for many in the U.S., and that's where many are turning to get their essential goods during the COVID-19 shutdown. But while sales of necessities are soaring, sales of higher-margin goods are slowing down, which is putting significant pressure on the earnings potential. Turnover growth of 20% on a year-over-year basis in March forced the company to hire additional employees in order to ensure a high level of service to the customers. But growth of 50%  in essential products also means it is also becoming more challenging to sustain a high level of service. So despite a short-term expected decrease in margins, higher turnover and commitment to customers should be of great advantage in the long run because they will result in a loyal customer base.

Amazon

Amazon.com Inc AMZN is another company that needs to hire additional employees in order to satisfy a surging demand. In March, Amazon announced it plans to hire 100,000 warehouse and delivery workers. Knowing that a lot of workers are not interested in putting themselves at risk by being in close contact with others, Amazon decided to raise wages by $2 per hour until the end of April. Still, there are a lot of workers who are complaining about the healthy precautions taken and believe the company isn't doing enough to protect its employees. Although the company assures that all necessary measures have been undertaken, employee relations have never been one of Amazon's strengths. It seems that the mistreatment of employees is only catching up with the e-commerce giant amid the COVID-19 drama.

Nike Is Optimistic

According to the latest earning reports, Nike Inc.'s NKE revenues increased to $10.1 billion in the third quarter, which is 5% on a reported basis and 7% on a currency-neutral basis, driven by 13% currency-neutral growth in Nike Direct with digital sales growth of 36%. Digital sales in Greater China increased more than 30% while retail sales were impacted by temporary store closures related to COVID-19. Currently, nearly 80% of stores have reopened their doors in Greater China with recorded revenue growth in double digits. On the other hand, since March 16th, all Nike-owned stores outside of China, Japan and Korea were closed also to help curb the spread of COVID-19 but Nike is optimistic for a reason as its latest digital sales have almost reached holiday levels and digital does represent 20 percent of its overall business.

Is The Positive Trend Sustainable? 2021 Has A Shot At Being Brighter

It is obvious that this crisis will be a major catalyst for the retail industry which is already in trouble due to the development of e-commerce and changes in consumer behavior. Another huge problem relates to landlords who are not willing to support retailers by insisting on rents being paid. This is only an additional dumbbell for the already troubled industry to carry. Consequently, many retailers might not be able to survive this unforeseen health crisis, but there are some who are managing to do well despite it all. The question is whether this positive trend can be sustained since traffic at Walmart Inc WMT, Costco Wholesale Corporation COST and even Target has fallen for the first time since the outbreak as a consequence of stockpiling. But there is always the silver lining. As economic activity resumes and people go back to shopping, traveling and dining out, 2021 could deliver very easy EPS and other performance results. This will only be the case if we don't see another round of economic shutdowns as Asian nations now fear the second coronavirus wave while Europe and the U.S. are still struggling with the first wave.

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