Financial Considerations for Retailers navigating COVID-19

The retail industry has been one of the hardest hit by the global pandemic know as COVID-19.  Retailers have lost significant revenue.  The question for many retail executives is how to maintain business continuity and manage the reduction in cash flow while many fixed costs remain.  The effects of a shutdown lasting into the summer may mean that stores that have shuttered their doors temporarily may in fact never reopen.  This may mean a much smaller store base for many retail chains.   Given the future of a smaller sized business, retailers are looking at key steps to improve cash flow or just as important to preserve cash.  The key steps retailers are taking include changes in inventory management, furloughing some employees and potentially evaluating the use of their revolving credit facilities to bridge the cash gap until stores can reopen.

Retailers that have been deemed “non-essential”, particularly apparel and specialty merchandise are closed and are now challenged with stranded and aging inventory at their stores.  Seasonal apparel for Easter sales are now markdowns; inventory that was previously allocated to stores will likely become a margin drain vs. the plan originally set at the beginning of the season. ​

 Detailed strategies are needed for how to profitably liquidate that inventory and improve retailers overall cash flow.   Inventory is one of the largest assets that retailers manage with some of that inventory quickly becoming aged or even obsolete due to seasonality.  Retailers need to look at key strategies like potentially pack and hold for next year on goods that are more basic or even seasonal basics that have a longer life or jobbers to liquidate truly aged inventory (with an eye to brand impacts).

On the human resources front, employees in stores are the brand ambassadors for retail organizations and the impact on these employees and their families is truly heartbreaking.  Since the shut down began more than 1 million retail employees have been furloughed.  Retailers that have furloughed store employees and some corporate staff like inventory allocators include:  Macy’s, Gap, TJX Companies, Kohls, L Brands, JC Penny and Best Buy.  While furloughs are easing the cash flow problem, most retailers are still covering some benefits to help employees with the transition, which is critical to keeping employees engaged for the day when stores are able to reopen.  There are other options outside of furloughs that can also be entertained including leveraging the workforce in store to support fulfillment methods like buy online pickup in store and ship from store (where technology can support these processes). Once the shutdown begins to be lifted, what key HR process will be needed to ensure that returning employees are coming back to a safe work environment?  New HR processes and operating procedures will be needed to ensure workers not only are safe, but feel safe as well.  It will be critical to not only implement new procedures for cleaning and safety but to communicate not only what is happening but why.  Human resources organizations for retailers are one of the most critical parts of the business continuity plans in a crisis of this scope and magnitude.

Many retailers were in a heavily leveraged position before COVID-19 began.  These retailers may be hard pressed to access additional credit.  For those that have a revolving credit facility, they will likely look to extend the terms and modify the covenants to increase flexibility.  The longer the stores remain closed and revenue is limited to online sales the more important it is for retailers to maintain as much financial flexibility as possible.  
There are still many unknowns for the industry today.  When stores do begin to reopen, will social distancing disappear?  Has consumer behavior changed permanently?   Ecommerce was expected to represent 12.4% of retail sales in 2020 according to Statista Research, that number will likely increase significantly as a result of COVID-19. We think the changes retailers need to make now require implementing the processes and infrastructure that support a true unified commerce model.  Likely retailers will come out of this with a larger ecommerce business but the need for fewer stores as consumers shift their purchase behavior to more online than prior to the pandemic.  Now it is more important than ever for retailer to make the investments needed to set up the future business and operating models that will ensure strategic success and survival.  

At Ascent we have a team of seasoned retail industry experts with real world experience.  We add value quickly and have knowledge to help you think through the impacts of COVID-19 on cash flow, stranded inventory, ways to maximize margin, and support employee transitions and HR process changes needed in the post COVID-19 world we will enter soon.  

If there are other topics that you would like us to help with, please reach out to me directly or to our team at [email protected] or by contacting us at 801.660.2901.  We hope you stay safe and healthy as we all work to “slow the spread” through social distancing.

All the best,

Jill Fleming
Ascent Enterprise Solutions