Coronavirus Is Already Changing How People Shop. Here's How.

If shoppers and retailers are concerned about the growing coronavirus outbreak, or the steepest drop in US stock indices in over a decade, they are keeping it to themselves in Manhattan's Soho shopping neighbourhood. The streets there, lined with stores that include everything from H&M and Zara to Off-White and Loewe, remain busy. Even on Wednesday, just hours after New York's governor announced a lockdown in an adjacent suburb five miles north of the city, you could still spy more than an influencer or two staging impromptu photoshoots among the cast-iron buildings.

Retail analysts say that sense of normalcy may not last. The number of confirmed cases of infection globally surpassed 100,000 over the weekend, with 3,809 deaths as of Monday, according to the World Health Organisation. In the US, over 800 cases have been reported, with New York’s outbreak the biggest. Along with the human tragedy, there has been an economic impact. In countries with major outbreaks, retail has been one of the hardest-hit sectors. Retail sales have plunged 25 percent in Italy and as much as 50 percent in China, by some estimates.

It’s too soon to say whether any of that will play out in America, where many public events have been cancelled, but few large-scale lockdowns or quarantines have been ordered. Some surveys suggest US consumers have yet to change their shopping habits, although retail traffic has dropped 9 percent in the first week of March 2020 compared to the same period last year, according to investment banking firm Cowen.

It doesn’t help that many large brands were already struggling with declining sales, thin margins and high debt loads. Retailers are also facing potential supply chain disruptions from when China shut down much of its economy earlier this year. Plunging share prices reflect growing concerns in financial markets that the outbreak — and efforts to contain it — will tilt major economies into recession, further curtailing consumer spending.

It doesn’t help that many large brands were already struggling with declining sales, thin margins and high debt loads — or in some cases all three — prior to the outbreak. Even before coronavirus began to dominate headlines, Macy’s announced that it was closing 125 stores, and Forever 21, which operated nearly 700 locations worldwide, was sold in bankruptcy court. Gap Inc. replaced its CEO and called off a spinoff of Old Navy, while J.Crew last week postponed a planned IPO of its Madewell brand. On Tuesday, shares of Ascena Group Inc., which owns Ann Taylor and other brands, plunged after the company reported a dip in revenue and an operating loss in its latest earnings report. Any disruption to regular shopping habits will exacerbate those problems, analysts say.

“When you look at highly leveraged companies, if they see dramatic declines in sales and traffic, that [impact] will be more serious than it would be for healthy businesses,” said Susan Anderson, a retail analyst at investment bank B. Riley FBR. In extreme cases, “they may have trouble paying interest on their debts or trigger covenants,” which are restrictions imposed on a company’s debt by its lender, and could lead to a potential default.

There are still pockets of the fashion industry that could prove resilient, even if more people begin to limit their time out of the house. In China, which has seen the most-comprehensive restrictions on movement, activewear is in demand as people gear up to work out from home. If people start to feel pinched on money, they would start to trade down.

Brands that sell necessities — and have a robust presence online — might be able to better navigate the coronavirus outbreak. In Monday’s stock market rout, Walmart and Target performed better than most retailers as consumers began stocking up on food and cleaning supplies. If the outbreak does kick off a recession, they may shop the big-box chains’ affordable clothing lines as well. Gap Inc.-owned Gap and Old Navy, which sell heavily discounted basics, may also see an uptick in sales.

Off-price retailers could also benefit. The 2008 financial crisis saw the emergence of flash-sales sites like Gilt Group and Rue La La, which took advantage of the additional inventory left over from designer brands. “If people start to feel pinched on money, they would start to trade down,” Anderson said. If brick-and-mortar sales falter, retailers can direct purchases online with email campaigns, social posts, and potential discounts, she suggested.

None of these retailers is immune; though Gap has a considerable online business, Old Navy’s more than 1,100 stores will be a drag on profits if people are afraid to set foot in them. Luxury brands could also suffer. In a down economy, fewer people are willing to spend discretionary income. The promise of high-touch, in-store service also loses its appeal in a pandemic. “We would anticipate likely heavier impact on luxury goods demand in [fiscal 2020],” Bernstein analyst Luca Solca said in a note Monday. Last week, he predicted that revenues in luxury retail overall will be down about 6 percent compared to previous forecasts.

In February, French fashion group Kering said in its earnings call that it had seen a decline in traffic and sales in China, while retailers like Burberry and Michael Kors-parent company Capri Holdings have adjusted forecasts to account for lost sales. Brands including Gucci, Versace and Prada have cancelled upcoming fashion shows.

Everyone is on panic mode now and nobody is interested in anything but taking the most pessimistic view on things. However, those companies have relatively healthy balance sheets that will help them wade through the outbreak. Not every brand has that sort of cushion. Neiman Marcus, for instance, has a $137 million bond payment due in October 2021, according to The Wall Street Journal, while Ascena Group is facing a 2022 maturity date for a $1.29 billion term loan, according to Moody’s.

Should those retailers or others need to refinance, they may struggle to find investors willing to work with them, said David Tawil, president of Maglan Capital, a distress-focused hedge fund. “Everyone is on panic mode now and nobody is interested in anything but taking the most pessimistic view on things,” he said.

Credit agencies like Moody’s, which monitor the financial health of companies, will be scrutinising how retailers react to changes in demand, said Christina Boni, vice president and senior credit officer at the firm. “Market access for these lowly-rated companies are arguably already challenged, as their capital structure is not sustainable,” she added. “That all said, in times of crisis, market access can become more limited even for companies that don’t have those challenges.”

Still, given that nobody knows how long the outbreak will last or how severe it will get, retailers and brands are advised against drastic measures — at least for now. “There’s no reason to give away the farm right today,” Anderson said. “You can wait and see how this thing plays.”