Retail Midyear Update: Retailers Show Surprising Strength, but Challenges Remain
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- midyear update
The retail industry got off to a surprising start in 2021. Many of us expected a continuation of 2020’s challenges, in which many retailers would struggle to survive. A lot of companies were already in distress prior to the pandemic, particularly those in subsectors such as department stores and mall-based apparel.
After a rash of bankruptcies and liquidations in 2020, we expected more of the same in 2021. That hasn’t been the case.
What’s become clear was that many companies had a solid fourth quarter in 2020, most likely from a combination of having scaled down their businesses, pent-up demand from the period when most companies had been shuttered and federal stimulus money. Apparel, hard goods and home goods all performed well out of the gate this year, and merger and acquisition activity has started to rebound.
The fact that there were only three retail bankruptcies in the first quarter—far below what happened in the first quarter of 2020—provides some evidence of that. And a lot of distressed companies, including department stores that had survived the 2020 campaign, were posting positive comparable sales and huge increases in their online businesses, as well as impressive cash flow numbers.
Retailers were also savvy in their use of debt. As BMO Capital Markets Retail & Services Analysts Simeon Siegel recently pointed out, the retail industry “borrowed to health” during the pandemic. There was a significant amount of borrowing on otherwise unfunded lines of credit last year, whereby retailers borrowed nearly to the max under their facilities to stave off any liquidity concerns. As the year progressed, most of those companies paid those loans back as business rebounded in the fourth quarter.
Highs and Lows
Among the top performers so far in 2021, discount retailers and companies in the home goods space have been particularly strong. Retailers that cater to hobbyists, like Guitar Center and Michaels Stores, have also performed well, as many people used their time during the pandemic to learn new skills. Similarly, sporting goods stores have picked up steam as youth sports leagues return.
While e-commerce has been a growing sales channel for many years, it became an essential channel to weather the pandemic. Retailers—especially the more bricks-and-mortar-dependent businesses—reallocated funds that they weren't paying to furloughed employees to their e-commerce capabilities. Based on conversations we’ve had with clients, companies generally took in 10% of their sales online prior to March 2020. The investment in digital sales—from online advertising to search engine optimization to website functionality—resulted in e-commerce representing up to 30% of revenues for some retailers, according to the clients we spoke with.
While e-commerce has been a boon to retailers, it also creates the challenge of how to get customers back into physical stores. That leaves retailers considering several questions, including:
- What’s the right balance of bricks-and-mortar and e-commerce?
- Where should you invest your funds?
- Will shopping ever return to pre-pandemic patterns?
A negative trend has been the continuing supply chain challenges. Between the pandemic and the delay at the Suez Canal in early 2021, the effect has been felt at the retail level. Consumers probably won’t be able to get a patio set until October, well after summer has passed. It’s not just affecting end products, either. Availability of materials has been a problem for hard goods retailers, in particular. That’s why lumber and plywood prices are so high at big-box hardware retailers.
And remember, we’re still in the midst of a global pandemic, so manufacturing disruptions in India—which recently experienced a devasting surge of COVID-19 infections—has implications on product supplies here.
The Right Balance
For many retailers, the goal heading into 2022 will be to transition to a more actively omnichannel business where possible. That means figuring out the optimal bricks-and-mortar versus e-commerce model; understanding the future of in-person shopping; and leveraging the lifestyle center concept as a way to attract consumers where they gather, because it's not going to be in an enclosed mall.
Just as important, retailers will need to continue to market themselves as brands. The most successful companies we've seen in the last several years aren't just selling other people’s products. The retailers that build brand equity in their products are the ones that create a loyal customer following.
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Michael Ganann
Head of Retail Finance, BMO Financial Group
The retail industry got off to a surprising start in 2021. Many of us expected a continuation of 2020’s challenges, in which many retailers would struggle to survive. A lot of companies were already in distress prior to the pandemic, particularly those in subsectors such as department stores and mall-based apparel.
After a rash of bankruptcies and liquidations in 2020, we expected more of the same in 2021. That hasn’t been the case.
What’s become clear was that many companies had a solid fourth quarter in 2020, most likely from a combination of having scaled down their businesses, pent-up demand from the period when most companies had been shuttered and federal stimulus money. Apparel, hard goods and home goods all performed well out of the gate this year, and merger and acquisition activity has started to rebound.
The fact that there were only three retail bankruptcies in the first quarter—far below what happened in the first quarter of 2020—provides some evidence of that. And a lot of distressed companies, including department stores that had survived the 2020 campaign, were posting positive comparable sales and huge increases in their online businesses, as well as impressive cash flow numbers.
Retailers were also savvy in their use of debt. As BMO Capital Markets Retail & Services Analysts Simeon Siegel recently pointed out, the retail industry “borrowed to health” during the pandemic. There was a significant amount of borrowing on otherwise unfunded lines of credit last year, whereby retailers borrowed nearly to the max under their facilities to stave off any liquidity concerns. As the year progressed, most of those companies paid those loans back as business rebounded in the fourth quarter.
Highs and Lows
Among the top performers so far in 2021, discount retailers and companies in the home goods space have been particularly strong. Retailers that cater to hobbyists, like Guitar Center and Michaels Stores, have also performed well, as many people used their time during the pandemic to learn new skills. Similarly, sporting goods stores have picked up steam as youth sports leagues return.
While e-commerce has been a growing sales channel for many years, it became an essential channel to weather the pandemic. Retailers—especially the more bricks-and-mortar-dependent businesses—reallocated funds that they weren't paying to furloughed employees to their e-commerce capabilities. Based on conversations we’ve had with clients, companies generally took in 10% of their sales online prior to March 2020. The investment in digital sales—from online advertising to search engine optimization to website functionality—resulted in e-commerce representing up to 30% of revenues for some retailers, according to the clients we spoke with.
While e-commerce has been a boon to retailers, it also creates the challenge of how to get customers back into physical stores. That leaves retailers considering several questions, including:
- What’s the right balance of bricks-and-mortar and e-commerce?
- Where should you invest your funds?
- Will shopping ever return to pre-pandemic patterns?
A negative trend has been the continuing supply chain challenges. Between the pandemic and the delay at the Suez Canal in early 2021, the effect has been felt at the retail level. Consumers probably won’t be able to get a patio set until October, well after summer has passed. It’s not just affecting end products, either. Availability of materials has been a problem for hard goods retailers, in particular. That’s why lumber and plywood prices are so high at big-box hardware retailers.
And remember, we’re still in the midst of a global pandemic, so manufacturing disruptions in India—which recently experienced a devasting surge of COVID-19 infections—has implications on product supplies here.
The Right Balance
For many retailers, the goal heading into 2022 will be to transition to a more actively omnichannel business where possible. That means figuring out the optimal bricks-and-mortar versus e-commerce model; understanding the future of in-person shopping; and leveraging the lifestyle center concept as a way to attract consumers where they gather, because it's not going to be in an enclosed mall.
Just as important, retailers will need to continue to market themselves as brands. The most successful companies we've seen in the last several years aren't just selling other people’s products. The retailers that build brand equity in their products are the ones that create a loyal customer following.
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