Retail is already being reshaped by Covid-19 as shoppers are stuck at home and companies are forced to find new ways to sell their goods and stay relevant. Even as states begin lifting restrictions, it isn’t clear when and how consumers will be ready to shop. Longtime retail analyst Dana Telsey, who heads up Telsey Advisory Group, says executives are comparing the crisis to wartime, and trying to reinvent themselves for a rapidly changing new normal.
Telsey, one of Barron’s 100 Most Influential Women in U.S. Finance, had a long history as a retail analyst and money manager before starting her own business. The New Yorker has seen retail go through various iterations, not just in her career but also growing up: Her family owned a bookstore on Madison Avenue and her mother and grandmother both worked in retail. We talked with Telsey to see what retailers need to do in a postpandemic world, which companies can make the transition, and whether it’s time to start shopping. An edited and condensed version of our conversation follows.
Q: What is the mood among retail executives?
A: Dana Telsey: Even the strongest of the strong companies are saying there is no road map—and [things] can change by the hour. They are watching their cash, evaluating their cost structure, and looking at store bases. When you think about fixed and variable costs, almost everything has become variable.
Q: How do you create an outlook amid this uncertainty?
A: 2020 is a lost year. It’s almost irrelevant in terms of the valuation and investment thesis because everything is so disrupted. When we reopen and see what the world looks like, we will have a new level-setting to see where we go from here. What we return to in terms of growth, newness, and capital investment is what 2021 will be about. Right now cash is king. Capital preservation, rather than earnings, matters most for 2020.
Q: Same-store sales don’t seem relevant. What metrics should investors watch?
A: Inventory levels; credit ratings; and what is happening with cash and debt positions, revolvers, and covenants. You have to become a credit analyst to determine the health of the business.
Q: What portion of this sector has the wherewithal to survive?
A: It takes a really long time to kill retailers. We have certainly seen a greater sense of urgency with the companies that were debt-laden: Those that had private-equity investments, underperformed, and can’t pay interest expenses could shrink and go away. That includes Party City (PRTY), Gap (GPS), L Brands (LB), and Macy’s (M).
On the other side, having a brand, a digital and physical footprint, and cash to engage with customers really matters. Everyone is going to watch inventory: Whenever we reopen, it’s not going to be the same season, so getting inventory back in line [will be important]. May and June orders are being canceled; holiday [ordering] is delayed.
Q: What will the holiday season look like compared with 2008-09?
A: There’s potential for holidays in 2020 to be worse with these unemployment levels. We need to get consumers back and working to have the comfort, confidence, and safety and security to spend disposable income.
Q: How will retailers accomplish that?
A: Retailers are thinking about the staff wearing masks and gloves, and making that available to customers; limiting the number of people in stores; having someone visibly sanitize/clean dressing rooms [between customers]; and having a contactless payment so you can just tap a credit card. The hours of operation will be reduced, starting maybe at 20 hours a week.
Q: What parallels can we draw from China as it reopens?
A: China had a national shutdown. But there have been some interesting numbers, like from H&M Hennes & Mauritz (HMRZF). In week one of the outbreak, H&M had no stores closed and sales were up 16%. In week seven, 64% of stores were closed and sales were down 89%. By week 10, just 11% of stores were closed, but sales were down 79%. And in week 14, 1% of stores were closed, and sales declined 23%. Yes, it improved, but people are not willing to go out and spend.
But there’s real differentiation: LVMH Moët Hennessy Louis Vuitton (LVMUY) and Hermès have seen spending come back. Hermès (HESAY) had one of its stores do $2.7 million in sales on the first day it reopened.
It will take a while to get people in the U.S. to feel comfortable enough to go back into stores and spend on discretionary items, given the unemployment levels. You will see a lot of markdowns in the luxury space. Not Chanel, LVMH, or Hermès, but when you see companies like Neiman Marcus on the precipice, you will see luxury apparel at markdown levels we haven’t seen since 2008 to 2009.
Q: Can midtier retailers and brands survive?
A: It all depends on balance-sheet strength. Some will restructure. The companies we used to talk about as kings of the industry, where growth would be forever—like L Brands and Gap—they are all working to get to what’s next. Capri Holdings (CPRI) and Tapestry (TPR) have been working on that for a while. Brands make a difference, whether that’s Levi Strauss (LEVI), VF Corp. (VFC), or Deckers Outdoor (DECK). Companies that can control their own destiny with a solid balance sheet can come through on the other side.
Q: That doesn’t sound great for real-estate property owners.
A: Before the Covid-19 crisis, experiential was a big focus. The mall of the future will be a different kind of gathering place—how do you turn a shopping center into a community-engagement center? If it’s a fitness center, how do you work out with two spaces between bikes, or two spaces between tables in a restaurant? Landlords and tenants will need to collaborate. We are going to see reformulation of the size of tenants and a new look to stores.
Q: People have been shopping at Walmart and Target during this crisis.
A: What’s winning today are essentials— Costco Wholesale (COST), Walmart (WMT), Target (TGT), Kroger (KR), Amazon. com (AMZN), or the dollar stores. When unemployment is as high as it is, the focus is on basics.
Walmart and Target’s ability to create personalized experiences—with loyalty programs, product recommendations [via] their heavy use of data, and ease of reordering—[plus] use of their supply chains, and focus on essentials and consumables made them not just nice-to-haves, but must-haves.
Q: Off-price retailers had been doing well. How are they positioned now?
A: Right now, they have no business, because their stores are closed and they don’t do much online. They typically have capital to get through this and can benefit from all the inventory that’s out there, as department stores will be weaker and need to promote heavily. But they will have to control how much they want to buy because they will be well positioned out of this.
Q: What’s the path to survival?
A: If [the virus] does come back and shuts down [the economy again], it just accelerates penetration of digital. Everyone will look closer at the physical format , and only the most productive set of tenants will be in demand. It would stress balance sheets more, and turning inventory into cash is key.
It will put the focus on personalization and loyalty programs. Companies are getting more creative with virtual marketing. Retailers had used their physical footprints as advertising; now they are advertising digitally.
Q: We’ve seen a lot of carnage so far. Is it time to buy yet?
A: It’s time to get your shopping list ready for who is going to come out on other side. The second quarter will be worse than the first quarter because it was lights out. Given that you don’t know the “e,” you don’t know the valuation. We may not get back to sales levels of 2019 until 2022. That’s not yet reflected in the stocks.
Q: What should investors put on their shopping lists?
A: It’s all about health and wellness, whether it’s Lululemon Athletica (LULU), Ulta Beauty (ULTA), Estée Lauder (EL), or staying active with Nike (NKE) and Adidas (ADDYY). Also essentials—Amazon, Walmart, Target, Costco—and off-price retailers. They all benefit, but TJX (TJX) is the most diversified given its size and scale. And as markets stabilize, when you have a return to discretionary spending for luxury goods, LVMH will benefit.
Q: Tell us about your top picks.
A: Estée Lauder has the liquidity to manage through the crisis, has made adjustments to its cost structure over the past few years, and benefits from diversification. And [since it offers] a more consumable product, consumers should return in shorter order as stores reopen. Plus, 30% of its sales are generated online.
Lululemon has loyal customers, $1.1 billion in cash with no debt, and the athleisure and casualization trends should only accelerate. And China, a profitable growth driver for Lululemon, has seen sequential improvement since stores have reopened.
Ulta is a leading beauty retailer, also with a strong balance sheet. Its customer base is becoming more omnichannel and spends three to four times more than store-only customers. Once stores reopen, health and wellness trends should accelerate, while the consumable nature of its products can sustain demand.
Levi’s is a well-run iconic brand that offers an extensive core product, that carries over from season to season, and it has a durable financial position with $1.8 billion in liquidity.
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