‘Retailers’ cash is stronger than expected, but the outlook has weakened’

Seven months ago, we as bankers were dealing with a flood of requests from retailers to provide liquidity and waive or reset covenants to get our clients through what was about to hit them. 

We had no prior knowledge of pandemics on which to base our assumptions, no idea when stores would reopen, no idea how online would perform and we hadn’t even heard of social distancing, let alone be in a position to predict its effect on trading. 

Where we thought we’d be

During April, we worked hard to quickly form a market consensus on the shape of recovery, helped along by our network in Asia where there were signs of this. 

Assumptions varied case by case. However, on average, non-food retailers prudently planned that their stores would open in July at -60%, building gradually up to -10% by Christmas and into 2021, with online sales down 10% to 20%. 

Where possible, liquidity was provided and covenants reset to match these trading assumptions, taking into account cost savings and government support. 

Publicly listed and private equity-owned businesses were quick to inject equity to shore up balance sheets, especially stronger businesses where investors had value to protect, while weaker companies struggled to find equity (at the right price) so were more reliant on debt (this will go on to create further polarisation).

Where we are

Today, I am encouraged to see retailers we deal with have traded well ahead of those early assumptions. 

Clothing retailers, for example, expected their stores would be at -30% to -40% now, but trading was pretty stable, at around -20% to -25%, through the summer and into the autumn. 

During lockdown online came to the rescue, especially in categories such as home, entertainment, sports/nutrition and athleisure. Retailers catering for at-home activities, such as Hobbycraft, achieved online sales growth in excess of 200% like-for-like over lockdown. 

As stores opened, retailers delivered stronger than expected sales. However, we didn’t predict to such an extent the huge variations in store performance based on location, as well as the rise in basket sizes and conversion rates. 

The two ends of the value spectrum outperformed. Some consumers looked for bargains as they faced tough economic times, while people with more stable incomes and improved personal balance sheets were treating themselves to luxury branded goods and new sofas, perhaps instead of a foreign holiday. 

“In early October, retailers we work with were typically ahead of their cash forecasts and covenants were being comfortably met”

The staycation trend also provided a boost throughout the summer and retailers such as Mountain Warehouse captured strong sales off the back of that, also benefiting from a strong value proposition.

In early October, retailers we work with were typically ahead of their cash forecasts and covenants were being comfortably met.

What was becoming clear from mid-August was that the prevalence of Covid-19 globally was going to mean many more months of working from home, not going out – I mean ‘out’ out – and significantly reduced international travel.

All of which, directly or indirectly, will impact sales over Christmas and longer term because of the impact on the domestic economy and the job market.

In late October, the resurgence in coronavirus cases in the UK and subsequent local lockdowns arrested the momentum in trading, putting retailers back 10 to 20 percentage points like-for-like.

Now, we are faced with another month in lockdown in the most critical of trading periods.

As it stands, while cash is currently stronger than expected, the outlook for Q4 and beyond has weakened, which is leading to further restructuring of financial covenants going forward and, in some cases, additional liquidity requests. 

Retailers have not only accumulated additional debt to fund losses through the pandemic, but they will also consume significant cash unwinding arrears and working capital as we head into 2021. 

Given the economic outlook and rising unemployment, I expect to see further challenges ahead and a probable second wave of admins and CVAs in the first half of 2021.

Those retailers who shored up balance sheets will use their relative strength to squeeze out marginal competition further.

Where are we going?

Retail had been in a period of transition for years before the crisis and Covid-19 has accelerated that, but the pace of this correction is translating into considerable pain felt in the economy and wider society. 

However, the faster the pace of change, the sooner we reap the economic benefits of more dynamic, more efficient, more relevant and more progressive business models picking up the slack left behind by failed businesses.

“Covid-19 has brought us closer to the equilibrium of ‘new world’ retail, where the very terminology of ‘online’ and ‘physical’ sales will be completely redundant”

In the commercial property market rents were falling even before the virus hit, and now a ream of pre-packs and CVAs is bringing the cost of renting space down and forcing landlords to offer much more flexible property deals. 

Rates will follow, completely changing the unit economics of a store. Small, independent businesses and entrepreneurs will soon be able to invest in our high streets and shopping centres and use these spaces for exciting, innovative, fashionable new concepts. That will drive footfall back to our high streets.

We remain in a period of transition, but Covid-19 has brought us closer to the equilibrium of ‘new world’ retail, where the very terminology of ‘online’ and ‘physical’ sales will be completely redundant. 

In this new world all brands and retailers will have a world-class ecommerce operation (underpinned by software as a service), and every retailer will also want a network of awe-inspiring physical spaces to showcase products, excite and engage customers and build brand affinity.