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May retail market: Historic US sales drop in April; 9 companies go bankrupt

U.S. retail sales plunged by a record 16.4% in April from the prior month as the coronavirus pandemic kept consumers at home. However, experts say the drop is likely the worst of the worst even as the sector faces an uncertain recovery.

"This report was always going to be terrible, but it likely marks the floor, given the gradual reopening now underway or soon to be underway in 42 states," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note.

Meanwhile, as retail layoffs continued to mount, the pandemic triggered a wave of casualties across the sector as nine companies went bankrupt in late April through mid-May, according to an S&P Global Market Intelligence analysis. This includes high-profile filings by brick-and-mortar retailers J.Crew Group Inc., Stage Stores Inc. and Neiman Marcus Group Inc.

Retail sales

The decrease in U.S. retail and food services sales during April marked the largest monthly decline on record since the U.S. Commerce Department started tracking the data in 1992.

Sales totaled a seasonally adjusted $403.95 billion during the month, data released May 15 by the U.S. Census Bureau shows.

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"With social distancing, lockdown and travel measures in effect across most states during the whole month of April, the report is the first in the series to capture the full impact on the retail sector," Karl Schamotta, chief market strategist at Cambridge Global Payments, said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

High unemployment, depressed income and weak consumer confidence will continue to weigh on consumer spending, Lydia Boussour, senior U.S. economist at Oxford Economics, said in a note.

"While we believe the worst of the consumer retrenchment is likely behind us, the gradual relaxation of lockdowns and lingering virus fear will translate into a slow release of purse strings," Boussour said. "As the economy gradually reopens and activity slowly resumes, we only foresee a modest bounce back in Q3 followed by a more pronounced rebound in the final quarter of the year."

Shepherdson of Pantheon Macroeconomics predicts a modest increase in May sales and then a bigger rise in June but warned that sales will remain "well below" their pre-coronavirus peak.

"While April will most likely prove to be the nadir in U.S. retail sales, we are not expecting a meaningful near-term rebound in sales because of the significant dislocation in the American labor market and clearly diminished income horizons for the near future," Joseph Brusuelas, chief economist at RSM US LLP said.

Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note that it will be important to see how things improve in the coming months. "[I]t will be months before we can say what the 'new normal' will look like."

Clothing and clothing accessories stores registered a decline of 78.8% in sales in April from the previous month to $2.37 billion. Sales at electronics and appliance stores decreased by 60.6% month over month to $2.83 billion. Furniture and home furniture sales dropped 58.7% from the previous month to $3.30 billion.

Food services and drinking places registered a monthly decline of 29.5% to $32.36 billion.

Meanwhile, nonstore retailers were a lone bright spot during the month as sales in the category rose 8.4% to $78.38 billion.

The Consumer Price Index, or CPI, in April registered its worst monthly decline since December 2008. Consumer prices declined by 0.8% in the U.S. in April, according to a monthly report released May 12 by the U.S. Bureau of Labor Statistics.

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Gasoline prices dropped 20.6% in April, while energy prices overall fell 10.1%. The core CPI, which excludes food and energy prices, decreased by 0.4%.

Meanwhile, prices for food increased by 1.5% in April after a 0.3% increase in March.

Prices for apparel declined 4.7% in April versus the prior month. Prices for men's and boys' apparel fell by 4.6% month over month, while prices for women's and girls' apparel declined by 5.4%.

Bankruptcy

Nine Market Intelligence-covered U.S. retail companies went bankrupt in late April and early May, pushing the total number of bankruptcies for 2020 to 23. The year-to-date total trails the 2019 count by just nine companies and could increase as rumors of bankruptcy circle J.C. Penney Co. Inc.

The bankruptcy count includes companies with a primary industry classification of retailing, household and personal products, or consumer durables and apparel, and secondary classification of retailing. Public companies included in the list of companies with public debt must have at least $2 million in either assets or liabilities at the time of the bankruptcy filing. In comparison, private companies must include at least $10 million.

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Texas-based department store operator Stage Stores on May 10 filed for Chapter 11 bankruptcy after "exhausting every possible alternative" to save its business. The company said it will seek bids for a sale of the business or any of its assets as it initiates a wind-down of its operations. Stage Stores said it will not wind down operations at certain locations if it gets a viable going-concern bid.

Luxury retailer Neiman Marcus filed for bankruptcy protection May 7. The company which filed in a Houston bankruptcy court, said it secured $675 million in debtor-in-possession financing as well as an exit financing package worth $750 million from the company's creditors.

Privately held J. Crew, an affiliate of Chinos Holdings Inc., on May 4 filed for Chapter 11 bankruptcy protection in the U.S. after struggling with a growing pile of debt in recent years. The apparel retailer said it reached a deal with its lenders to convert about $1.65 billion of debt into equity. It also secured $400 million in debtor-in-possession financing and committed exit financing provided by its existing lenders.

John Varvatos Enterprises Inc., which sells fashion products for men, filed a voluntary petition for reorganization under Chapter 11 on May 6. The company listed assets of $10 million to $50 million and liabilities of $100 million to $500 million.

Other retailers that filed for Chapter 11 bankruptcy protection during the period include J.Hilburn Inc. and Rubie's Costume Co. Inc. Clothes importer CD II Fashions LLC and N B L Textiles Inc. had involuntary petitions filed against them. RTS USA Corp. filed a voluntary petition for liquidation under Chapter 7 on April 29.

Employment

The retail sector lost 2.1 million jobs in April, a 13.48% month-on-month decline to 13.5 million, according to a monthly report from the U.S. Bureau of Labor Statistics.

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Clothing and clothing accessories stores led the decline with a loss of 739,600 jobs, a 58.25% drop.

Jobs at furniture and home furnishings retailers declined by 209,000, or 45.24%, to 253,000 for the month. Sporting goods, hobby, books and music stores lost 184,900 jobs, down 34.5%, to 351,000 jobs.

Employment at miscellaneous store retailers declined by 264,200 jobs, while vehicle and parts dealers shed 344,700 jobs during April.

Vulnerability

In May, Market Intelligence identified 15 public retailers for its vulnerability list, which now includes companies with a primary industry classification of retailing, household and personal products, or consumer durables and apparel, and secondary classification of retailing.

The one-year probability-of-default score among these companies ranged from 31.2% to 12.6%, and their corresponding implied credit scores were "ccc-" to "ccc+."

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Merion Inc., which provides health supplements and personal care products, topped the list with a probability of default of 31.2%, followed by precious metals retailer Sunstock Inc. with a score of 27.6%.

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S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, see the PD Model Fundamentals - Public Corporates white paper.