Shutdown Implications – Retail

May 22, 2020

A recent post took a brief look at the impact of the shut down on Canadian restaurant operator Cara Foods, but understanding the impact will be guess work for a while.  This morning however a well known retailer, Footlocker, released their financial results and it may prove helpful to see what the impact will be on mass market retailers.

To begin, the big picture is instructive as to the effects of the shut down.  The report covered the period from February 1st to May 2nd, 2020.

Revenue during the period was 56.5% of the prior year (off 43%), while cost of sales declined by just a bit more, at almost 45%.   Sales, General and Administrative costs were down just 24%, but this higher level of SG&A cost meant that the company went from a profit of $172MM in the quarter to a loss of $98MM in the quarter.   

There are many important characteristics that should be examined here, and these differences will be relevant in various industries, but here are a few key issues.

  1. Margins are really important.   A vast amount of margin is maintained through efficient use of assets.  The SG&A number quickly threw margins out of whack and the 8.27% of revenue that went to income was crushed into a 8% loss because of that overhead.  In this case lets look closer at SG&A which was 20% of revenue in the prior year.  Had the SG&A declined at the same rate ($235MM instead of $316MM), then the company would have lost just $17MM dollars, instead of $98MM.
  2. The company has a relatively healthy balance sheet with just $330MM of debt and $2.5 billion in long term lease liabilities (long term rent).   Their balance sheet has plenty of capacity for reducing costs (rents) and increasing debt to add financial flexibility.   There may be room to reduce rents as well as the COVID crisis unfolds.
  3. Same store sales are an important comparator in retail.  The number of stores and square footage had minimal change in the quarter (from the prior year period) but these minor changes were ignored.

Overall, it is meaningful to see that sales were down by 46% while this had a modest effect on profitability.   The coming quarters will provide insight into any prospective bounce and changes to rents, store closings and more.

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