TGT Target Corp

By Soma Biswas and Jennifer Smith 

The weakest U.S. retailers face the biggest risks from the coronavirus epidemic if Chinese factories overseas remain understaffed and customers at home stay away from bricks-and-mortar stores, according to lenders and analysts.

Luxury chain Neiman Marcus Group Ltd., fabric and craft supplies chain Jo-Ann Stores Inc., and apparel seller J.Crew Group Inc. are among the junk-rated retailers exposed to the potential fallout from the coronavirus outbreak, they said.

China's efforts to contain the epidemic have weighed on its manufacturing sector as small private factories and larger state-owned facilities endure extended shutdowns. U.S. retailers have varied exposure to the manufacturing contraction, depending on how much of their inventory comes from China or other affected regions.

Economists say it is too soon to know how much the virus might affect consumer spending but that it could upend supply chains and cause some product shortages, especially as retailers run out of Chinese-made goods already stocked in warehouses. The biggest risk facing weaker retailers is a possible pullback in demand as the virus spreads in the U.S., spooking consumers, said Moody's Investors Service managing director Mickey Chadha.

But if production in China doesn't return to normal levels by late April, U.S. retailers also could face challenges stocking up in time for the back-to-school and holiday shopping seasons, said Thomas O'Connor, a senior director and research analyst for supply chains at Gartner Inc.

"If you're a smaller retailer, it's likely you'll have more challenge sourcing your product, and more challenge in terms of obtaining that inventory at the normal prices you are used to," particularly for businesses with large debt loads, Mr. O'Connor said.

Neiman restructured $4.7 billion in debt last year, and its liquidity was already a concern before the coronavirus outbreak. Jo-Ann Stores' sales and earnings also took a hit last year from higher product prices due to Chinese tariffs.

Neiman is vulnerable to a sharp drop-off in tourism, as foreign visitors account for 12% to 15% of the company's sales, while Jo-Ann relies heavily on supplies from China, with over 40% of its merchandise coming from the country, JPMorgan Chase & Co. high-yield analyst Carla Casella said in a Monday research note.

Neiman has been burning cash, drawing down on its revolving loan over the summer, though it reported access to $354 million in cash and revolving borrowing capacity in October, ahead of the holiday shopping season, according to people familiar with the matter. The retailer has yet to report its earnings for the period covering last year's holidays, people familiar with the matter said.

Since Neiman was already burning cash, it is vulnerable to a hit to its revenue and needs a way to pay down or refinance a $137 million bond that comes due in October.

A Neiman spokesperson said the retailer's exposure to tourists from China is significantly lower than the 12% to 15% total exposure to tourists estimated by JPMorgan. Neiman's bonds maturing in 2024, already valued well below par, shed nearly four points Wednesday to 28.75 cents on the dollar, according to MarketAxess.

Jo-Ann Stores has seen minimal disruption from the coronavirus, a spokesperson said. Investors valued the chain's loans at 73 cents on the dollar on Tuesday, according to IHS Market. Neiman and Jo-Ann are owned by private-equity firms and only report their financials privately to shareholders and creditors.

In the event Chinese production slows further or the epidemic begins affecting other Asian regions more severely, retailers with the financial heft to access what products are still available may have an advantage over competitors.

So far, the impact of the coronavirus has been muted for many retailers, particularly the largest. Some brands and merchants have breathing room to withstand shocks to their supply chains after stocking up on inventory last year to get ahead of Chinese tariffs and in anticipation of factory shutdowns during the Lunar New Year.

Executives at Target Corp. and Kohl's Corp. said Tuesday the impact from the virus has been minor. Big retailers tend to have more diversified sourcing than those with $250 million or less in annual revenue, said RSR Research LLC managing partner Paula Rosenblum.

Yet even retailers that source goods outside China often rely on Chinese factories to finish goods and add on things such as zippers and buttons, or even to box the goods, according to people familiar with international supply chains.

J.Crew, which narrowly avoided bankruptcy as part of a 2017 debt swap, is highly dependent on Chinese imports, which account for 54% of the company's inventory purchases, according to Moody's. The retailer didn't respond to a request for comment.

A prolonged production slowdown in China could lead to missing inventory and potentially erode earnings at J.Crew at a time when it can't afford to stumble. It is trying to take its smaller and healthier Madewell chain public and to use proceeds from a public offering to pay down debt, but it isn't clear whether it will be able to do so. Most of the company's $1.6 billion in debt is coming due in March 2021.

Write to Soma Biswas at soma.biswas@wsj.com and Jennifer Smith at jennifer.smith@wsj.com

(END) Dow Jones Newswires

March 05, 2020 05:44 ET (10:44 GMT)

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