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Getty Images Retailers will be hurt if their customers stay away to combat virus
If COVID-19, the coronavirus that has sickened more than 80,000 people, spreads across the U.S. as health officials are warning, consumer-facing companies would be the first to be hit as their customers isolate themselves and avoid public spaces, experts said Wednesday.
The list includes everyone from retailers to restaurant operators, luxury goods companies and cinema chains, many of whom are starting to offer the first clues as to how the disease is impacting business. For now, those clues are mostly focused on business conducted in China or supply chain-related issues. Few have offered any details on how bad things could get if the U.S. is subjected to similar restrictions on movement as those imposed in China to contain the spread of the disease.
With the current December quarter corporate earnings reporting season all but over— and most companies saying they did not include the virus in their expectations for the year—investors should brace for a round of profit warnings and changes to guidance in the coming weeks. That could revive the heavy selling in markets around the world that shook investors this week.
“Investors have largely been caught off-guard by the serious and far-reaching economic consequence of the coronavirus,” said Nigel Green, founder and chief executive of the deVere Group, a financial services and advisory company.
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While some multinationals have lowered guidance, “many more are likely to do so in coming weeks. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too,” said Green.
The U.S. retail sector will be hit by both demand and supply chain issues, according to Cowen analysts, but that’s not all.
“Declining consumer confidence, potentially severe retail traffic declines, and temporary store closures are evolving risk factors that depend on uncertain variables like the geographic spread of the virus and the timing of containment/eradication solutions,” they wrote in a note this week.
Companies are preparing for a big increase in the number of employees working from home, in the event that schools close or quarantines are enforced, depriving restaurants and other food providers of revenue. The global nature of supply chains means potential bottlenecks in the transportation of goods at a time when many retailers are keeping inventories tight.
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Wells Fargo analyst said there could be empty store shelves as soon as mid-April with retailers like Target Corp. TGT, -0.91% and Walmart Inc. WMT, -0.56% at highest risk.
For daily coverage of the coronavirus, see: Coronavirus update: 81,245 cases, 2,770 deaths, Trump to hold virus news conference
“It’s worth noting that big-box players like Target and Walmart could be the first to experience out-of-stock issues, as they are more heavily dependent on a shorter lead time replenishment model,” Wells Fargo said. Analysts also named Best Buy Co. Inc. BBY, +1.01%, Dick’s Sporting Goods Inc. DKS, -4.18%, and G-III Apparel Group Ltd. GIII, -2.65% as companies at risk.
Read: Coronavirus could drive up out-of-stocks at stores by April: Wells Fargo
Macy’s Inc. M, -6.40% told investors this week it’s taking steps to minimize disruption, although executives say it’s still too early say much more than that. The department store chain’s guidance does not factor in coronavirus impact.
Still, less than half the company’s private-label items come from China, the source of the outbreak and the country that has suffered the most cases of the virus and the most deaths. China’s move to quarantine cities and restrict travel has kept factories idle and slowed economic activity, and U.S. vendors source a considerable amount of merchandise from the region.
“There was a protocol that we developed under the SARS epidemic with the coronavirus to protect our workers, make sure we’ve got flexible schedules,” said Jeff Gennette, Macy’s chief executive on the company’s earnings call, according to a FactSet transcript.
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Some companies are already starting to fret that the virus will have longer-term consequences, if it cannot be contained in the near term. Cracker Barrel Old Country Store Inc. CBRL, -1.76%, for example, said Tuesday that merchandise shipping for the 2020 holiday season starts in the next couple of months, with production on items like Christmas ornaments starting now.
The U.S. toy industry is at high risk, according to UBS with more than 85% of sales in the sector comprised of goods that are made in China.
D.A. Davidson analysts who met with toy maker Hasbro Inc. HAS, -0.47% said that holiday toy production wouldn’t be impacted as long as Chinese facilities are up and running by the first week of May.
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“It’s really a matter of how quickly the factories get back to operations,” said Hasbro’s chief operating officer John Frascotti, at an investor meeting last weekend. “But I do think the fact that it happened in the first quarter and early in the first quarter gives us more time through the year to catch up.”
Cinema operators can expect to see steep declines in attendance if the coronavirus spreads rapidly. Already, IMAX Corp. IMAX, -4.38% has taken a hit from the closure of screens in China, especially during the Lunar Year holiday, when consumers typically flock to see the latest blockbusters. The company is operating at about two-thirds strength due to the coronavirus, according to MKM analyst Eric Handler.
On its fourth-quarter earnings call last week, IMAX Chief Executive Richard Gelfond said China is a $1 billion business for the company, where it had 702 locations at the end of 2019, a 13% increase from 2018. The company’s Greater China box office rose 9% to a record $366 million in 2019.
Gelfond is expecting cinemagoers will be keen to get out of their homes and return to shopping malls and cinema complexes as soon as the Chinese authorities give them the all-clear, which is what happened after the SARS outbreak in 2003.
“Overall, we’re encouraged by the long-term performance and trajectory of our business in China. And while the coronavirus is a serious short-termchallenge, we see it as a rare, out-of-the-ordinary event that will ultimately pass.”
Other theater chain stocks have already been under pressure in the past year as they continue to grapple with competition from streaming and other changes in consumer behavior. Cinemark Holdings Inc. shares CNK, -7.02% have fallen 32% in the last 12 months, while AMC Entertainment Holdings Inc. AMC, -9.99% has lost 17% and IMAX is down 26%.
Still, The National Retail Federation is less fearful, saying that it didn’t take the outbreak into account when forecasting a 3.5% to 4.1% increase in 2020 retail sales.
“There are always wild cards we cannot control like coronavirus and a politically charged election year,” said NRF Chief Executive Matthew Shay in a statement on Wednesday. “But when it comes to the fundamentals, our economy is sound and consumers continue to lead the way”
NRF expect retail sales to reach more than $3.9 trillion for the year.
For a full tally of U.S. companies that have talked about the coronavirus: What Apple, Coca-Cola, Nike and other U.S. companies are saying about the coronavirus outbreak
And for non-U.S. companies: Businesses count coronavirus cost. And it’s looking bleak.
