LOS ANGELES - While national retailer J.Crew muddles through its recently filed Chapter 11 bankruptcy, stores in California are preparing to restart in the hopes of avoiding a complete collapse in their business due to the COVID-19 outbreak.
“It’s not surprising that J. Crew filed for bankruptcy,” said Robert Marticello, a partner with Smile Wang-Ekvall law firm in Orange County. “J. Crew has been struggling for some time. The COVID-19 effect accelerated the Amazon effect. The pandemic and stay at home orders pushed it over the edge.”
The preppy retailer is among the first major clothing outlets to fail during a time when overall sales dropped suddenly due to the pandemic and subsequent shutdown orders, according to media reports.
“They will likely try to keep the brand alive by restructuring but whether that’s possible will be a function of what the marketplace looks like in the next three to six months,” said Brian Davidoff, partner and chair of the financial restructuring practice at Greenberg Glukser in Los Angeles and author of Reviving the Financially Distressed Business. “The current environment has highlighted the unstable position of many companies and J. Crew is one of them.”
Gov. Gavin Newsom announced on Monday that the state would advance into Stage 2 of its plan to modify March 19 stay-at-home orders and allow lower-risk retail stores to operate curbside pick ups.
“We will issue guidelines and if the guidelines are met and modifications are made then people can start reopening with those modifications in place as early as Friday, May 8,” Gov. Newsom said during his May 4, 2020 press conference on Facebook Live.
Lower risk retail stores, as defined by Gov. Newsom, include clothing, books, music, toys, sporting goods, florists and all of the associated logistics and manufacturing related to retail.
However, some retail stores couldn’t wait until Friday and reopened ahead of the statewide plan. As previously reported, Quent and Linda Cordair, restarted their Quent Cordair Fine Art gallery in Napa on May 4 even though Gov. Newsom has yet to modify his statewide stay-at-home order.
“We received a phone call on Monday from the county informing us that we are in violation of the standard order,” Linda Cordair told the Southern California Record on Wednesday, May 6. “We have not heard from them since. What’s important is that we’re back to work.”
She added that 50 to 60 people have dropped by the art gallery to support the couple’s decision to reopen in advance and to purchase artwork.
“Hopefully, they are making it less likely that they will have to file for bankruptcy,” Marticello told the Southern California Record. “To the extent that violating the governor’s order results in some action that prevents a retailer from operating further in the future, it may be a good idea to wait.”
What’s also uncertain is whether curbside pickups will be enough to jumpstart the retail economy with 58,815 positive coronavirus cases statewide and 2,412 fatalities, according to the Department of Health.
"It’s good we can take this next step into Stage 2 with retailers offering some services and reopening to some extent but whether limited operations will make a difference in their financial health will depend on the business,” Marticello said.
In addition to the fear of exposure to the coronavirus, there’s also the rising number of unemployed Californians who may not have disposable income to spare. Some 3.4 million people filed for benefits during the pandemic shutdown, according to media reports.
“Just because retailers can open to some extent, it doesn’t mean the public will take advantage of it,” Marticello said. “I don’t know if it’s going to change anything. Do people really want to buy merchandise?”
Marticello and Davidoff offer these tips for re-opening retail stores after the extended shutdown:
Manage cash flow. Davidoff suggests modeling out cash flow under different scenarios. “Consider a turnaround advisor to help you build cash flow models that include alternatives,” Davidoff told the Southern California Record. “I expect they have already cut their overhead to the maximum extent possible.”
Review insurance coverage. “Retailers may want to weigh the risk of being sued if an employee or consumer gets sick from COVID-19 against the limited sales they will receive being partially open,” Marticello said.
Secure cooperation from creditors. “If business owners have huge debts to pay because bills have piled up and creditors are waiting, it could prevent them from having the capital or the time they need to move forward if they are hit with lawsuits from creditors or evictions from a landlord,” said Marticello.