Retailers Grapple With Rent Payments as Stores Remain Closed and Workers Are Furloughed

Retailers have been canceling purchase orders because they no longer need as much inventory since stores are closed indefinitely. And now they’re scrutinizing other components of their financial obligations, such as rent and vendor-payment terms.

On Tuesday, millennial-friendly Urban Outfitters Inc. said it will “suspend the payment of rent temporarily,” and will pause or cancel some planned new store openings. The specialty chain is also furloughing many of its employees while the temporary store closures are in effect during the coronavirus outbreak. On top of that, Urban will either cancel or delay inventory orders and seek price concessions on the balance, the retailer said. And the chain is also extending payment terms for both merchandise and non-merchandise vendor invoices.

It’s not the only company making changes to keep its cash flow intact.

J.C. Penney. too, is “extending the terms for payment of goods and services,” it said Tuesday.

The cancellation of orders presents a problem in the industry, not only for vendors but also for their factories and raw materials suppliers. Purchase orders are contractual obligations and are considered binding contracts.

And while they should be honored, one former apparel executive said in her experience that “orders were routinely canceled by retailers for one reason or another.” Following a canceled order, it was up to her to figure out how to “save it” for the good of the business, she added. That meant begging the retailer to take the order, usually by dangling a discount, this person said.

But what was really bad was when retailers took it upon themselves to shift vendor-payment terms back in 2008 and 2009 during the Great Recession, this former executive said. That kind of unilateral change in terms usually meant retailers added an additional 30 days or more in which to pay from the agreed upon time frame. Most agreements call for payment 60 days from receipt.

Changing terms is a tactic that’s happening now, as Urban Outfitters and J.C. Penney have said they are doing. To be fair to these retailers, it was not immediately clear whether they were unilaterally changing terms or have had negotiations with vendors to adjust the negotiated terms in question.

Christopher & Banks, a women’s specialty apparel chain, said Tuesday it is collaborating with “vendor partners to adjust near-term supply chain as well as with its landlords.”

Negotiating rent payments — a substantial component of a retailer’s overhead expense structure — could also help ease some of the cash-flow pressure on the balance sheet.

Urban said it was suspending rent payments temporarily. Other retailers have said they are looking at their expense structure and trying to work out arrangements with their landlords. And if they haven’t done so, it’s likely that more retailers could be following a similar playbook to save their balance sheets as liquidity pressures rise the longer the shelter-in-place orders by state and local governments continue.

The stay-home, social-distancing orders are impacting others in the retail sector as well, especially the real estate investment trusts that own shopping malls in the U.S. and overseas.

Simon Property Group, the largest U.S. mall operator, is furloughing 30% of its workforce in response to the hard-hitting COVID-19 pandemic, CNBC reported Tuesday. The furloughs impact all full-time and part-time employees at its malls and outlets, and at corporate headquarters. And Macerich, another mall operator, last week said it borrowed $550 million on its revolving line of credit to maintain financial flexibility.

Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.

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