Dive Brief:

• Department stores as a sector have a 42.1% median probability of defaulting on their debt within a year, according to emailed research from S&P Global Market Intelligence.
• The sector's default risk, as of April 7, is the highest among consumer companies. Retailers of food and household goods carry some of the lowest default risk, according to S&P. Calculations are based on fluctuations in the company's share price and other industry-related risks.
• Department stores' default risk rose nearly 20 percentage points between March 25 and April 7, according to S&P data. Meanwhile, Amazon's default risk was among the lowest, at 0.56%.

Dive Insight:

Department stores entered 2020 with a long list of existential troubles. Sales and profits were sliding as mall traffic at middle and low tier malls continued its long downward trajectory. Off-price, e-commerce and mass merchants continued to take market share.

Moody's analysts, in slashing their forecasts for the sectors' profits last year, noted that these challenges persist even after steady investments in e-commerce, supply chains and other efforts to modernize. Macy's, the sector's largest remaining player, is a chief example. The company threw the kitchen sink at its sales struggles, only to see sales decline for another year in 2019 and forge yet another turnaround plan that includes substantial store closures.

And then came a global pandemic that turned the industry on its head. Stores, as potential vectors for COVID-19, have temporarily closed en masse. That includes major department store retailers like Macy's, Nordstrom, J.C. Penney and others. As store sales effectively disappear, some analysts think those sales are simply gone, not to be replaced by e-commerce.

Of prime importance for department stores right now, and for all discretionary retailers that have closed their stores during the pandemic, is liquidity. To free up cash, department stores have tapped credit lines, furloughed tens of thousands of employees and are likely negotiating with landlords around rent payments during the closure period. Others have cut spending and halted investments. That includes, notably, Macy's, which has paused its "Polaris" turnaround plan. 

Analysts with Cowen & Co. estimated in March that department stores as a sector have five to eight months worth of liquidity to weather the closures. But that is just a measure of short-term survival. Penney, for example, has eight months of liquidity according to Cowen — much of it owning to availability under its revolver —​ but the retailer also has a mountain of debt and was trying to reverse a long downward trend in its sales and margins that was financially painful well before the pandemic hit. 

Now Penney and its peers face unprecedented closures, that have no certain end date, as well as an uncertain economy and post-pandemic landscape. Fitch analysts, for instance, think retail sales could remain depressed through 2021. Based on current stresses and long-term uncertainty, ratings agencies have issued a flurry of downgrades —​ many of the department stores among them —​ another indication of the default risk for retailers of anything but essential goods.