With Bankruptcy Hovering At 3-2, Will Retail Walk Or Strike Out?

The baseball season arrives later this July, and there is a really good chance that you never heard this sports story!

It appears that Donald J. Trump was scouted by the Philadelphia Phillies when he was in High School. He played first base and reportedly was a solid batter. Apparently, he decided not to pursue a career in baseball, possibly because the third base coach told him to steal home, but he decided to build homes instead.

As citizen Trump transitioned to the Office of President, his intense training in baseball aligned some of his thinking. One of the first career trades for the new position, was getting called “out” from the world of retail. In baseball terms, Mr. Trump’s apparel was fouled out at Macy’s, and Ivanka’s line was benched at Nordstrom. A good coach, however, never carries a grudge, so let’s look at the tale of the tape.

When President Trump took office, he pitched a good economy and he delivered. Unfortunately, we have now arrived at a different time when fashion retail is trailing the league, and some wonder if the business is just a victim of circumstance, or is headed towards an unintentional strike out.

Strike One – During the President’s first year in office – importers, consumers, and retailers were in-line to get taxed under the Trump Administration’s newly developed tax plan that was being directed by House Speaker Paul Ryan and Congressman Kevin Brady. The legislation called for an enormous reduction under the “Tax Cuts and Jobs Act of 2017.” Attempting to offset the loss of tax revenue, the team tried to institute a change called the Border Adjustment Tax (BAT Tax). To his credit, the President was not keen on the concept, but its very creation actually sent shivers down the spine of the entire retail community.

Without getting into the weeds, the BAT Tax was just a terrible idea and would have been devastating for retail. In their wisdom, the concept was to lower the tax rate from 35% to 20% but add “cost of goods sold” to the taxable amount (for calculation purposes) when imported goods crossed the border. While this idea sounded reasonable on paper, it created a situation where the tax on imported products ended up being higher than the retailer’s profit. Ultimately, the tax team was faced vigorous opposition and eventually the BAT Tax just miraculously disappeared.

Strike Two – In the second and third years, the Trump Administration implemented the President’s famous tariffs against China. Retail fought this concept tooth and nail but lost the battle. Today, 98% of all apparel & footwear is imported – but 40% of apparel, 65% of footwear, and approximately 80% of accessories still arrive from China, and are taxed at an additional 7.5% or 25%. This is quite a painful experience when the government decides to add taxes to an industry that is already hurting, and add taxes to a consumer that simply is not interested to pay more.

Strike Three – Unfortunately, in this 2020 year, COVID-19 has shuttered most retail for months. Under the CARES Act, the government has doled out survival cash for small business and many companies were able to cover employee wages, rent, and utility bills. However, for a variety of reasons, some small retailers chose not to apply. In addition, some of the larger retailers were not able to secure big loans, because they didn’t have the credit rating that the government required.

Interesting as it has been, the last inning for the Paycheck Protection Program actually occurs today (6/30), and much to their surprise, the government still has $134 billion available to lend. Overall, the program was quite successful, and they gave out 4,798,187 loans to the tune of $519 billion dollars. It is also important to note that 66% of the loans were under $50,000.

Unfortunately, fashion retail will not be totally healed by the Paycheck Protection Program, and that brings us to the final pitch and to the last batter.

Everyone understands that if you are at the bottom of the ninth inning with two outs and two strikes against the batter, a third strike can be devastating. Retail is working hard to put up a good front with social distancing, store density restrictions, shortened hours, and face masks – but, factually, there are less people in the stores – and that means lower sales with heightened carrying costs. In fact, yearly sales through the month of May were off by 63.3%, which statistically is equivalent to Yankee Stadium filling only 20,000 of the 54,000 available seats.

Not to get everyone crazy, but fashion retail is running out of time and out of cash. There is an immediate need for the federal government to back a credit loan facility that would bridge the gap towards self-sustainability. The original government loans helped with rent and employees, but additional cash (or credit) is still needed to run inventory for the business. Essentially, if the shelves are bare, there will be no business – which is reminiscent of a former retailer in Texas who used to say: “stack em high and sell em low.”  Retail is getting to a point where there might not be anything to stack, as retail’s ability to secure credit continues to run dry.

Senator Marco Rubio (R) and Senator Ben Cardin (D) have taken the lead to see how the $134 billion left in the PPP fund could possibly be put to work. One hope is that they might look at fashion retail for a credit allocation. That would surely help, and it would be great if President Trump, Secretary Mnuchin, and Secretary Ross would also step up to the plate and umpire this final inning, simply because a third strike means the end the game.

Most agree that baseball is a big part of America and is a sport that has carried many important voices. Probably their best spokesman was the incredible Yogi Berra.

Yogi once summarized all this angst about the future when he said: “you’ve got to be very careful if you don’t know where you are going, because you might not get there.”

The Yogi statement is critical for both retail and for our federal government. If the credit well runs dry, the third retail strike will be called, and the game will be over.