COVID-19 FAQ: Retail & Consumer Products

May 2020

COVID-19 has disrupted business continuity across all industries, and retail is feeling the impact. While some sectors—including grocers and general merchandisers—are benefitting in the short-term from consumers bulking up on essentials, the industry overall is facing widespread store closures or limitations and declines in consumer spending.

Here are some of the most frequently asked questions and resources to help retail and consumer product companies in their immediate response and planning. We have also created a COVID-19 Response Resource Center for your overall reference.

A. COVID-19 has caused significant interruptions for many retailers, but there are steps that can be taken to mitigate some of those interruptions. If there is an existing incident response and business continuity plan, these can highlight critical measures to implement now.

Retailers must ensure they understand their cash runway, including cash, sales, pipeline and lines of credit to understand their needs. Retailers should also assess the specific risks that the pandemic poses to business continuity and identify a core response team to lead ongoing crisis management efforts. While a crisis management team should be formed, it will be a part of every executive’s job to continuously build intelligence, scenario plan and apply lessons learned to operations. Communicating consistently with internal and external stakeholders will also help the organization stay up to date about the response.

Reviewing current and potential disruptions to operations can help develop scenario planning for a range of circumstances in the short and medium terms. Assessing supply chain problems and options for diversifying suppliers also helps mitigate disruption. And reviewing current workforce needs and capabilities can inform the business’ options for transitioning temporarily to remote work. When it comes to workforce reintegration planning, prioritization and staging for a slow return to work is essential.

It’s also important to carefully review insurance coverage to see if interruptions as a result of COVID-19 apply, and then establish milestones for claim recovery. Retailers should maintain contemporaneous documentation and carefully record any losses and expenses related to the pandemic. In cases of declining revenue and liquidity issues, retailers can engage with lenders and landlords to review options for payment terms. There are also options for economic relief through programs under the CARES Act stimulus, but eligibility and compliance requirements need to be reviewed thoroughly.

For more on weathering the crisis, view our insight.

A. In response to the COVID-19 pandemic, governments around the globe have taken action to provide both companies and individuals with tax relief designed to increase cashflow and help businesses continue to employ their workers. In the United States, The Coronavirus Aid, Relief, and Economic Security (CARES) Act addresses the economic impacts of COVID-19 and includes a number of tax relief options.

The CARES Act includes payroll tax credits for employers that have been harmed by COVID-19 but have retained their employees, and permits employers to defer payment on the employer portion of Social Security tax that would otherwise be due at the end of this year.

Additionally, the CARES Act accelerates the refund schedule for corporate AMT credits. Now the credits are fully refundable for either the 2019 or 2018 tax year. The Act also allows businesses to utilize net operating losses (NOLs) generated in prior years to offset 100% of taxable income for tax years 2019 and 2020.

The CARES Act also fixed the so-called “retail glitch” included in the Tax Cuts and Jobs Act. Now, Qualified Improvement Property is generally depreciable over a 15-year period and is eligible for 100% bonus depreciation.

While there are many tax savings opportunities included in the CARES Act, eligibility for some provisions is dependent on a retailers’ size and other factors, and many benefits are mutually exclusive or have other tax implications. Given the level of complexity in applying these provisions, it is critical that retailers consult with tax professionals in order to maximize their savings.

Outside of the existing stimulus measures, retailers should also consider tax relief measures that pre-dated the COVID-19 pandemic. If retailers are working to develop, improve and adapt products and processes, they may be eligible for Research & Development tax credits from federal and state taxing authorities.

To learn about the “retail glitch” fix, read our recent insight.

A. For many retailers, supply chain disruption has meant supply shortages and increased prices, fulfilment delays, and heightened transportation costs. Others are bracing themselves as supply chain disruption aftershocks can often outweigh initial impacts.

Despite the uncertainty surrounding the intensity and duration of disruption, there are steps retailers can take now to minimize the damage and protect against future unexpected ripple effects of this crisis:

If conversations around geographic diversification in supply chains aren’t already underway following the U.S.-China trade tensions of the past year, now is the time. By shifting supply sources to a variety of countries, and minimizing the dependence on a single location, retailers have more flexibility when it comes to procurement and manufacturing. When evaluating changes to supply chain operations, it’s important to assess potential exit charges, permanent establishment status and the tax liabilities associated with the movement of functions and assets.

Retailers should also ensure they have effective supply chain resiliency and third-party risk initiatives, which begin with strengthening operational risk programs that cover crisis management and communication, business continuity and third-party risk. Operational risk programs should identify and evaluate the organization and its retail segment, as well as cite critical path analyses, interdependencies, product and service priority levels, Value-at-Risk (VaR) and recovery time objectives.

It’s especially critical to understand the impact of COVID-19 disruptions on lead times, inventory and product variability. Since retailers have varying levels of control over each source of risk, they need to quantify the expected effects of these risks, defined by probability and business impact.

Retailers should also familiarize themselves with their insurance policies and understand the extent of their coverage. For COVID-19 specifically, pay close attention to whether or not insurance coverage contains a Communicable Disease Exclusion.

If possible, implementing technologies such as cargo-tracking, cloud-based GPS and RFID can help increase visibility into nearly every part of the supply chain. Real-time transparency can help retailers more proactively identify specific areas of risk early on, or more quickly notice and respond to disruption that occurs.

For more, read our insight on how companies can navigate COVID-19 supply chain impacts.

A. First and foremost, retailers should thoroughly evaluate all of the government assistance programs designed to reimburse employers for continuation of wage payments to employees under the PPP, Emergency Paid Sick Leave, Emergency Family Leave, Employee Retention Credits, 3601 Payments as well as employee payroll tax deferrals.

If provisions of the CARES Act do not provide the assistance necessary to maintain a retailer’s workforce, leadership teams are faced with difficult decisions. However, there may be some alternatives to the worse-case scenario of layoffs.

Many companies are implementing pay cuts across the board to save jobs, with higher reductions for higher salary brackets to protect the most vulnerable. If going this route, it’s critical that the leadership team lead by example and also commit to pay cuts. Several executives, especially in the hard-hit airline industry, have announced that they’re giving up their salaries altogether to avoid layoffs for as long as possible.

Retailers can also consider shortening the work week for any roles in which a capacity reduction is feasible. If given the choice, some employees might opt for part-time work if it will save their job.

Some employers may also make the tough decision to delay or temporarily cut back on fringe benefits like 401(K) contributions, paid vacation and gym or tuition reimbursements, in efforts to preserve salaries and health insurance.

Similarly, temporarily suspending non-essential vendor services—including corporate office supplies, maintenance for closed physical stores, event support or certain conveniences—could free up cash to reallocate for labor expenses.

In any scenario, open and clear communication with staff is critical during turbulent times when stress levels are already heightened. If staff reduction is unavoidable, companies should also consider the differences between formally laying off vs. furloughing workers. Layoffs terminate employment status and mean an organization will incur costs from rehiring, while furloughing maintains employment status but the employee stops working until they are reactivated. Minimizing uncertainty and maintaining transparency surrounding difficult decisions is key for individual wellbeing.

A. Business interruption due to COVID-19 has had a widespread effect on many retailers, so trimming costs during a time of revenue constraints is crucial to continuing operations. Organizations should examine all liabilities to see how to mitigate any potential financial issues. If faced with financial distress, then preserving core business functions, identifying process optimizations and increasing efficiencies to maximize available resources should be the focus for the short and medium terms.

Assessing the status of vendors and suppliers can also help identify possibilities for temporary relief, as they may be willing to amend the usual payment terms or offer an extension. Additionally, landlords may be willing to offer retail tenants a grace period on rent, especially for mall-based anchor stores that typically drive traffic throughout the mall or shopping center. Streamlining product offerings can also reduce costs, and pricing models should reflect any necessary cost increases that the business may face as a result of the pandemic.

Retailers should examine their current cash flow and make realistic projections over the next three to six months to understand their expected capital requirements and how costs will need to be adjusted. If there is an existing business continuity plan, this can highlight critical measures to implement now. Introducing temporary pay cuts or furloughing some workers could be necessary to sustain operations as well. If further cost-cutting is needed, contacting a specialist in restructuring and turnaround services can help retailers identify the most effective cost-cutting actions to pursue.

A. To determine how forced closures may impact your insurance coverage, you need to first review your business interruption coverage. Non-physical damage coverage for business interruption losses can include lack of access to facilities, government declarations of emergency, and cancelation of events, among others relevant during a public health crisis. Identify the impact to your business from such non-physical damages and identify coverage for broader civil authority and ingress/egress, supply chain interruptions, loss mitigation, and extra expenses that can arise from increased logistics and redistribution costs, workforce disruption and shifting production to potentially higher-cost locations.

Once you’ve evaluated your coverage, you should establish milestones for claim recovery that are appropriate for your business.

Maintaining contemporaneous documentation is also critical to ensuring your claims hold up. It’s a trying time for retailers and their people as they work to navigate public safety concerns while preserving their operations. However, keeping careful records even during this crisis is critical. Email records around non-physical damages, and suppliers being impacted are the difference between receiving relief from a business interruption claim and not.

A. The SEC has provided conditional relief for registrants that are impacted by COVID-19 and are unable to file on a timely basis. On March 25, 2020, the SEC issued a new order extending the due date by 45 days to file certain SEC disclosure reports, such as Forms 10-K or 10-Q. The exemptions granted relate to reporting and proxy delivery requirements for registrants and the new order modified exemptions to now cover filings due between March 1, 2020 and July 1, 2020. Registrants must disclose why they were unable to file on a timely basis.

For more on how to take advantage of the extension, read our report on the accounting and reporting impacts of COVID-19.

A. There is too much uncertainty in projections and the appropriate discount rate to build reliable valuation models at present, but given COVID-19’s disruption to the retail industry, it is likely that valuations will be impacted. For non-essential retailers, the decisions and mandates to close stores and furlough workers—along with changed consumer behavior and decreased optimism—will have serious effects on revenue and overall EBITDA. Retailers must consider that we are likely to emerge from the novel coronavirus into a recession and that some learned consumer behaviors—like the push to digital shopping—may not snap back. Retailers who were already struggling with liquidity or investing in capital improvements to increase relevance may be set back further. The focus now must be on preserving value and planning for value creation in a new normal.

A. With so much uncertainty, organizations should seek to develop flexible cash flow projection models for liquidity and business planning, and to enable decisions to be made as early as possible.

To start, identify the key drivers of cash flow for your company and then evaluate how the pandemic and related economic and social impacts will affect those drivers. This information can then be used to develop a flexible and dynamic model to evaluate alternative scenarios and corresponding strategic responses.

It’s important to conduct stress tests of varying durations given the uncertainty around the length of the pandemic and its ripple effects.

Retailers should also perform financial forecasting including sensitivity and ration analyses, examining the overall threat to the business based on varying sales decrease scenarios.

Short-term measures to increase liquidity might include:

  • Reducing variable costs
  • Halting non-essential purchases
  • Negotiating longer payment terms with suppliers
  • Negotiating a debt service holiday or covenant relief
  • Filing for bankruptcy protection
  • Applying for a low-interest government loan
  • Taking advantage of tax relief provisions
  • Borrowing under revolving credit arrangements
  • Monitor accounts receivables collections to quickly identify potential collection issues

A. There is financial relief available for many retailers under the various federal stimulus bills. While there are many tax savings opportunities included in the CARES Act, eligibility for some provisions is dependent on size and other factors, and many benefits are mutually exclusive or have other tax implications. Given the level of complexity in applying these provisions, it is critical organizations consult with tax professionals in order to maximize their savings.

The CARES Act includes a number of programs for employers that keep employees on payroll instead of laying them off. Keeping the employee population intact provides the additional benefits of not having to locate, screen and train new employees upon re-opening which will accelerate the ability to re-start operations.

The most publicized of these programs is the Payroll Protection Program (PPP) that provides loans to certain employers through the Small Business Association. In addition to providing a very favorable two-year loan at 1% interest, there is an opportunity for the loan to be forgiven if the employer maintains its employee headcount and wage payments at pre-COVID-19 levels.

Eligibility for the PPP and its forgiveness requirements is dependent on many variables. These conditions need to be reviewed thoroughly to determine if you qualify.

Additionally, the Employee Retention Credit (a 50% credit on qualifying wages paid to employees on March 13 through December 31, 2020) is available for employers that do not take advantage of the PPP and either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar year

All employers are eligible to defer social security tax liability due March 27 through the earlier of either PPP loan forgiveness or December 31, 2020.

Retailers should also check with their applicable state taxing authorities for relief and updates on how states are coordinating with the CARES Act’s provisions, and should examine all liabilities to see how to mitigate any potential financial issues. You can engage with lenders to confirm existing lines of credit, negotiate terms of existing loans or seek additional funds for relief in the near term. You can also contact landlords to seek a grace period on rent. Additionally, assessing the status of vendors and suppliers can identify possibilities for temporary relief, as they may be willing to amend the usual payment terms or offer an extension, especially if there is an established relationship.

It’s also important to carefully review insurance coverage to see if this applies to current losses due to business interruption, and then establish milestones for claim recovery. Organizations should maintain contemporaneous documentation and carefully track any losses and expenses related to the pandemic as well.