Experts predict rough months ahead for U.S. consumer spending as fears over the coronavirus outbreak contributed to a drop in retail sales in February over the previous month.

Retail and restaurant sales dropped by 0.5% compared to January, according to government data. Consumer companies have curtailed operations in recent weeks as the virus continues to spread and government officials urge people to stay home. Retailers like Target Corp. and The Kroger Co. have cut hours, while department store chains such as Macy's Inc. and Nordstrom Inc. temporarily closed their doors to keep the virus from spreading.

The dramatic cutback is all but certain to hurt the industry in March, April and beyond, experts said.

"The March figures are going to be off-the-charts bad, and the April results may not show much of a rebound, depending on how long the more extreme social distancing steps remain in place," Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a March 17 research note.

Meanwhile, four small retailers filed for bankruptcy in the late February through mid-March period, nearly doubling the U.S. retail bankruptcy count year-to-date, according to an analysis by S&P Global Market Intelligence. Employment in the sector declined in February while consumer prices inched up slightly.

Retail sales

U.S. retail and food services sales decreased in February to a seasonally adjusted $528.11 billion, according to a report released March 17 by the U.S. Census Bureau.

"Consumers pulled back across the board on spending in February as the onset of the coronavirus began to shape household expectations about the economy and society," Joseph Brusuelas, chief economist at RSM US LLP said March 17.

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U.S. economists expect retail sales to decline further in March and April.

Spending on eating out at restaurants and drinking establishments as well as on luxury goods will further decline in March as consumers focus on necessities such as groceries and utilities, Brusuelas said.

Shoppers kept their wallets surprisingly shut during February, Gregory Daco, chief U.S. economist at Oxford Economics said.

"With strict measures restraining social activities now in place to contain the coronavirus outbreak, consumer spending is poised for a severe pullback in coming months,” Daco said in a note, adding that the "disruptions from the coronavirus will bring the economy's main engine to a halt."

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note that March sales are likely to tumble given lockdowns around the U.S.

The decline comes as the coronavirus outbreak continues to rattle markets and threaten global economic activity.

U.S. President Donald Trump on March 16 urged Americans to avoid bars, restaurants and public food courts, discretionary travel and groups of 10 or more people in an effort to reduce the spread of the virus.

Just days earlier, Trump declared a national emergency due to the virus, and several states have imposed social restrictions. New York, New Jersey, Connecticut and Washington, D.C., are among states that have announced plans to close nonessential businesses to reduce the spread of the coronavirus.

San Francisco on March 16 announced a "shelter in place" order that requires residents to stay at home except for essential needs. Florida Gov. Ron DeSantis on March 17 signed an executive order asking bars to suspend operations for 30 days and imposing restrictions on social gatherings.

During February, electronics and appliance stores saw the sharpest decline in sales at 1.4% to $8.05 billion. Sales at building material and garden equipment and supplies dealers decreased 1.3% to $32.84 billion.

Clothing and clothing accessories sales dropped 1.2% from the previous month to $22.41 billion.

Motor vehicle and parts dealers registered a 0.9% decline in sales to $106 billion.

Meanwhile, nonstore retailers posted a 0.7% gain from January. Sales during the month totaled $66.63 billion.

The consumer price index, or CPI, rose 0.1% in February from the prior month, according to a monthly report released March 11 by the U.S. Bureau of Labor Statistics. Prices increased 2.3% year over year.

The core CPI, which excludes food and energy prices, increased 0.2% during the month. Energy prices declined by 2%, while food prices rose by 0.4%.

Apparel prices increased by 0.4% in February versus the month prior. Prices for men's and boys' apparel declined by 0.3% month over month, while prices for women's and girls' apparel increased by 1.4%.

Footwear prices increased by 0.1%, while the prices of jewelry and watches declined by 1.2% in February.

Bankruptcy

Four Market Intelligence-covered U.S. retail companies filed for bankruptcy in late February through mid-March. The filings bring the bankruptcy count in 2020 to nine.

The total includes companies with a primary industry classification of retailing, household and personal products, or consumer durables and apparel, and secondary classification of retailing. Public companies included in the list of companies with public debt must have at least $2 million in either assets or liabilities at the time of the bankruptcy filing, while private companies must include at least $10 million.

Online auction house Paddle8 Inc. filed for Chapter 11 bankruptcy protection on March 16. The company listed its assets in the range of less than $50,000 and liabilities in the range of $10 million to $50 million.

Generation Zero Group Inc., which operates content-driven e-commerce marketplace Find.com, filed a voluntary petition for reorganization under Chapter 11 on March 13. Online retailer Bluestem Brands Inc. filed for Chapter 11 bankruptcy on March 9. The company listed both its assets and liabilities in the range of $500 million to $1 billion.

Art Van Furniture Inc. filed a voluntary petition for reorganization under Chapter 11 on March 8. The company operates and franchises furniture stores in the U.S.

Employment

The retail sector lost 7,000 jobs in February, a 0.04% month-over-month decrease to 15.7 million jobs, according to a March 6 monthly report from the U.S. Bureau of Labor Statistics.

Employment at clothing and clothing accessories stores decreased by 12,200 jobs, or 0.95%, month over month, to 1.3 million jobs. Building material and garden supply stores registered a decrease of 0.42%, or 5,500 jobs, during February to 1.3 million jobs.

General merchandise stores lost 2,500 jobs, down 0.08% from January to 3 million jobs.

Meanwhile, health and personal care stores added 10,900 jobs during the month, up 1.04% from January to 1.1 million jobs. Electronics and appliance retailers registered an increase of 0.55%, or 2,600 jobs, to 475,900 jobs.

Vulnerability

A March analysis of the one-year probability of default scores identified 15 U.S. department stores and apparel companies with scores ranging from 12.9% to 2% and corresponding implied credit scores of "ccc+" to "b+."

The calculated one-year probability of default remained unchanged for most of the retailers on the list.

Specialty retailer Christopher & Banks Corp. continued to lead the list as its one-year probability of default decreased to 12.9% as of March 17 from 13.1% a month earlier.

Ascena Retail Group Inc., which moved to the No. 6 spot, saw its probability of default increase to 8.4%, up from 6.7% in February's reiteration. The company on March 9 reported a net loss from continuing operations for the second quarter of fiscal 2020 of $132 million.

Mahwah, N.J.-based Ascena Retail on March 17 said it would temporarily close all company-operated retail stores from March 18 through March 28.

J.Jill Inc. moved one place up the list to the No. 11 spot as its probability of default rose to 5%. The specialty retailer on March 9 received a notice of noncompliance from the New York Stock Exchange for failing to meet listing requirements for market capitalization and stockholders' equity.

S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, see the PD Model Fundamentals - Public Corporates white paper.