Costs of COVID-19 downturn are uneven for Minnesota's public companies

Medtronic took a 62% hit to its earnings per share in the fourth quarter of its 2020 fiscal year. Yet its healthy cash reserves had executives talking on a recent earnings call about buying up bargain-priced companies during the global coronavirus pandemic.

In contrast, clothier Christopher & Banks closed all of its retail outlets and laid off employees early in the pandemic — with sales plunging 50% in February, April and May — and now relies on a forgivable government loan to help it survive.

More than six months into the COVID-19 crisis, it is apparent that the virus hasn't affected all populations — or businesses — the same. Disparities exist from region to region based on preparedness and efforts to stem the spread of the virus.

While corporate filings and earnings calls show the pandemic has hurt the vast majority of Minnesota's public companies, some have fared better than others. Factors such as existing cash reserves and credit lines played a role in easing sales erosion, year-over-year profit losses and slumping earnings per share.

But happenstance, such as market sector, also was a factor. Companies generally responded quickly to pandemic-forced disruptions in the economy, but the costs of COVID-19 have not spread equally.

Within individual companies certain product categories or segments have fared better than others depending on the end markets served.

For the most part, Minnesota companies moved quickly in March to address the most immediate concerns regarding the virus and its economic effects.

"As a longtime Minnesotan, I've spent my entire business career here, I'm really proud of the way our companies really stepped up." said Carol Schleif, deputy chief investment officer at the Minneapolis office of Abbot Downing, which is part of Wells Fargo's wealth management business. "They didn't sit around and wait for a week or two or a month or two. They had all of their teams deployed really quickly."

Schleif saw a trio of things that she has not seen happen before: More than 200 of the S&P 500 have pulled guidance; companies cut dividends and suspended share-buyback programs; and companies moved quickly to improve their liquidity by drawing down their revolving lines or credit, rework loan covenants or issue new debt.

Adjusting to COVID-19 conditions also meant companies moved as many employees as practical to work-from-home solutions, investing in technology when needed. They also eliminated unnecessary travel and flexed up on the use of videoconferencing technologies.

Companies also instituted furloughs or temporary wage cuts or deferrals of merit-pay increases. Some companies hoped to build goodwill when they made layoffs by helping employees understand new state and federal unemployment benefits.

Companies such as Ecolab and General Mills mobilized quickly to get their cleaning and sanitation products out to businesses and packaged foods to a sudden surge of home cooks. Best Buy and Target moved quickly to lean more heavily on their e-commerce and remote pickup options.

Even smaller companies such as Minneapolis-based Hawkins mobilized quickly by ramping up production of bottled bleach to meet demand in food and health end markets, it said in its earnings release on May 20. It also saw decreased demand from ethanol producers and resorts, besides its traditional customers.

Patrick Hawkins, the company's president and CEO, said the company was able to adjust its manufacturing mix to meet demands, and as a result, it kept its approximately 650 employees working throughout.

Andy Adams, chief investment officer at St. Paul-based investment firm Mairs & Power, noted that some of Minnesota's local manufacturing companies have benefited from earlier investments that have helped mitigate their COVID-19 costs.

"In touring most of the manufacturing facilities of our Minnesota-based companies over the years, I believe they are in a good position to restart operations with minimal changes to how they operate," Adams said. "Companies like Toro, Graco and Donaldson have invested significantly in automation over the years, which has had the benefit of creating natural social distance in their facilities."

While some companies — especially those with operations in China — had early visibility into the economic effects of the coronavirus spread, most started to feel the direct effects in last half of March. Thus, public financial statements are just now beginning to record the effects.

Those with overseas operations like Donaldson said they already are starting to see recovery, especially in China and other Asian markets.

Both consumer behaviors and supply-chain effects were hard to predict as well.

"Honestly, I think we've handled [the pandemic] about as well as anyone has," said Scott Wine, chief executive of Medina-based Polaris.

Supply-chain risk was one of the outdoor vehicle company's big concerns as it tracked and tried to minimize disruptions from China, to California, New York, Italy, India and most recently Mexico.

The company's production was deemed essential, but Polaris took a voluntary week to 10-day shutdown of manufacturing operations to make changes to production lines and processes to meet Centers for Disease Control and Prevention guidelines and other safer operating procedures for employees.

Wine said the biggest impact to Polaris came from the closure of dealers because of stay-at-home orders.

The company quickly rolled out a Click.Deliver.Ride tool as a way for people to buy off-road vehicles, motorcycles and snowmobiles through participating dealers and get home delivery.

"That's been very, very helpful in serving our customers, but that is just an example of how our team has pivoted when needed to provide customer solutions," Wine said.

Consumers also helped. In April and May, new customers turned to Polaris' side-by-side and four-seat vehicles for family-friendly outdoor recreation. The online-sales program helped deliver those purchases, and Wine said the option will continue as part of a broader mobile service option the company had in development.

Although Polaris has not yet disclosed the total cost, company officials said earlier this year that changes cost hundreds of thousands of dollars.

Austin, Minn.-based Hormel reported $20 million in COVID-19 costs in the second quarter and said it would need to spend $60 million to $80 million more in the second half of the year.

"They'll get some efficiency leverage with time but initially there was no time to negotiate for PPE, and safety measures had to be implemented quickly," said Michelle Warren, an equity analyst with Mairs & Power

The latest predictions from analysts and executives is that recovery from the pandemic's financial devastation likely will be measured in years.

"When you say … emerge, clearly you have to take out the next few quarters, just based on the uncertainty that we talked about, and really the industry is talking about. From our perspective, we're thinking two-plus years out," said Hormel CEO Jim Snee in a June 2 earnings call.

Still, the COVID-19 pandemic hasn't just increased costs and hurt earnings, it has also presented opportunities and accelerated business trends.

"Any economic trends that were in place the COVID crisis probably accelerated by three to five to seven years," said Abbot Downing's Schleif. "So any industries that were having trouble are now finding themselves in a deeper hole, and trends like e-commerce, in-home delivery and work from home suddenly accelerated."

Yet because companies pulled guidance with the economy's uncertainty for the rest of the year, there is a chance to try some innovation that would not have been possible if there were strict financial goals to meet.

Even as Medtronic predicted slightly worse earnings in the first quarter of 2021 because of the COVID-19 effects, CEO Geoff Martha on an earnings call was addressing chances for mergers and acquisitions.

"I think it is a good time to do M&A," Martha told stock analysts. "Asset prices are down. It doesn't mean that we lower our standards. I just think, again, we can play offense."

Medtronic, the world's largest medical device maker, has $10.9 billion in cash and investments and a $3.5 billion bank credit line that it has yet to tap, Martha said. The company owes no public debt on earlier borrowing until March 2021. It believes it normal growth will replace losses beginning in the third quarter of fiscal 2021.

The leeway isn't unlimited, though.

"This [pandemic] absolutely gives companies the ability to reset expectations in the short term," said Adams of Mairs & Powers. "I think investors have given management teams a free pass on Q1 and Q2 earnings results. However, if the number of new cases stays stable or improves from here, I think investors will expect a pretty strong bounce-back in margins over the remainder of the year and certainly in 2021."