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article imageCredit crunch and sales slump hitting US retailers as bankruptcies rise

By Paul Wallis     Apr 15, 2008 in Business
While “pundits” argue the point about whether the US is in or heading for a recession, retailers are voting with their bankruptcy suits. Unlike the more glitzy financial stories, this is the baseline economy getting hit, America’s bottom line.
What goes around has definitely come around with a vengeance. The course of normal business, which for retailers includes such exotic hobbies as sales, has been derailed. Added to which, business debt hasn’t benefited from the new, grim, credit environment, or the banks’ defensive tactics.
The New York Times:
Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.
But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.
Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.
Foot Locker and the others’ duck and cover move is a good indication of some genuine hard nose calls by retailers watching their market closely. Stores can always be reopened, but losses tend not to come back.
Increased consumer prices for things like food are another real problem for retailers. Disposable incomes are being hit, and they’re the first to be affected. Things like health insurance and other big cash-eaters aren’t helping.
Put it this way, using some pretty conservative figures:
If food goes up by 5%, health insurance by 5%, gas goes up by 5%, and your local retailers have to put up their prices by 5%, your outlays are going to have to change. The retailers have good reason to want to get out of the way of the runaway train.
Then there’s the nature of the retail business: It’s high maintenance, it needs good cash flow, growth is expensive, debt is a reality.
NYT explains:
Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.
“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.
The banks aren’t being mean. They have a serious situation with loans, they need to get some stability. Taking on new liabilities isn’t part of that need. Their own liquidity is under enough pressure, and giving loans isn’t necessarily good for them. Given that the retailers themselves are so busily cutting their own exposure to losses, that’s a very understandable position. They really can’t do a “business as usual” approach.
Some of the retailers were big borrowers, and that sort of money isn’t getting much enthusiasm from the banks. Many retailers were caught with heavy debts, in the middle of business situations which weren’t good to begin with. As a risk, these retailers don’t look good.
This is business, not charity, and the more you look at the various scenarios in the NYT article, the more sense the big retailers’ ducking and weaving makes.
Retail is murder. It's a tough business most of the time. For every successful retailer, a hundred have failed. Only a total ignoramus could consider this to be a safe environment for retailers.
There’s a further dimension to this retail rout. Retailers have other debts, too, like to suppliers and service providers. If they can’t meet those debts, those creditors get hurt, and that can do a domino effect down the line until someone actually pays a debt.
NYT has an each way bet on whether the companies now filing for bankruptcy will avoid liquidation. Most of them are filing for reorganization, which is something like receivership, as I understand it. In this economic environment, the prognosis isn’t good:
But, in a contrast with previous recessions, many are unlikely to emerge from bankruptcy, lawyers and industry experts said.
Changes in the federal bankruptcy code in 2005 significantly tightened deadlines for ailing companies to restructure their businesses, offering them less leeway.
And the changes may force companies to pay suppliers before paying wages or honoring obligations to customers, like redeeming gift cards, said Sally Henry, a partner in the bankruptcy law practice at Skadden, Arps, Slate, Meagher & Flom and the author of several books on bankruptcy.
As a result, she said, “it’s no longer reorganization or even liquidation for these companies. In many cases, it’s evaporation.”
Not paying wages has a distinct smell to it, but it’s also the law. Creditors, as defined by any law, have precedence.
The shrinking workforce is a measure of a further issue. It takes about 10-20 full time jobs to make a service job. That means that the layoffs will trigger additional unemployment which can be expected to flow on as the waves of job losses spread to the services industries.
Store closures are expected to be up by 25% on 2007, and even the big chains are scaling back new store openings. On of the biggest, Office Depot, is opening 75 new stores, instead of 150.
In the second last paragraph of the NYT article, three retail chains are said to be closing a total of 461 stores.
“No recession,” huh?
What would you call it?
A Spring breeze?
When all the rhetoric, the self-righteousness, and the other useless garbage blows away, this is the problem.
It doesn’t matter if a liberal, a conservative, or a friendly gerbil wins this US Presidential election.
The US consumer economy is drowning in costs.
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