STORES Magazine - November 2008 - (Page 27)

folios and rising unemployment rates — have dramatically reined in spending. “Consumers are finding it more difficult to borrow and tap home equity lines of credit as banks tighten their credit standards,” says Frank Badillo, senior economist and global program manager for TNS Retail Forward. “This will continue to be a drag on retail spending well into 2009. Some of this will also happen voluntarily as economic conditions cause households to decide that they don’t want to carry the kind of debt burdens they had in the past.” Michael O’Hara, president of Consensus Advisory Services, an investment banking and financial advisory services firm, expects third-party consumer credit companies like Visa and MasterCard to increase their risk profiles, making it tougher to open new accounts or increase lines of credit. “As shoppers struggle to pay loans, credit scores are likely to migrate down,” he says. O’Hara is keeping a wary eye on the retail companies that provide consumer credit cards, too. “There was a time when store credit was common for jewelry or furniture retailers,” he says. “Now, unless a store has a pristine balance sheet, they’re not going to be able to take on consumer credit. The low financing, multi-year payment deals shoppers became accustomed to could really dry up.” Working capital etail executives are already reporting difficulty borrowing for their working capital requirements. Revolving lines of credit have been drastically reduced — or worse. And the crisis couldn’t have come at a worse time for the industry: Most retailers’ working capital needs are highest in August, September and October as they ramp up for holiday selling. Deborah Weinswig, leader of retailing/broadlines, food and drug and home improvement for Citi Investment Research, says smaller retailers “are having the most difficulty renewing lines of credit. We don’t believe that the broadlines retailers will run into liquidity issues at this point.” Rick Darling, president of Li & Fung USA, expects problems to plague a more extended group. “Those retailers that are “I expect the credit either highly leveraged or on weak finanagencies to be very cial footing may have serious problems getting through this period,” he says. aggressive in review“Those with strong balance sheets and ing a retailer’s business models will capture market performance before share and come out stronger.” granting loans.” Jim D’Addario is director of SAP ERP – Walter Loeb Financials. A former banker, he recalls R making credit decisions “Those retailers based on the review of a with strong balance retail company’s key fisheets and business nancial metrics. In the models will capture current environment, he market share and says, even retailers with come out stronger.” pristine balance sheets and income statements — Rick Darling, Li & Fung USA will hear, “I’m sorry” from the banks. “In the past, if a company waivered on a covenant, the banks were reasonably forgiving,” D’Addario says. “Now they’re assessing penalties right and left, and you can bet they’ll impose higher interest rates, too.” Therefore, retailers “need to find a way to do a better job of liquidity planning,” he says. “Typical 60 percent accurate cash forecasts are no longer tolerable for when cash flows slow dramatically and financing is hard to come by.” Mitch Jacobs, CEO of On Deck Capital, a New York-based financing network for small businesses, says that a growing percentage of the 25 million U.S. small businesses are already seeking alternative financing. “A central characteristic of small business owners is resiliency,” he says. “They’re feeling the pain, but what I’m hearing is a desire to grow their way through this period. They can’t go to banks because, in most instances, they don’t have a lot of hard assets.” On Deck Capital provides alternative financing to small retailers at rates ranging from 18 percent to 36 percent – more expensive than bank capital. Still, Jacobs insists that, for many small retailers, it’s an attractive alternative. “Many small businesses have remarkable durable cash flow but, using traditional methods, banks can’t decipher that. We’re providing much needed capital to small retailers who have always been underserved.” Inventory tensions ost retailers insist there will be plenty of inventory on store shelves for holiday selling. That’s especially true for those retailers that source a majority of products from China, because those goods have already landed stateside. But if consumers pull back on spending as anticipated, retailers may have little choice but to move goods at highly promotional prices. Weinswig concurs. “Most ordered conservatively . . . but they may not have ordered conservatively enough given the recent deterioration in the markets and the impact it will have on consumer spending,” she says. “This could lead to gross margin risk.” M WWW.STORES.ORG STORES / NOVEMBER 2008 27 http://WWW.STORES.ORG

Table of Contents Feed for the Digital Edition of STORES Magazine - November 2008

STORES Magazine - November 2008 Contents Executive Editor's Page President's Page Every Cup Counts What Shoppers Think Less Park Time, More Shop Time 10 Things You May Have Missed Numbers Worth Counting Full Price/Markdown Retail People Retail Held Captive First Look Concept2Watch Marketing Technology Custom Software PCI Compliance Data Security Arts Update Newsbeat LP Issues: Q&A Cover Story Surveillance Systems Online Fraud Industry Perspective LOEB Retail Letter Point of View NRF News Retail Crossword Retail Industry Calendar Last Laugh

STORES Magazine - November 2008

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