Monday, December 29, 2008

Retail Will Get Worse Before it Gets Better

From Bloomberg:

U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”

This shouldn't be surprising considering retail sales are off for the holiday season:

Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending. Total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit. WSJ

Customer visits to U.S. retailers fell 24 percent last weekend compared with a year earlier, the biggest drop on record, as deepened discounts failed to attract consumers. Foot traffic was hurt by the economy, unfavorable weather and a calendar shift, research firm ShopperTrak RCT Corp. said.

Barron's ran a story on the retailers a few weeks ago. Here are some snippets from the article:

Among cash-rich retailers, Nike and Coach look especially attractive. They sport moderate price/earnings multiples, have little debt and are expected to report higher earnings in fiscal 2009. Bob Drbul, a retail analyst at Barclays Capital, has an Overweight rating on both, and notes that "retailers become more dependent on established brands" in uncertain times.


The equity markets already have sniffed out retailers that could have big problems in coming quarters. Bon-Ton Stores , a regional department-store chain, trades for 1.16 a share, down from a high of 57 in March 2007. Talbots , a women's apparel chain, fetches 2.30; Dillard's , 3.78, and Charming Shoppes , another women's-wear retailer, 2.88. All are expected to report losses this year, and have borrowed heavily relative to their operating performance. Bottom fishing among these stocks looks unwise for now.


THE NATION'S LARGER department stores also face a tough 2009, but they are in better financial shape. J.C. Penney , the mall-based retailer, has $3.5 billion of debt but $1.6 billion of cash. It should have little trouble funding its first debt maturity of $506 million in 2010, and a subsequent payment of $230 million in 2012. Kohl's has a similar customer base and a strong balance sheet. But its shares are cheaper, at 13.9 times 2009 earnings estimates, than Penney's, at 15.1.