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Thread: retailers cutting to the bone ...

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    Banned Melonie's Avatar
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    Default retailers cutting to the bone ...

    (snip)"24/7 Wall St. has reviewed the stocks of a number of retailers that are still operating independently. If consumer buying power gets worse it could lead to an ugly outcome for retailers that don't have strong balance sheets and at least modest same-store sales. Bankruptcy is not at all a pre-determined fate and these retailers may have modest prospects if they can get their houses in order. But significant risks loom for their shareholders, especially if the economy takes several quarters to recover.

    Sears (SHLD) is the most likely candidate for mass store closings. It has the balance sheet to weather a tough period, but not at its current size. Between the Sears and K-Mart brands, SHLD operates in 3,800 locations. The company is losing money and its cash balance fell sharply in the last quarter. In its comments about financial results, Sears said it did not expect that the troubles with a slow economy or rising commodities prices would get better this year. Comparable store sales for the Sears brand dropped almost 10%. The only way to improve that if the current retail recession continues is to close 10% of the company's outlet, about 350 locations.

    Circuit City (CC) has to top the list of retailers that are not likely to make it out of a severe recession.The company's share price is $2, down from over $25 less than two years ago. Its market cap is only $350 million even though annual revenue runs about $12 billion. The competition in consumer electronics is killing CC margins.The company has almost 700 stores. If a downturn lasts well into next year, CC will have to cut scores of locations or seek court protection for its assets

    The cool importers..... You can argue that Pier 1 Imports Inc. (PIR) and Cost Plus Inc. (CPWM) are being thought of as one because of the plan by Pier 1 to acquire its smaller troubled competitor.

    Pier 1 is expected to lose money for fiscal Feb-2009 and has posted losses over the last three years. The good news is that appears to have liquidity enough to get through the storm as long as it can move back to annual profitability in fiscal 2010 as analysts expect. As of March 1, 2008 it had 1,117 stores and it has already closed some locations and many expect more. If consumer buying power get worse, at a minimum you could anticipate fewer Pier 1 stores as it reviews its geographic position. If the retail recession lasts into next year, Pier 1's future starts to get dicey.

    Cost Plus is thought of by many as "The Other Pier 1" and it can't be any secret that its restructuring and turnaround have failed to generate anything of benefit. Its market cap is only $50 million against annual sales of $1 billion It has just shy of 300 locations and Cost Plus is faced with the prospects of closing more stores or paring down the size of some of the stores on its current leases whether their landlords want that or not. As it fights a buyout by Pier 1, Cost Plus is faced with management and legal distractions not unlike those which Yahoo! has been up against. Analysts expect losses for the next two years and loyal customers are likely wondering how long the financial performance can be tolerated. The current market value of the company is astonishing close to nothing

    Re-Sellers and Retailers:

    Tuesday Morning Corp. (TUES) is another at-risk liquidation retailer that sells many in-home items that overlap products sold at larger retailers. In fact, it is not infrequent at all that the items on their shelves still have the original large store's price and retail tag on them with the lower-priced Tuesday Morning tag over the original price. The company is expected to be profitable by analysts but it doesn't take a genius to realize that the company has had enough earnings warnings to bring the stock down from $30 in 2005 down to $4 today. Bankruptcy isn't an immediate possibility, but it would be easy to imagine that with 800+ locations the company may start lopping off some under-performing units.

    Gap Inc. (GPS) is such a damaged brand that you have to be amazed that it has remained profitable during a period of declining sales. The "dead money stock" classification for investors has been in effect for almost this entire decade. It shuttered its Forth & Towne brand and has been restructuring under new management. It has announced that it is closing many locations of the Gap, Banana Republic, and Old Navy brand stores, and it is really consolidating the Gap locations of Baby, Kids, and "Us." The problem is that GPS has to fight so much brand damage that even in the current economy the restructuring could go on for years. Added economic pressure will drive more store closures. The good news here is that this could always be a break-up stock or a a perpetual "re-org" for investors. Analysts are still expecting profits for the coming years, so don't lose too much sleep about whether or not the company will be there. How many locations of each store brand is another question entirely. With same-store sales at Old Navy in particularly bad shape, the entire division may be closed. The Gap will make it, but its weakest brand will not

    Blockbuster Inc. (BBI) has been a perpetual saga which many would have to call a race to Zero. Netflix is only one of its problems, but it is amazing that Blockbuster has managed to do well as it has. Many market pundits believe it is only WHEN rather than IF it disappears. But there is hope and amazingly enough it is expected that the company will be profitable for each of the next two years and it is even expected to grow earnings. Whether or not this happens depends on both the economy and the rate at which consumer move to digital downloads. The company has sliced store counts already but it still has 7,800 locations when combining the U.S. overseas. Competition and a changing consumer are elements BBI has had to adapt to and Wall Street would seemingly not be in a position to blame management if they decided to close more stores. While consumers may still rent DVD's, the risk that internet delivery of content will grows as a formidable alternative every day puts an endpoint on physical stores are a primary delivery system. At some point Blockbuster cannot support its own infrastructure.

    Rite Aid Corp. (NYSE: RAD) has been another turnaround stock that just never turned around. The company was a huge growth engine for investors for much of the 1990's, but it has been under $10 this whole decade and sits close to a $1 now. It has lost money in the last two years and Wall Street expects losses to continue for the next two years. It has over 5,000 stores and yet it doesn't cover the entire U.S. When a company keep losing money, has sporadic to negative sales growth, and faces much more dominant competition, the market begins to wonder if or when the day will come when it disappears. A turnaround is always possible and it has many investors holding out for that day. But competing against Walgreen's, CVS, Wal-Mart, and Target is a tough space to be in. If the trends of the last decade continue and if you include an economy where stronger companies can undercut Rite-Aid day in and day out, then store traffic is likely to fall very sharply. Management's purchase of shares recently can't change the economy.

    Some of these companies will not make it, at least not without a Chapter 11 filing. Others may survive, but in terms or size and store count, they will likely look nothing like they do now."(snip)

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    Featured Member snoopy's Avatar
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    Default Re: retailers cutting to the bone ...

    i hate sears/kmart. client of ours for over twenty years until i booted them out once i took over. i absolutely refused orders from them (repeatedly!) until they simply stopped sending them in.

    then they had the gall to try and chargeback fees to me on business of my competitors! uh, i didn't sell you idiots that. they did. dumas.

    i'm in shock they have a balance sheet even worth considering. because as far as i know, business as usual stayed even after their move from Troy, MI to champaign hills, IL or wherever they're at now. and that means "bullshit accounting".

    sears and the inherent real estate values are (have been) propping them up. i wonder how they'll fare once commercial real estate starts to falter. i don't think it'll plummet but they're not known to have A+ grade properties either (the kmart side). hmmm...

    rite aid, another client of mine. actually, i have seen a marked improvement in their operations in recent years. are they CVS? (another client) no way. but they're not the rite aid of old at least. the brooks & eckerd buyout (also clients of mine ) did help them by injecting good blood and better locations imho.

    i'd bet against sears and i'd bet for rite aid. jmo

    as for the others...hear that sucking wind sound? it's the sound of inevitability, mr. anderson.

    blockbuster has a good chance if they can adopt the netflix model and exploit the gamer market. why should "game stop", "toy r us", wal-mart electronics, etc. not have competition? there's a LOT of $$$ in that niche. they have to accept a change in paradigm from rental-oriented to sale. maybe even a rent-to-buy scenario?

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    Default Re: retailers cutting to the bone ...

    Hey Mel,

    I've been OTL or atleast not around SW for a while. I took 2 weeks and went to auction school as it is an interest of mine to pursue a career as an auctioneer following my dancing days and time spent gaining my university degree. I'm back now...

    Anyways, at auction school there was much repetitive talk around similar topics relating to so much excessive retail inventory stemming from Hurricane Katrina and accumulating vastly over the past 12 months as consumer spending grinds its way. I wouldn't be surprised to see many large retailers fail to pull through the next 24 months. Business failure for many may be imminent if they don't have the necessary healthy balance sheets as the banks are no longer there to support them and investors are looking elsewhere to seek more manageable risk when investing their money.
    Oh Canada, we stand on cars and freeze...

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    Banned Melonie's Avatar
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    Default Re: retailers cutting to the bone ...

    ^^^ I've heard much the same, but from different angles.

    #1 issue with the retailers who are primarily selling low-ball Asian imported product is the time delay involved in the supply pipeline. If a huge US retailer placed an order for 1000 pieces of 'whatever' last march, between the Chinese factory's lead time, 6 weeks crossing the pacific ocean on a slow boat, and another couple of weeks to clear US customs and get transported by truck to the store, those 1000 pieces ordered last march should be showing up right about now. However, as everybody can see, retail customer demand has dropped significantly since last march meaning that the retailer will only be able to sell 1/2 as many pieces as anticipated last march - which in turn will probably leave the low-ball retailer with 500 pieces of inventory that will be hard to move without discounting away their profit margin.

    To make matters worse, the $50,000 that the retailer has 'stranded' in their cost of the 500 pieces of unsold inventory is racking up interest charges ... plus making it impossible for that retailer to order $50,000 worth of some other product for which retail customer demand is still high. As you pointed out, this weakens the retailer's balance sheet big time, and increases their borrowing costs - with associated reduction in profit margin on products that ARE selling.

    But the real coup-de-grace will be the closing of stores - both by the retailer in question as well as by their competitors. When this happens, pricing is dropped to break even levels ... or even loss levels (versus the additional costs involve to trans-ship that product to other stores, to re-add that product to corporate warehouse inventory, to risk 'scratch and dent' losses etc. ) But when retail customers get a whiff that major bargains will soon be available as a result of a store closing, it shoots the hell out of retail sales at 'regular' prices.

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    Default Re: retailers cutting to the bone ...

    Quote Originally Posted by Melonie View Post
    But the real coup-de-grace will be the closing of stores - both by the retailer in question as well as by their competitors. When this happens, pricing is dropped to break even levels ... or even loss levels (versus the additional costs involve to trans-ship that product to other stores, to re-add that product to corporate warehouse inventory, to risk 'scratch and dent' losses etc. ) But when retail customers get a whiff that major bargains will soon be available as a result of a store closing, it shoots the hell out of retail sales at 'regular' prices.
    Then ya get airline level service.

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    Default Re: retailers cutting to the bone ...

    ^^^ yes, but while it's happening customers also get 'unrealistically cheap fare' (prices) while the airlines (retailers) profit margins fall to zero if they're lucky or swing to losses if they're unlucky. It then becomes a race among airlines (retailers) to cut operating costs (grounded planes = closed stores) and lower prices in order to drive the weakest companies into bankruptcy.

    Once a couple of retail companies are removed from the market, and once the reduced ordering of additional product allows inventory to be sold off, the situation will (hopefully for the retailers) arrive where the reduced level of stores / products again matches a reduced level of consumer retail demand - in the same way that a reduced number of available flights will eventually result in filling the seats on the flights that are still available. At that point, the companies will (hopefully for the retailers) be in a position to begin raising prices and thus restore economically sustainable profit margins. With the airline analogy, this point was arguably reached 2-3 months back, with the 'surviving' airline stock prices now beginning to climb back out of the basement. With the retail industry, there will probably be several more months before the bottom is reached (i'd guess next January, after the grinch of high heating bill costs steals Christmas).

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    Featured Member snoopy's Avatar
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    Default Re: retailers cutting to the bone ...

    ^^^i'd tend to agree with that. the 'behind-the-scenes' issue with the collapse of the 'fringe' retailers is that their downfall will take a significant number of vendors/suppliers with them; which in turn, will also ripple outwards in the form of lost jobs and business to their suppliers and so on, further impacting the economy.

    i'm seeing that sorta firsthand as my competitors have taken hits in the recent spate of chp11's (LNT, Boscov, Mervyn's, etc.). those were all accounts i pushed out within the last few years but my competitors took on. the chp11's can be a compounded problem in that the suppliers not only lose their initial AR (kick to the crotch) but then during reorg they often continue to do business with the bankrupt client hoping to recoup their losses or simply needing the business for cashflow/survival, i.e. they're "all in" at that point.

    i don't see many of those filings surviving in any substantial form though and some will simply liquidate/close down for a complete kick #2 to the crotch. >.<

    so i definitely see things getting a bit worst before we see any improvements. Q2 '09...maybe.

    the ironic thing (from consumers' pov) is that inflation is a necessary component of that recovery as melonie stated above. most people don't realize/understand that.

    frankly, i was jumping off the ship until i saw the overall (reported ) inflation uptick significantly. until then, i wasn't even seeing market mechanisms work. at least now the market mechanisms are working...sorta. so now i've got my life-vest on and i'm in line for the lifeboats.

    oh, the ships' still sinking. make no mistake about that! we just have to wait for whatever rescue ship comes along. my bet though, is that that ship's a bit smaller than this one.

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    Default Re: retailers cutting to the bone ...

    oh, the ships' still sinking. make no mistake about that! we just have to wait for whatever rescue ship comes along. my bet though, is that that ship's a bit smaller than this one
    just hope that you're personally covered to the point that you don't wind up being chained to an oar below decks when that rescue ship finally floats by !!!

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    Default Re: retailers cutting to the bone ...

    Quote Originally Posted by Melonie View Post
    just hope that you're personally covered to the point that you don't wind up being chained to an oar below decks when that rescue ship finally floats by !!!
    no fair! you're peeking at my notes! >.<

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