Amid the worst economic downturn of their careers, the chief executives of the nation’s retail chains face a dilemma.
Legally, they must tell investors the truth about their abysmal sales and eroding profit margins. But to avoid provoking a panic that would send their companies spiraling into bankruptcy, they must also project confidence and inspire the belief that they can outlast the recession.
The skill with which executives are walking this tightrope varies.
PHOTO: NY TIMES NEWS SERVICE
“Some of them continue to deny there is anything wrong,” said Mark Cohen, a professor at Columbia Business School. “And they’re lying.”
Retailing executives have long been described as showmen. Now, some are giving the performances of their lives, striving to instill confidence not only among skittish investors but also among the suppliers who keep them alive by shipping them merchandise on faith.
It is no easy task. Since consumers went into hiding in the fall, major chains have suffered double-digit sales declines. Household names like Circuit City, Sharper Image and Mervyns have filed for bankruptcy, and dozens more chains are expected to disappear this year. Which stores will survive the Great Recession?
Nobody can know for sure, but experts are keeping a close eye on certain indicators.
Foremost among them is debt. Like the nation and its consumers, stores have too much of it. Saks has more than US$600 million in long-term debt. Claire’s, the accessories chain, is on the hook for more than US$2 billion. And Rite Aid is groaning under the weight of more than US$6 billion in debt.
Many of the nation’s best-known chains — Barneys, Neiman Marcus, Lord & Taylor, Toys “R” Us — are saddled with debt after being bought by private equity companies in the halcyon days of consumer spending.
Debt itself is not a problem, necessarily — Wal-Mart Stores has plenty, but it also has healthy sales. The question is whether a company with weak sales has any big payments coming due soon, and if so, whether it can make them.
Executives from several indebted retail chains said in interviews that they could. Toys “R” Us executives said it had no debt due for more than a year. Saks executives said it had no long-term payments due until December next year.
“We are very comfortable with our liquidity position,” said Richard Baker, the head of the private equity firm that owns Lord & Taylor, NRDC Equity Partners.
With credit markets reeling, stores with big interest payments due in the next couple of years are hoarding cash not only to survive, but to calm investors. Macy’s, for instance, was recently able to damp down investor concerns by paying off US$950 million that was coming due this year. Still, the company’s total debt is upward of US$8 billion, which has led some industry professionals to question its prospects.
Debt is not the only sign of trouble for a chain. Drastic and sustained sales declines are another indicator.
Most retailers’ sales have been terrible for months, and they can sustain such losses for only so long. The worst results have come from upscale stores like Saks and Neiman Marcus.
In general, chains that have managed to pull off sales increases — and capture market share — are big-box stores, like Wal-Mart and BJ’s Wholesale Club, which sell food and other necessities at low prices. Bill Dreher, senior retailing analyst at Deutsche Bank Securities, and his colleagues estimate that the retail shakeout will result in more than US$27 billion in sales up for grabs.
A few niche mall retailers popular with teenagers, like Aeropostale, Buckle and Hot Topic, have also defied sales trends. And Macy’s, while posting single-digit declines, has outperformed competitors.
But rock-bottom prices and fast teenage fashions are not enough to keep a retailer alive. Tight credit markets mean it also has to have cash, or assets that can easily be turned into cash.
Stephen Sadove, the chairman and chief executive of Saks, pointed out that the company had unencumbered real estate in prime locations that it could sell if it must.
“We own nearly 70 percent of our Saks Fifth Avenue square footage,” he said in an e-mail message, “including the New York flagship store.”
The industry’s top analysts and executives are not in agreement about the likely fate of every chain.
But they said certain stores — including Barneys, Rite Aid, Claire’s, Bon-Ton, Pier 1 Imports, Dillard’s and Office Depot — were grappling with severe problems. In many cases, their troubles began years ago, making them vulnerable in the downturn.
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