The Housing Chronicles Blog: Retailers prepare for major change in 2009

Saturday, December 27, 2008

Retailers prepare for major change in 2009

Following a fairly abysmal second half of 2008 for the nation's retailers, many of which sought volume and multiple locations in order to grow sales and profits at the expense of basic metrics such as same-store sales and sales per square foot, 2009 will likely prove a watershed year for many famous retailing brands. Does this mean investors like Eddie Lampert (i.e., Sears) weren't the retailing geniuses once extolled by the business press? From a Wall Street Journal story (hat tip: Calculated Risk):

This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures...

...retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.

"We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession."

More Bankruptcies: Corporate-turnaround experts and bankruptcy lawyers are predicting a wave of retailer bankruptcies early next year, after being contacted by big and small retailers either preparing to file for Chapter 11 bankruptcy protection or scrambling to avoid that fate.

Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing. Retailers are particularly vulnerable to a recession because of their high fixed costs...

Recent changes in the bankruptcy code make it more difficult for retailers to emerge from bankruptcy reorganization. The changes, passed in 2005, shortened to 210 days the time retailers have to determine whether or not to assume real-estate leases, limiting the amount of time they have to complete their restructuring. Lawrence Gottlieb, a New York bankruptcy attorney at Cooley Godward Kronish LLP says that only two retailers have successfully emerged from bankruptcy proceedings since the amendments to the code were passed.

In turn, because the debtor-in-possession market for financing bankrupt companies remains squeezed, many bankrupt retailers could quickly turn into liquidations -- as was the case earlier this year with chains Linens 'N Things, Mervyn's and Steve and Barry's...

Less Selection: Several department stores, including Saks Inc. and Neiman Marcus Group Inc., already have announced that they would narrow the range of merchandise they carry and drop vendors that don't perform. The cutbacks will ripple through the apparel industry, hurting the companies that are most exposed to the wholesale channel. Companies such as Jones Apparel Group Inc., for example, generate 50% of sales from department stores...

As a result of such cutbacks, a number of smaller fashion brands that have thrived over the past decade as luxury boomed, are expected to struggle or fail. "There's no question that you are going to see bankruptcies in the designer world," says Peter Boneparth, a Kohl's Corp. director and former chief executive of Jones Apparel...

Fewer Concept Stores: Many retailers invented new brands to spur rapid growth in recent years. But many such concepts already are being abandoned or cut back. Neiman Marcus said it would postpone plans to expand its Cusp store concept. Pacific Sunwear of California Inc. closed down its d.e.mo. stores earlier this year, and AnnTaylor abandoned plans for a "modern" baby-boomer concept.

2 comments:

Ryan Philipenko said...

Retailers should be taking stock of the way the economy is, I don't think it's going to turn around anytime soon.

Ryan Philipenko - Real Estate Edmonton

Brandon said...

It's going to be interesting 12 months from now, reading wrap ups of 2010 in business.