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Stores Build Up Cash to Weather the Storm

Cash is the metric of the moment.

Cash is the metric of the moment.


Consider the state of mind of Limited Brands chairman and chief executive officer Leslie H. Wexner at the firm’s annual analyst update in October. So what if the market was tanking and sales were depressed practically industrywide? “I’m really in a good mood today,” said Wexner, with an air of irony, and it was largely because of the retailer’s balance sheet. He said Limited would end the year with $1 billion in cash and $1.3 billion in bank lines the company had no intention to use.

“From a financial point of view, it’s about as good as it’s ever been,” Wexner said. “I just can’t see the bumps in the road.”

In the heat of a grinding recession, when industry analysts, suppliers, factors and shareholders are wondering which retailers will make it into next year, the focus on liquidity has intensified. Sales, margins and stock prices are way down. Yet with retailing a game of survival, the fittest are being measured by their cash positions and their ability to pay off the debt, maintain operations and purchase inventory. With little capital available to borrow, stores are increasingly pressured to fund their businesses with the cash that flows through their registers.

“There is no question that in this environment, the cash position of a retail or real estate entity is used to determine the overall health of that company, more than operating metrics, stock price and retail trends,” said Daniel B. Hurwitz, president and chief operating officer of Developers Diversified Realty Co., which owns and manages 720 retail operating and development properties.

“Today, the reason why cash is so important is because people are suffering major downturns in their business, which means they are generating less cash, and that’s making it more challenging to cover the daily expense requirements as well as repaying debt obligations on a timely basis,” added Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates.

With sales receding and borrowing difficult, retailers are working doubly hard to build cash by relentlessly marking down to move merchandise, canceling orders, delaying payments from 30 days to a couple of months or longer, and pressing vendors for markdown money. “We’re pushing the supply chain backwards, which is dramatically altering the economics of the suppliers,” said Andrew Jassin, managing director at the consultancy Jassin-O’Rourke Group. “If the retailer can’t sell it, it affects [the supply chain] all the way down to the person who plants the crops.”

Retailers are also cutting staff and slashing capital expenditures. In some cases, companies are trying to renegotiate rents with landlords on weak locations.

Tough times call for getting creative in finding revenue sources. Macy’s has sold its private label to Bon-Ton and stores outside the U.S. in past years, and is rumored to be considering selling some products it sources and designs to Dillard’s, a competitor in approximately 100 locations. However, Macy’s would not sell its products under the same labels that it advertises as Macy’s exclusives. The retailer declined to comment on the speculation.

“Retailers have become very tactical,” observed Isaac Lagnado, president of consulting and marketing research firm Tactical Retail Solutions, though he added that generally, retailing is “a very cash rich industry” depending on how fast the inventory turns.

Tim Belk, chairman and chief executive of Belk, the regional department store in the South, saw fit to emphasize the cash position when the store reported third-quarter results last week. “Like many retailers, we have continued to experience the effects of a severe economic slowdown,” Belk said. “However, we have maintained a strong balance sheet and positive cash flow, which places us in a good position to weather the downturn. This is a result of the diligent efforts of our managers and associates across the company to manage inventory, expense and capital investments. We are also continuing to invest in our business with the opening of three new stores, the relaunch of our expanded Web site and the development of new brands.”

And what about Saks Fifth Avenue, which, like many of its competitors, is catching the ire of vendors for widespread markdowns? For the quarter ended Nov. 1, losses were $42.8 million, but Saks had $20 million in cash on hand and $80.6 million of direct outstanding borrowings on its $500 million revolving credit facility. Saks’ New York flagship is “unencumbered,” meaning the company could take a mortgage on the property, or sell it and lease it back if it needed cash.

Saks has no short-term maturities of senior debt. The company’s revolving credit facility terminates in September 2011 and is subject to no covenants unless the availability falls below $60 million. The company’s remaining senior notes total $192.3 million and mature from December 2010 to February 2019. The company also has a 2 percent, $230 million convertible debenture, which matures in 2024. “I feel very comfortable with our financial situation and our ability to weather the storm,’’ said chairman and chief executive Steven I. Sadove following the company’s third-quarter conference call.

“Cash is king. No question about it,” said a former department store chief financial officer. “For factors, that’s their whole thrust now. The only thing they really want to know is whether this company has solid enough cash to pay their bills. They don’t want to hear fancy stories about great products or private labels.”

Retailers, the source added, must enter January flush with cash. “November and December are the two big months. If you don’t come out with heavy cash by the end of December, there is something radically wrong. These days, it’s even more important because everybody is scared they are not going to paid.”

“Liquidity is a well-known coward ­— it runs and hides at the first sign of trouble,” said Thomas Cook, Citigroup Inc. managing director and senior analyst on a recent conference call.

Most broadline chains, at least, have credit lines in place and vast amounts of money tied up in their real estate that they could ultimately tap. Cook said stores would do well to spend only where necessary, giving up store openings and share buyback programs. In an apparent response to the times, Wal-Mart Stores Inc. on Tuesday, for the time being, suspended its share buyback program, pointing to cash needs, the instability in credit markets and the price of its stock, which this year has risen 19 percent, benefiting from consumers trading down and buying necessities.

“Most of the retail world is in actually pretty good shape from a liquidity point of view,” said Ed Henderson, vice president and senior analyst at Moody’s Investors Service. “It’s because of how easy credit was a year and a half ago. They got these deals with no covenants. You’re not going to see anybody who’s got good liquidity going out [of business] over this holiday season.”

Many of the existing bank facilities came with very few covenants or strings attached during the go-go days of credit. By 2010, those bank arrangements will need to be replaced at what are likely to be more stringent terms.

For some, the financial strain from a wary consumer could still be too much.

“There are certain weak players that may not survive,” said Michael Stanley at factor Rosenthal & Rosenthal. “What’s going to get them through the season is their ability to manage their cash flow. So those that don’t have adequate financing platforms…are going to run out of gas, and the banks are being much more difficult.”

Factors help keep goods moving through the supply chain by paying brands when they ship the goods and collecting from retailers later. Rosenthal & Rosenthal evaluates retailers by looking at their ability to pay their bills over roughly four months. Debt loads at companies of all shapes and sizes remain under the microscopes of investors and rating agencies alike.

For example, on Tuesday, Fitch Ratings cut its debt grades on beleaguered developer General Growth Properties Inc., noting “default of some kind appears imminent.” The mall giant’s issuer default rating was cut to “C” from “B,” skipping over the “CCC” and “CC” ratings.

“Fitch’s rating action contemplates that either a distressed debt exchange, whereby GGP would be forced to restructure its debt obligations in an effort to avert bankruptcy, or failure to repay debt currently due is likely in the near term,” said the rating agency. GGP is pressured to sell assets or otherwise raise cash to repay roughly $600 million in unsecured debt coming due next year.

Fitch also reduced its rating on Bon-Ton, the regional department store, to “B-minus” from “B” and gave a negative outlook. Fitch did say Bon-Ton had “adequate near-term liquidity” but added that beyond 2009, there is concern and that the store’s liquidity position and ability to fund operations and meet financial commitments is dependent on stabilization in top line growth.