The pressure keeps growing on vendors and retailers.
As global stock markets wheeze, credit markets drip and consumers hold onto their dollars tighter than a bear trap, the fashion industry scales back by the day to cope with the squeeze. The latest is Liz Claiborne Inc., which sharply cut 2008 financial projections and halved capital expenditures for 2009.
“What we’re all seeing right now is a shutdown in discretionary spending,” William L. McComb, chief executive officer, told WWD. “Back-to-school didn’t happen, so that’s when the nose went down on the plane.”
For the third quarter, the firm is expecting losses from continuing operations of 8 cents to 14 cents a share, down from year-ago earnings of 33 cents a diluted share. Claiborne slashed its 2008 adjusted earnings projections from continuing operations to $1 to $1.10 a share from $1.40 to $1.50. In August, it had narrowed projections to that level from a previous $1.40 to $1.60.
The firm, which in August reduced 2008 capital expenditures by $15 million to $195 million, said it would spend half as much next year.
That means, among other cost-cutting measures, a slowdown in the rollout of Juicy Couture stores, McComb said. The firm already pulled back on retail expansion plans for Kate Spade and Lucky Brand. Unlike Kate Spade and Lucky, however, the Juicy stores enjoyed same-store sales growth during the third quarter of 5 percent. Lucky’s were down 4 percent and Kate Spade’s were off 13 percent.
“It’s all about careful cash management, which is what the Street wants companies like ours to do,” he said. The company expects to have debt of $750 million to $775 million at the end of the year, and expects to be in compliance with its bank credit facility financial covenants during the third and fourth quarters.
“This is an environment where providing that very specific guidance around balance sheet metrics is potentially more important than what we think [about] where the earnings are going to come out,” McComb said.
But Wall Street didn’t react well to the news: As the stock market overall took another tumble, Claiborne’s shares fell 4.8 percent on Friday to $6.95, down 77.5 percent from their 52-week high.
Claiborne isn’t alone, of course: A slew of other fashion companies, from competitor Jones Apparel Group to retail client Macy’s Inc., also have lowered bottom-line projections as the consumer climate has worsened.
Meanwhile, at least one major vendor has begun to quantify the impact of Mervyns’ liquidation. Hanesbrands Inc. on Friday said it would take a pretax charge of $5.5 million in the third quarter because of the liquidation of the retailer’s remaining 149 stores and the decision to close up shop in the wake of its July bankruptcy.
That will reduce earnings by 4 cents a diluted share. The innerwear producer now expects third-quarter earnings of 17 cents a diluted share, which includes 35 cents worth of restructuring charges and the charge for Mervyns.
McComb said Claiborne, which he has been shepherding through a massive restructuring and a series of divestitures, is lean and mean and ready for the tough environment.
Asked if the company’s turnaround might run out of time given tight credit markets and its sinking stock price, McComb said: “My answer to that question is very different than I would have given six months ago. Now the rest of the world is in our same boat.”
To what degree the slowing consumer economy is going to rock that boat remains to be seen.
“There’s this general shift from wants to needs that we think is going to carry into the holiday season more than we’ve ever seen before,” McComb said.
The ceo said his company has seen some order cancellations from retailers, but nothing “overly dramatic.”
Claiborne’s profit warning prompted Moody’s Investors Service to place the vendor’s credit rating, currently at “Baa3,” on review for possible downgrade. The review covers ratings of both its senior unsecured credit and its prime-3 commercial paper.
“Moody’s no longer expects the company to show a sustained improvement in sales or margins in the current year,” Ed Henderson, vice president and senior analyst at the rating agency, said. “As a result, the company is unlikely to maintain financial metrics appropriate for an investment grade rating.”
Debt ratings are part of the equation that determines how much it costs companies to borrow money.
Moody’s also placed the ratings of two hard-pressed regional department stores, Dillard’s Inc. and The Bon-Ton Stores Inc., under review for possible downgrades.
Dillard’s current family credit rating of “B1,” considered speculative, will be studied based on concern that its “continuing weak operating performance will prevent the company from maintaining a financial profile and debt protection measures appropriate for its current rating.” Moody’s Henderson also raised questions about Dillard’s ability to realize improvement in its retail stores “instead of relying on profits from its credit card-related operations.” For Bon-Ton, currently rated “B2,” questions focus on the retailer’s recent revision of guidance, which estimated that the deficit for the year would be at the lower end of its range of a loss of between $1.17 and $1.67, which could jeopardize the company’s credit metrics. Agitation in the markets also led in an about-face by Macy’s on Friday, when the firm said it would temporarily resume reporting monthly sales data on Nov. 6. The company checked out of the monthly sales rally earlier this year. “We want to provide investors as much information and transparency as possible,” Terry Lundgren, Macy’s chairman, president and ceo, said. “While we continue to believe that sales on a monthly basis are an incomplete and sometimes misleading measure of a retailer’s performance, we will again provide this information so investors have a sense of the direction of our business on a more frequent basis through this uncertain time.”
Not long ago, when oil soared above $140 a barrel, higher energy costs seemed like the biggest threat to second-half spending. Oil fell to less than $65 a barrel Friday after oil-producing countries said they would cut their output by 1.5 million barrels a day in the wake of weakening demand.
Now economists and retailers are more worried about the employment picture and the ability and willingness of shoppers to spend during what could be a prolonged and global economic slump.
Anxiety over the economic slowdown kept investors on edge last week, making life all the harder for publicly traded fashion companies.
The Standard & Poor’s Retail Index closed out the week at 247.04, 11.1 percent below Oct. 17’s level and 3.7 percent under Thursday’s 256.53 finish. It’s also 47 percent below the 52-week high of 466.38, hit Oct. 29.
The decline in retail stocks for the week by far outstripped declines for the period in the Dow Jones Industrial Average (5.3 percent) and the S&P 500 (6.8 percent). However, they were modest in comparison to sell-offs in Asia, where the Nikkei 225 was off 12 percent for the week after a 9.6 percent drop on Friday. Hong Kong’s Hang Seng Index plummeted 13.3 percent during the week after Friday’s 8.3 percent swoon.
In Europe, London’s FTSE 100 dropped 5 percent on Friday, putting its decline for the week at 4.4 percent. The CAC 40 in Paris fell 3.5 percent to put its slide for the week at 4.1 percent.
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