BDO USA in its latest report has listed six warning signs that a retailer may be heading toward financial distress.
To be sure, economic factors are typically outside a retailer’s control, but issues such as unemployment and other rising costs that impact consumer discretionary income usually result in a negative impact on a retailer’s bottom line.
According to the report by David Berliner and Don Levy, there are six warning signs that a retailer might be in need of a financial restructuring if it can’t find alternative sources of capital.
Those six signs are:
• Decline in customer traffic: A decline in consumer discretionary spending typically results in a decrease in customer traffic and sales at retail stores.
• Shortage of inventory: A shortfall in inventory levels could indicate a lack of cash flow and difficulties in purchasing replacement goods. A related issue is an improper mix of inventory offerings.
• Storewide sales/discounts: Storewide sales or major discounting could be a signal of the need to generate sales to increase short-term liquidity.
• Delay in paying vendors, landlords or lenders: These delays could indicate tightening liquidity and an attempt to manage cash flow. Most retailers use revolving lines of credit with borrowing limits based on inventory values, and an inability to borrow on the line suggests cash-flow issues.
• Aggressive cost cutting: Think reductions in workforce and a shift from full-time to part-time employees, as well as cuts in capital expenditures, advertising and remodeling plans.
• Store closures: Look for multiple store closures in a relatively short time frame.