You've probably gotten the email - the one warning not to buy holiday gift cards at this or that retailer because it's either bankrupt or ailing. The email is a sign of the times for retailers, showing that many are struggling amid the weak U.S. economy and that more will be pushed over the edge to insolvency after the holiday season.
"There is growing recognition among shoppers that these chains may not be around much longer to honor the cards," said Steven Buxbaum of turnaround and liquidation firm Buxbaum Group.
Bankruptcy and turnaround experts expect early 2009 to bring a large number of bankruptcy filings by retailers following what some retail analysts expect could be the weakest holiday season since 1980.
Already this year, retailers including Value City Department Stores, Steve & Barry's, Linens 'N Things and Circuit City (CCTYQ) have filed for bankruptcy and begun closing some or all of their stores.
"We haven't broken any records yet, but the numbers are increasing at an increasing rate," said Jack F. Williams, the American Bankruptcy Institute's resident scholar and a professor of law at Georgia State University. "At least for retail, it will get much worse before it gets better."
Through October, 52,132 companies have sought protection under Chapters 7 or 11 of the U.S. Bankruptcy code in 2008, 21% more than in all of 2007, according to data from Automated Access to Court Electronics Records, or AACER.
Experts say it's hard to say how many of those are retailers, but another data collector, BankruptcyData.com, lists 24 major retail bankruptcies this year, compared with seven in 2007 and the most since 32 in 2001.
Holiday sales are the industry's crucial test, given that most retailers rely on them for the bulk of their annual sales, earnings and cash flow, Moody's Investor Service senior credit officer Margaret Taylor said in a recent report.
The National Retail Federation estimates U.S. 2008 holiday sales will rise 2.2% to $470 billion, while other organizations also see low single-digit percentage increases. November economic data suggest the weakest holiday season since 1980, according to Stifel Nicolaus hardline retailing analyst David Schick.
Meanwhile, companies are going to find it harder to leverage expenses against weak sales, especially as they enter the seasonally slow first half of the year, according to JPMorgan analyst Christopher Horvers. "Companies are increasingly hitting their fixed-cost wall, as many retailers are at minimum staffing levels in stores and rent is fixed," he said Wednesday in a note to clients.
The financial market upheaval this fall has not only set the stage for disappointing holiday sales, but also means tighter borrowing terms are likely through 2009 for consumers and retailers alike, Taylor said. Those factors "could lead to covenant violations in the year ahead, especially for companies rated B2 or lower," she said.
Taylor and others suspect most retailers will have adequate liquidity for the next year, but there are areas of concern.
Specialty retailing is the most vulnerable retail segment, followed by home improvement and department stores, Taylor said. Specialty retailers earn some 70% of their total annual operating income during the holiday selling season, yet they are the most dependent on discretionary spending. And many of them underwent leveraged buyouts between 2004 and 2007 that left them with a heavy interest burden that will exacerbate the pressures they face, she said.
An early November survey by research firm NDP Group found that restaurants, apparel and furniture are the top areas consumers have targeted for cutting back on holiday purchases, while video games and toys are down the list.
Overall, there is a lot of retailer debt coming due next year, but lenders are more reluctant to lend as much against lower levels of EBITDA, or earnings before interest, taxes, depreciation and amortization.
"We have a lot of companies that are going to make a choice, do they service their debt or preserve cash?" said George Blanco, a partner with BDO Consulting's business restructuring services. "I think we're in for a lot more filings."
Retailers continue to pull back on expansion and close underperforming stores.
Turnaround and advisory firm CRG Partners has had more lenders or owners of retail chains inquiring about available services in the past four to six months than in quite a while, said John C. Calabrese, a debt restructuring and crisis management specialist with the firm.
"You've got to believe there's going to be some continued fallout and there will be an increase in bankruptcies," he said.
The most highly levered retailers with debt maturities in late 2008 or 2009 include Nordstrom Inc. (JWN), Kroger Inc. (KR), Macy's Inc. (M), Target Corp. (TGT) and Supervalu Inc. (SVU), Citigroup analyst Deborah Weinswig said in a research note Friday.
Companies needing access to debt markets "will likely be at risk for higher rates, and could possibly risk the ability to access the credit markets given tighter credit conditions," she said. "However, based on our analysis, this is not a major concern for most broadlines/food & drug/home improvement retailers."
Indeed, Home Depot (HD) has about $1.7 billion of its $11 billion in long-term debt coming due in 2009. "Where I'm sitting today, I think we'd just pay it off," given the likely costs to refinance, Chief Financial Officer Carol Tome said in a recent interview.
Home Depot and its smaller rival Lowe's (LOW) have also tested commercial paper markets successfully in recent weeks, borrowing small amounts and repaying them quickly, the companies said.
Restructuring experts and analysts said entrepreneurial businesses, industry leaders and cash-rich retailers stand to benefit from any shakeout.
"I think the successful ones are going to be the ones that know their customer and know their businesses," said the American Bankruptcy Institute's Williams. "Those establishments that are heavy into financial management are not going to do well, and those that have deep and long operational experience will survive."
