'Retail' Archive
Many of our nation’s retailers are caught in a vise. On the one hand, retail sales have weakened as spooked consumers have quit spending. On the other, their suppliers are finding their access to credit — supplied by companies called factors — is being curtailed.
Factors are companies, typically owned by banks, that provide financing to retail suppliers, be they apparel makers, sporting goods manufacturers, or what have you. Consumer products makers rely on factors when they have supplied inventory to a merchant, but don’t want to wait to get paid. Manufacturers sell their receivables to factors at a discount, enabling the manufacturer to maintain its cash flow. Naturally, factors want to be repaid so they keep close tabs on the credit worthiness of retailers. In today’s tight credit environment factors are becoming increasingly cautious and stingy with their lending. Without the liquidity supplied by factors, manufacturers may stop shipping to troubled retailers, leaving bare shelves in many stores.
Indeed, the situation can be dire for merchants like Mervyn’s, which filed for Chapter 11 bankruptcy protection in July. The company, which was having trouble paying vendors, was said to be a victim of factors that stopped funding manufacturers supplying its stores.
A new study by the accounting and consulting firm BDO Seidman reveals just how serious and widespread the current credit squeeze is for retailers. A telephone survey of 100 CFOs at leading chains nationwide conducted in August and September reveals that 41% of US retailers are experiencing a tightening of credit by their lenders. Also, more than a third of the CFOs report a reduction of planned inventory purchases for 2008. What’s frightening is that the retailers surveyed were among the largest in the country, with revenues of more than $100 million. So it’s not just a few troubled companies feeling the pinch.
The repercussions for employment are grave. The BDO survey found that nearly a third of the top 100 retailers are implementing layoffs in 2008. Store closings, which can’t help the commercial real estate market, are another consequence: 36% of the retail CFOs say that they have, or will, close stores this year. (More than a quarter say they will shutter more stores this year than they did in 2007.)
As most US retailers are supplied with inventory from overseas, reduced spending here threatens economic growth in developing countries, notes Doug Hart, a partner at BDO Seidman.
Taken all together, it’s easy to see how the cascading effect of tight credit could lead to a global recession.
The National Retail Federation released its annual holiday forecast on Tuesday and the news was not good. The NRF projected sales gains of just over 2% for November and December, exactly half the 10-year average of 4.4% holiday sales growth. The meager gain is also the smallest rise since 2002, when sales increased only 1.3%. Frankly, after listening to President Bush’s dire warning on the state of the US economy on Wednesday evening, I’m surprised that even a 2% increase is in the cards.
The pain will be widespread. While rising food and gas prices have already taken a toll on lower-income consumers, the crisis on Wall Street threatens to pull the plug on the luxury-goods market as the bonuses and brokerage accounts of the more affluent are diminished.
Merchants with a big New York presence are in double trouble. Upscale department store chain Saks, which generates more than 20% of its annual sales from its flagship Fifth Avenue store, and Tiffany up the street are particularly vulnerable as they rely on wealthy New Yorkers and tourists. Indeed, jewelry stores are the most vulnerable of retailers as they log about 30% of their annual sales during the holidays. While diamonds and pearls are nice gifts, they are among the most discretionary of items. Young women, who make up the majority of the seasonal retail workforce, are also less likely to find employment this year as retailers curtail hiring in expectation of a slow season.
If the NRF’s 2.2% projection is on target, 2008 holiday sales will be in the neighborhood of $420 billion. Why that’s not even enough to cover Henry Paulson’s bailout of Wall Street!
The rivalry between the nation’s two leading drugstore chains –- Walgreen and CVS –- is heating up as they battle for one of the last big prizes in the chain drugstore industry: Longs Drug Stores.
With some 520 stores in Hawaii, California, Nevada, and Arizona, Longs Drug Stores is indeed desirable.
Last month CVS bid $71.50 per share (about $2.9 billion) to acquire the chain, citing its valuable store locations in fast-growing markets. Indeed, in its press release CVS noted that it had “conservatively valued the store locations alone at more than $1 billion,” adding that Longs’ stores were situated in markets where “commercial real estate values are among the highest in the country.”
So it should come as no surprise that after boasting about Longs’ real estate riches, CVS met with rejection from Longs’ shareholders on the basis that its offer undervalues the chain’s property assets. Advisory Research Inc., which holds about 9% of Longs’ stock, has said it will not tender its shares to CVS at the $71.50-per-share price. The New York hedge fund Pershing Square Capital Management, led by the activist shareholder William Ackman, also rejected the CVS offer as too low and called for a competitive sale.
Enter Walgreen, which on Friday made an unsolicited bid of $75 per share for Longs. Yesterday, Longs rejected Walgreen’s sweeter offer and said its board continues to recommend the CVS deal to shareholders. (CVS has extended the expiration date for the tender offer to October 15 from September 15.) CEO Tom Ryan has said CVS is “not moving” on its price.
It’s hard to imagine that Walgreen will walk away or that Longs’ investors will settle for less than $75 per share. (Earlier this week Longs’ shares topped $76 per share, an all-time high.) Walgreen has said it’s prepared to take its offer directly to Longs’ shareholders, and it has offered to pay the $115 million termination fee if the Longs/CVS deal falls through.
While Walgreen has historically steered clear of big acquisitions, preferring to build its own stores, Longs is too luscious to let slip away. Longs’ presence in key West Coast markets, plus the fact that if CVS prevails its store count will surpass Walgreen’s, make winning Longs’ hand imperative.
Walgreen has deep pockets, possibly deeper than CVS’s following its $26.5 billion purchase of pharmacy benefits manager Caremark just last year. Longs’ savvy shareholders are itching for a bidding war and have raised the possibility of other potential bidders, including real estate players and retail giant Wal-Mart Stores. My guess is that ultimately CVS will have to raise its $71.50 offer to have a chance of landing Longs.
Discount department store operator Mervyn’s, which filed for Chapter 11 bankruptcy protection back in July, is suing its current owners and Target, alleging that the 2004 leveraged buyout of the firm from Target was a fraudulent transfer that ultimately doomed it to bankruptcy.
At first glance, Mervyn’s looked to be yet another casualty of the economic downturn and the difficult operating environment for retailers in general. With about 125 of its 175 stores located in California, where plummeting housing values and rising gas prices have put the squeeze on the chain’s core customers, Mervyn’s appeared to be a particularly vulnerable company in a teetering industry. But Mervyn’s, which has weathered previous downturns, says it has a bigger problem.
In papers filed by the company on Tuesday with the US Bankruptcy Court, Mervyn’s alleges that it was the victim of a plot by its new owners to strip it of its valuable real estate assets and then lease the properties back to the company at “substantially increased rates.” Mervyn’s claims that its annual occupancy expense (aka rent) has increased by about $80 million to $172 million after the sale. The filing goes on to claim that by “separating the firm’s real estate assets from its retail operations, the private equity owners — Cerberus Capital Management, Sun Capital Management, and Lubert-Adler and Klaff Partners — made sure that any residual value or upside in the real estate assets were reserved for themselves and not for Mervyn’s.” The three investors used loans against Mervyn’s real estate assets to finance the $800 million LBO from Target.
The company was founded in 1949 by Mervin Morris and acquired by Dayton Hudson (now Target) in 1978. Other defendants named in the suit include Goldman Sachs (Target’s investment banker), and the banks and real estate lenders involved in the deal.
Mervyn’s, which is still open for business but is shuttering 26 stores as it reorganizes, alleges that its owners have extracted $400 million from the company since acquiring it from Target, leaving it strapped for cash to pay vendors. The suit seeks the return of $58 million in transaction fees and other damages as well as a court order allowing Mervyn’s to reclaim its real estate.
The lawsuit may be among the first to address what has become a popular strategy among private equity firms in recent years. Acquirers take advantage of high real estate values to finance the purchase of retailers, such as Mervyn’s and ShopKo Stores (another Sun Capital deal), and then separate the underlying real estate from the retail business. Retailers who favor sale lease-back transactions say they provide money to open new locations and remodel existing ones. Indeed, ailing merchants like Sears and Kmart have attracted investors (enter Eddie Lampert) not for their retail operations but rather for the valuable land underneath their stores.
The current steep decline in commercial real estate values may put the brakes on the practice. But for Mervyn’s, and other ailing retailers who entered into real estate-backed LBOs, it may be too late.
When the mercury dips below 95 degrees here in Central Texas it can only mean one thing: The back-to-school shopping season is upon us. Actually, yesterday was the first day of school for my daughters, while parents in the Northeast and other parts of the country still have a week or so before the first bell rings in a new school year.
With an estimated $51 billion in back-to-school spending on the line, retailers are competing fiercely to capture as many of those dollars as possible. Given the hobbled state of the US economy, it comes as no surprise to learn that back-to-school (grades K-12) spending is expected to rise only modestly this year vs. last, while back-to-college spending will actually drop an estimated seven percent, from an average of $641.56 per student in 2007 to about $599 this year, according to the National Retail Federation’s 2008 Back to School Consumer Intentions and Actions Survey.
With the turmoil in the student loan industry and sky-high tuition bills it’s no wonder that parents of college bound students are spooked. But they’re not alone. Parents of younger kids are searching for bargains like never before to outfit their children for school. Indeed, about a fifth of thrifty parents nationwide report having set aside a portion of their tax rebate checks to cover back-to-school purchases, says the NRF.
One bright spot in the back-to-school outlook is electronics spending. While purchases of apparel, shoes, and school supplies are expected to rise only modestly this year over last, spending on computers and (gasp!) cell phones for kids are expected to enjoy double digit increases. That’s good news for chains like Best Buy, which was already outperforming its competitors and retailers in other categories prior to the back-to-school rush. (Wal-Mart is also aggressively courting the electronics shoppers with deals on lap tops, etc.)
Speaking of the back-to-school rush, while the NRF study reports that about 45% of parents will begin shopping at least three weeks before school starts, the majority of shoppers will opt for a more last-minute approach. My family could be found a mere 48 hours before school began combing the aisles of Target, OfficeMax, and The Gap frantically checking items off our school supply lists. Both by procrastinating and visiting discount and office supply chains we were fairly typical back-to-school shoppers: 73 percent of consumers will visit discount stores, such as Target and Wal-Mart, for back-to-school supplies while more than 40 percent will shop at office supply stores.
For those who’ve yet to begin their back-to-school shopping, you’ve got company. Nearly 4% of us begin shopping the week school starts, while about 2% wait until after the first bell has rung.