Maybe it’s not a full-fledged financial draught, but capital markets that were flush with liquidity six months ago are seeing rivers of opportunity evaporate into a mere trickle of slim possibilities. The scarcity of money options was precipitated by a dramatic shift in credit markets last month.
Industry analysts, lenders and journalists were grappling with what to label this downshift. While there was no denying the potential for dire repercussions, calling it a “credit crisis” or “credit crash” seemed too intense. Most went with “credit crunch” or “credit correction,” when describing the unfolding scenario. Whatever the vernacular, there are widespread concerns because money is no longer readily accessible.
David N. Deutsch, president of New York City-based David N. Deutsch & Co., noted that the recent developments were reminiscent of the credit corrections of 1990-91. Speaking to the current conditions, he said, “The capital market is very much on edge, both equity markets and, in particular, debt markets. Weighing heavily on the market are sub-prime mortgage loans, hedge funds and equity controversy.”
For retailers looking to finance growth, the effects are already being felt. “The impact is absolutely most pronounced on cyclical industries,” said Deutsch. “Consumer spending, as everyone knows, is a product of the GDP so if the market is off, then everything related to consumer [spending] is off as well—and that is what makes banks worry about loaning to consumer-related industries.”
Cheryl Carner, managing director, retail finance, of CapitalSource Finance, Boston, echoed the sentiment that some retailers have already begun to feel the pain. “Everybody is operating with a fair degree of uncertainty that makes deal-doing in general challenging,” she noted. “Some transactions have been delayed or pulled because of the instability in the market and there is a lack of consensus in the market. As a result, many are waiting until later in September, certainly after Labor Day, to proceed.”
Risky Business for Retailers
If consumers are forced to choose between defaulting on mortgage payments or credit-card payments, the probability is that credit accounts will become delinquent first.
For retailers offering private-label credit accounts, this poses unique liabilities—albeit, most large national chains outsource their private-label accounts to third-party financers. However, many retailers share the liability for delinquent accounts with the lending institution.
Cheryl Carner, managing director, retail finance, of CapitalSource Finance, Boston, noted, “Most retailers with private-label credit don’t have balance-sheet exposure on these accounts.”
She suggested, however, that retailers could feel an impact if the third-party lender chose to set higher standards for credit approvals, making it more difficult for consumers to qualify for credit thus negatively impacting retail sales.
How long the instability may last is a crystal-ball prediction. However, Carner suggested it will likely be measured in months, not weeks.
One thing she felt confident will happen is that purchase prices will decline. She also predicted, “It will be difficult for retailers to obtain capital for expansion, despite the fact that most experts say the global economy is strong, unemployment is fairly low and inflation is moderate. However, on the flip side, retailers such as Wal-Mart and The Home Depot had soft earnings announcements, and there is concern about the overall U.S. economy and how consumers will continue to react.”
Although prices may come down, the prevailing uncertainty may preclude deal-making. Deutsch explained, “Lenders are very careful about lending to retailers and consumer-related companies now, and if you are looking to buy a consumer-related company, the lenders are very wary.”
Ultimately, the credit shift has affected the size of debt lenders are willing to consider, the availability of options where companies can draw debt, the interest rate, the amount of term debt and the covenants tied to deals.
“If I were a retailer, I would tread very carefully about [financing] expansion, regardless of the sector of retailing that you are operating in,” advised Carner.
Even the luxury sector, which has generally remained insulated from economic fluctuations, could be impacted, she warned, if there is “continued contraction” in leverage buyout activity.
“For retail in general, there will likely be continued choppiness on the horizon, and it is not a great time to take on a lot of debt,” concluded Carner. “Leverage should be used very prudently and modestly.”
Sears Holdings ceo unhappy with 2Q
HOFFMAN ESTATES, Ill. Sears Holdings today reported net income of $176 million, or $1.17 per diluted share, for the second quarter ended Aug. 4, compared with net income of $294 million, or $1.88 per diluted share, for the second quarter ended July 29, 2006. The company attributed the decline in its second quarter results from the same quarter last year to lower operating results at both Sears Domestic and Kmart, which were partially offset by improved operating results at Sears Canada.
“We are disappointed with our second quarter results. Our gross margins came under pressure from sales declines and increased promotional activity, and as a result, our net income was significantly below last year and our expectations,” said Aylwin Lewis, Sears Holdings’ ceo and president.
Sears Domestic’s comparable-store sales declined 4.3% for the quarter, while Kmart’s comparable-store sales declined 3.8%. Total domestic comparable-store sales declined 4.1%. The company reported lower sales across most merchandise categories at both Kmart and Sears Domestic, partially offset by increased sales of women’s apparel at both Kmart and Sears Domestic, as well as within consumer electronics and footwear at Sears Domestic. For the quarter, total revenues declined $0.6 billion to $12.2 billion in fiscal 2007, as compared to $12.8 billion for the second quarter of fiscal 2006.
Lane Bryant pres. joins Christopher & Banks
MINNEAPOLIS Former Lane Bryant president Lorna Nagler will join Christopher & Banks as president and ceo effective Aug. 31. She will replace Matthew Dillon, who resigned from his position as president and ceo and as a member of the board of directors today. Nagler has also been elected as a member of Christopher & Banks’ board of directors effective Aug. 31.
Nagler most recently served as president of Lane Bryant, a division of Charming Shoppes. Before joining Charming Shoppes in April, 2002, Nagler served as a senior vp and general merchandising manager for apparel and jewelry at Kmart Corp.