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Retailers At A Crossroads: Navigating Out Of The Downturn

It looks like many retailers have
been able to weather the Great Recession
as a result of tactics initiated
in early 2009.

Most retailers took a very conservative
approach by keeping inventories
low, focusing on efficiencies, delaying
or canceling store growth, and in
some cases contracting their store base
as lower consumer demand rendered
marginal locations unprofitable.

So far in 2010 same-store sales are
generally up, although the discounters
that were the better performers in
2008 and early 2009 have seen a reduction
in their positive comps. There are
also some retailers whose strategies and
business models were under duress prior
to the economic meltdown, and the
tough economy has only made things
worse for these players. Nonetheless,
it looks like most retailers came out
of 2009 in better shape than expected.
We see this in our own portfolio,
where most clients are much more liquid
than they were a year ago.

This year retailers are at a strategic
crossroads. How quickly they build
out their inventories and how fast they
add new stores again remains to be
seen. Those retailers
with stronger
balance sheets will
be better positioned
to take advantage of
the market and real
estate opportunities
resulting from abandoned
locations of
failed competitors.
they may also look
at other ways to deploy capital via Internet
and digital strategies, as well as
product extensions.

Other retailers are facing fundamental
changes in their segments that will
require market intelligence and capital.
The book selling business has the challenge
of digital book delivery. Some industries
are reliant on consumer credit,
and the availability of consumer credit is
still constrained as the credit card issuers
have tightened up. However, recent
reports indicate that consumer credit
card borrowing has declined and savings
rates have peaked over the past few
months, a function of consumers tightening
their belts during the recession.
These statistics suggest that consumers
may be poised to start buying biggerticket
retail items again as long as the
economy does not go into another dip.

Many people expected to see bankruptcies
in January and February, which
are when retail companies typically file,
as their inventories are low and their
debts lower. Surprisingly, despite there
being many companies that need to fix
their businesses, we haven’t seen any large
retail bankruptcies. The conservative approach
to inventories and spending enabled
many players to conserve cash, and,
in fact, generate some additional cash,
which helped them to see another day.
After significant cost cutting, there is not
much more to cut, so the top line needs
to come back for some of these marginally
surviving companies.

Also, capital has started to free up. In
2008 and most of 2009, there was virtually
no “rescue capital” available. Investing
in a retailer in 2008 and early 2009 was
like catching a falling knife, given the inability
to gauge when negative sales trends
would stop. Today there is more activity
in terms of investors willing to help some
ailing companies that need junior capital
to turn their businesses around.

Burt Feinberg is managing director and
industry group head for the Retail Finance
group within CIT Commercial & Industrial,
a leading provider of asset-based revolving
credit facilities and cash-flow term
financing to U.S. retailers.