Retailers’ Balance Sheets Tell All
As holiday season sales results come rolling in, analysts stipulate that the downturn in sales may push even more retailers into bankruptcy court. But sales trends are not the only measure of a retailer's health, Barron's writes
To distinguish the companies with promise from those that are truly in danger of going under, it examined other factors on the corporate balance sheet, like ratios of debt to EBITDA (earnings before interest, taxes, depreciation and amortization). (See table
.) Barron's also considered each company's ability to secure vendor financing.
Likely to Survive the Recession
Retailers in "excellent" financial condition, according to Barron's:
Steer Clear of These Retailers
- Costco Wholesale would still have nearly $1 billion in cash if it paid down all of its debt.
- Other discount retailers Wal-Mart and Family Dollar are also rated as strong, and unlike the others have had positive stock growth in '08.
- Amazon has the most cash ($2.3 billion) and has the strongest price/earnings multiple of 35 times next year's estimated earnings.
- Nike and Coach both have moderate price/earnings multiples, have minimal debt, and are expected to report higher earnings in fiscal 2009. Retailers become more dependent on well-known brands in times of recession, said a Barclays analyst.
- Teen apparel chains Abercrombie & Fitch and American Eagle Outfitters, while suffering from stock depreciation of 70% and 53%, respectively, this year, are holding onto net cash ($198 million and $269 million, respectively).
On the bottom part of the list sit retailers that have borrowed heavily relative to their operating performance. Among them are regional department store chain Bon-Ton Stores and accessories seller Claire's, which has suffered from weak mall traffic
Women's apparel stores Dillard's, Liz Claiborne, and Talbots are all expected to report losses this year, and analysts don't see much promise for any of them, Barron's said.
Jones Apparel Group, while rated "fair," is under pressure because it is a major supplier to other struggling retailers. And negotiating a new line of credit in the next year may be expensive, said one analyst.
Department Store Roundup
Mid-tier department stores JC Penney and Kohl's were rated as having "good" balance sheets. JC Penney won't have much trouble funding its first debt maturity of $506 million in 2010, Barron said.
Sears Holdings, however, is in a more precarious condition. By the end of the year, the company's debt level could hit $2.2 billion, and its cash position has eroded. Sears has had rapidly declining sales and profits
, particularly in the home sector, and management has not revealed a turnaround plan - instead, it spends aggressively on stock buybacks.
Higher end department stores (Saks, Nordstrom, Macy's) received "fair" ratings, having reported lower sales and earnings. Macy's debt has investors worried; the company said it may suspend its quarterly dividend to conserve cash.
Circuit City's bankruptcy will likely benefit its rival, Best Buy, which was rated "good."
RadioShack's earnings are up but may start to slide after the rush for digital-TV converters is over
, said a hedge-fund manager. As of Sept. 30, the company had cash and equivalents of $824 million and short- and long-term debt of $761 million.