Antony Karabus, chief executive of Karabus Management, which advises retailers, said one reason some chains were ailing was that they went on shopping sprees in robust times and bought more real estate than they could afford. “A lot of people were seduced by the easy accessibility to debt at relatively low rates,” he said.
Boscov’s, for instance, bought about 10 stores and is now selling off that many. Bon-Ton — which in August had a 10.3 percent decrease in stores open at least a year, an important indicator of retail health — bought dozens of stores from Saks.
While recent sales figures for the aforementioned retailers were down from a year ago, the chains argue that they are not in extreme distress.
For example, when some of its debt ratings were downgraded last week, Sears Holdings issued a statement saying it was being unfairly treated, noting that other companies were also suffering from high levels of debt taken on in the last few years. Sears says it has generated $5.2 billion of operating cash since the Sears chain merged with Kmart to form Sears Holdings, in 2005, and it generated $1.5 billion in cash last year.
A spokesman for the company declined to elaborate on the statement, which said that Sears “has consistently maintained a strong capital structure and generated significant cash flow from operations.”
Though Christmas is traditionally the time of year when retailers earn much of their profit, this year they will have to contend with a frosty sales environment. Consumers, feeling the effects of the credit squeeze and inflation, are expected to continue to trade down to lower-priced items and chains, and to cut back on big-ticket gifts. The National Retail Federation estimates that holiday sales will rise a meager 2.2 percent this year, well below the 10-year average of 4.4 percent.
The Wall Street crisis “just exacerbates the situation,” said Rosalind Wells, the federation’s chief economist. “You can’t turn on your radio or TV without hearing the world is coming to an end.”
Many retailers are doing their best to prepare, in part by controlling costs, and analysts say some of them may be able to ride out a weak season. “I think the industry has gone into the current holiday season with pretty conservative plans with inventory and employment levels,” said Carl Steidtmann, Deloitte Research’s chief economist.
Indeed, for retailers this Christmas is about trimming inventories, not trees. But a delicate balancing act is required. They must stock enough merchandise to fill the stores’ racks and shelves but not so much that it ends up having to be put on sale, eroding profits. The strongest retailers — those that are able to pull off the balancing act — may well post low sales growth figures, but their profit margins will be healthy compared to weaker stores.
“We think we’re well positioned going into the holiday,” said Myron E. Ullman III, chairman and chief executive of J. C. Penney, adding that the company had more than $2 billion in cash and relatively low debt.
Jim Sluzewski, a spokesman for Macy’s , said the retailer had ample cash on hand (nearly $1.3 billion in the three-month reporting period that ended Aug. 2), part of which is being used to pay down debt. Macy’s also has a $2 billion line of credit in place with Bank of America and JPMorgan Chase as the lead banks. “It’s too soon to know what the effect will be on the overall economy or the consumer,” Mr. Sluzewski said in an e-mail message.
Retail professionals say they think the impact of extensive Wall Street layoffs will be felt most acutely by stores in New York, particularly those that cater to upscale customers. Said Walter Loeb, president of Loeb Associates, a retail consulting firm: “No Ferraris, no Lexuses, no luxury apartments.”