Initial indications are that the Grinch didn't steal Christmas this year, and retail sales may have actually increased over the holiday shopping period. But that doesn't mean that retailers are in the clear yet, as we all know how uncertain market forecasts are these days.
Piles of debt can cripple companies teetering on the brink of disaster, but lack of cash can be equally disastrous. In this installment, we're going to take a look at two retailers whose cash-poor status could spell trouble if their holiday sales aren't stellar.
Dude, where's my cash?
Back in April 2008, I took a look at trends in teen retail. Even before the stock market crash, youth-focused retailers were feeling pain as the most style-conscious teens moved from higher-priced brands such as Pacific Sunwear (Nasdaq: PSUN ) and Abercrombie & Fitch (NYSE: ANF ) to value plays such as Aeropostale (NYSE: ARO ) .
Fast forward almost two years, and Pacific Sunwear continues to bleed cash. In January 2006, the company held about $170 million in cash and equivalents. In its most recent earnings release, Pacific Sunwear reported $15.6 million in cash, down about 90% in less than four years. Its big cash cow is the holiday season, so PacSun really needs a strong quarter to boost its cash.
The cash drain does give the company something in common with its potential client base: both are finding the current recession increasingly painful. One economist estimated that 50% of recent job losses have been to folks under 30, while those from 16 to 19 years old have seen a 23% drop in jobs. Teens seem to be hit with a double-edged sword right now: Parents are finding it hard to deal with 401(k) and 529 account losses and often have less discretionary income. But teens looking for jobs to generate extra spending money on their own are often out of luck.
Pacific Sunwear's on-going outlook isn't too sunny: The company admitted in its earnings release that sales had dropped through the end of the third quarter into the beginning of the fourth quarter. Same-store sales were expected to fall by at least 20% for the quarter, generating a loss as low as $0.35 per share. Ouch!
With inventory up by 57% over the past nine months, to $168 million (but down 28% year over year), Pacific Sunwear is certainly building a wardrobe of clothing options while trying to control inventory. The company doesn't carry long-term debt, but combine its inventory with a quick ratio of 0.20 and the company is surely hoping for some pleasant Christmas surprises to stay afloat, in spite of dwindling cash and struggling same-store sales.
Biff and Buffy take a break
Hey, in case you haven't heard, conspicuous consumption is out and penny pinching is back en vogue. Even the most die-hard preppies have turned their backs on high-end purchases, as Saks (NYSE: SKS ) has seen in recent months.
Saks reported a 26.1% drop in November same-store sales, and had an average same-store sales decline of 18.5% over the past 10 months. Over the previous three quarters, Saks has lost $53.3 million. Cash is down to $7.1 million and inventory, which was up to over $1 billion last year at this time, sits at $799 million. Long-term debt looms at $462 million.
Nordstrom (NYSE: JWN ) has experienced similar sales declines, but it has rebuilt its cash position from $78 million in May 2009 to $484 million in October. Nevertheless, Nordstrom had to increase its long-term debt to do so, and also has been "leaning on the trade," increasing accounts payable and so delaying payment to suppliers. While Nordstrom does have $2.3 billion in long-term debt, its interest payments are not too unwieldy given its cash flow.
In January 2008, Saks had $101 million in cash and nearly $573 million in long-term debt. Nearly two years later, its cash had decreased by 93%, but it has managed to pay down over $100 million in long-term debt.
Saks is expecting continued same store-sales drops for its fourth quarter and has delivered a "cautious" but "positive" outlook for 2010. The company plans to focus on controlling costs, inventory and capital expenditures to continue to boost results. Obviously, Saks must counter these lackluster sales trends to fight its cash-poor status.
Now what?
As we've seen with Pacific Sunwear and Saks, it isn't just one demographic that has been hit by the economy: retailers across the board have experienced extreme sales declines. But the trend isn't completely widespread. Fickle teens who have turned their backs on Pacific Sunwear have moved on to the trendier -- and certainly not value-priced -- Buckle (NYSE: BKE ) stores. The upper echelon is still buying top-notch goods, with Tiffany (NYSE: TIF ) among their shopping choices. The economy is driving consumers to be more selective with their spending, which should remind all retailers to keep a full pocketbook (and pulse on consumer tastes) to stay strong and solvent in these tough times.
For related Foolishness:
RSS Headlines
Fool UK