Kiss These Retailers Goodbye

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The coming holiday season promises to be interesting, given our current economic crisis and the intense pressure many consumers feel on their pocketbooks because of rising energy and food costs, among other things. This means many retailers may get the equivalent of coal and switches in their stockings, and some may not even get the opportunity to make up for it next year. Be on guard, retail investors.

Dark times for some retailers
The Friday after Thanksgiving is called Black Friday because, traditionally, retailers finally venture into the black thanks to the tremendous volume of revenues that day as shoppers hit the pavement in earnest.

This winter, though, a weak and frightened consumer may be a real chiller, and many retailers may find themselves lingering in red. September consumer confidence looked a little stronger -- as strong as it did last April -- at 59.8, but that's not saying much. First of all, that figure didn't include the recent harrowing developments in the credit crisis. Secondly, the index was 99.5 last September.

And, of course, word on the street is that many credit card companies are tightening up credit -- and that means some are cutting credit lines of already strapped consumers. People might not be able to whip out their plastic bearing the Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) logos as much as they did in the past, even if they want to.

Instead of smooching under mistletoe, we're likely to end up kissing some retailers goodbye. The Grinch may be stealing more than just Christmas, taking along quite a few retailers with him. So get under the misled toe and kiss these retailers goodbye.

The quick and the dead
In good times, it's a bit easier for an ailing business to mask its problem areas. But in economic crises, the weak are finally winnowed out. Based on several vital metrics, I've accumulated a list of companies unlikely to make it through this holiday season.



Operating Margin

Quick Ratio

Circuit City (NYSE: CC  )




Talbots (NYSE: TLB  )




Borders (NYSE: BGP  )




There's more red to Circuit City than the color of its storefront. The retailer was suffering even when the economy was chugging along, as consumers looked elsewhere for deals on electronics. And Borders may be working on paying down its debt, but with a quick ratio of just 0.1, this is one heck of a risky investment. A quick ratio beneath 1.0 can serve as a major warning flag, particularly if a company's sales and profit margins are suffering and its inventories may have to go on clearance sale. (Read up on these ratios in "How to Read a Balance Sheet: Current and Quick Ratios" and "Using the Debt-to-Equity Ratio".)

All three of these companies have several years of falling sales, falling profit margins, and lack of profitability. Circuit City and Talbots reported negative operating income in the last 12 months, meaning neither boasts the ability to cover interest expenses with operating income. Throw in a major economic crisis and a lot of terribly frightened, cash-poor, credit-constrained consumers, and the headwinds look perilous this holiday season.

Cash is king
I've been saying this for months now: A far safer path for investors is to buy and hold stocks of companies that have plenty of cash and little or no debt during these tough economic times. Even if those companies are pressured by the current economic storm and suffer near-term drops in profitability, they still have the means to weather the storm, and maybe even make strategic acquisitions.

For example, personally, I can't stand Gap (NYSE: GPS  ) as a potential investment, but I did have to admit a couple of weeks ago that Gap's strong cash position allowed it to make a strategic acquisition despite the tough times. No credit required. There's a survivalist moral to that story.

And of course, consider a company like Apple (Nasdaq: AAPL  ) . As much as many people griped for years that it just sat on its huge trove of cash like Scrooge McDuck, it's a high-quality stock with cash as a safety net, since not only do people love its products, it can ride out the blizzard and come up with more innovative products at its leisure, and without any need for debt.

The reason for the season
The good news is, perhaps, that we'll all remember what the holiday season is all about, and it's not materialism. (Sorry, retailers.) As for us investors, it's a good time to remember to select financial houses in good order that never go out of style.

How much are consumers expecting to shop this holiday season? Find out in our Fool Poll.

Borders Group and MasterCard are Motley Fool Inside Value recommendations. Apple and Gap are Motley Fool Stock Advisor picks.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (15) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2008, at 7:37 PM, mdiamond58 wrote:

    I can't speak for the 2 other companies in this article, but to say Talbots will not survive the holiday season is not only wrong, but very irresponsible. Talbots has been around for over 60 years, and although sales have been lower recently like almost every other retailer, it is by no means in any danger of closing. If you take a snapshot of every company over the last 12 months and based its future solely on those numbers, there would be MANY companies that would appear doomed to failure. The author needs to look at all the facts and not just an equation based on a few numbers from a short time period. This is reckless commentary and is one of the big problems of today's stock market.

  • Report this Comment On October 06, 2008, at 8:42 PM, bababaseh wrote:

    I can not beleive that fools are constantly putting talbot down,look I work for the companey ,iam just an employee,but Ican see the merchendise is great and customers are shopping in the store constantly,the new mangment is great and this componey going to be here for another 100 year,please do not bad mouth the good componey

    thank you


  • Report this Comment On October 07, 2008, at 2:22 AM, FinanceMajor21 wrote:

    PLEASE, if you are going to comment on a website, spell your words correctly, Nothing discredits what you are saying quite as well as misspelling what you write.

  • Report this Comment On October 07, 2008, at 10:13 PM, Karasuman wrote:

    I worked at Circuit City for two and a half years until last week when I decided it was time to find a real job. Speaking as someone from the inside, I can tell you that company's going nowhere.

    Their management is piss-poor at every tier, and they make a lot of bone-headed decisions, such as the cut of those 3400 "over-paid" employees, thus losing any advantage they had over anyone else. Now, noone even wants to buy CC because they're so poorly perceived, and poor perception is the bane of retail profitability.

    Mark my words, they're on their way out.

  • Report this Comment On October 10, 2008, at 1:41 PM, took4ever wrote:

    I also worked at Circuit City. I was there for over three years as a Store Manager.

    At one time, they looked like one of the companies who 'had it going on'. Jim Collins mentioned them in "Good to Great". However, like other failing companies before them, they made bad decisions at the leadership posts and lost sight of what made them good in the first place.

    After working at Montgomery Ward for 12 years and seeing their demise, I still feel a loss seeing what could have been so good turn so bad.

    Still, 'the market place prevails'. As deep as my connections may go, the way they (Circuit City) have treated their workforce, their failure to upgrade stores when they had the chance, the bad leadership at the district level, and bringing in ex-Best Buy people enforces that you need to be who you are, not try to clone someone else's success ... unique-ness is an entrepreneurial part of being a market leader ... not a follower.

  • Report this Comment On October 10, 2008, at 1:59 PM, vmb63 wrote:

    FinanceMajor21 - What are you the spelling police?

    I too am employed by Talbots and it seems to me that the Fool is the only one reporting negatively about the company. Nowhere have I seen any news about the newly launched product line flying off the shelves. The stores are full of people and the product has been met with great response.

    Talbots is a veteran label with a loyal following. That customer will help the turnaround. No one says it will be instant, but to claim that they won't make it through the holidays is wishful thinking on their part.

    In my opinion, they should dump the J. Jill brand and get back to their classic roots and stick with the flagship label.

  • Report this Comment On October 10, 2008, at 2:30 PM, dockofthebay wrote:

    I have no inside knowledge about how Talbot's is doing currently. However, I do know one sales associate who tells me that the current merchandise is an improvement on what was available last year and that sales in the store in which she works seem to be better than last year's sales at this time. I think Trudy Sullivan has been doing a good job since she came aboard and I would not write off Talbot's at this point.

  • Report this Comment On October 12, 2008, at 5:53 AM, waterlogged3261 wrote:

    must be a nice place to work...(talbots)

    the employees sure seem to be emotionally "tied".

    it's kinda like buying/selling anything-

    ya gotta get the emotion out folks... leads to lots of bad decisions.

    where's that spelling police? how do you feel about bad grammar? ;-)


  • Report this Comment On October 21, 2008, at 7:46 PM, billddrummer wrote:

    I work for BBY and a CC store opened just across the street about a month after we did.

    We get more customers from there saying they were ignored, had no products, were rude, talked down to them, that I'm going to be a little saddened when the company finally goes away.

    But only a little. One of the CC stores here had no functioning audio displays and three prices for the same product--two of them were on opposite sides of the same endcap!

    Unbelievably bad execution.

    Shoot the wounded and move on.

  • Report this Comment On November 18, 2008, at 2:22 PM, andrewz332 wrote:

    Does Talbots own JJill? I thought I read someplace that they do, and I'm a huge JJill shopper. Should I be concerned about buying gift cards for Christmas from JJill or Talbots? I think Louis Kestenbaum wrote an article about clothing stores going down instead of up on Black Friday. Circuit City's situation does not surprise me in the least - in fact I'm surprised they've survived this long!

  • Report this Comment On November 20, 2008, at 5:14 PM, latanya23 wrote:


    I am a Talbots employee. Talbots does own JJill. However, we are selling the company(bad investment). There is an email foating around stating that we are going out of business and don't buy our gift cards. However, this information is inaccurate. There is a letter from our CEO on the Talbots website. Please make sure that you read it and tell everyone that we will not be going out of business. Thanks

  • Report this Comment On November 28, 2008, at 12:01 PM, kenmaureen wrote:

    I love shopping at Talbots and would really miss it if they weren't around. I thought the store's early fall colors of teal and purple and magenta missed the mark but their current line is better. The new look of the catalogs is much improved and appealing to the eye. I love the fit and the quality of Talbots clothing. They are much better constructed than Ann Taylor, for example.

  • Report this Comment On December 05, 2008, at 5:47 AM, passedyoureyes wrote:

    As a loyal Talbots employee, I must agree with all the positives above! Perhaps clothes don't "make the person," however, looking well inspires confidence. Talbots has a wonderful lineage of pulling smart looks together, and in a way so that the customer does not see her look repeatedly on the street. The Talbots wardrobe has substance, wonderful color, patterns one never tires of, and accessories that "put the icing on the cake." As a retailer, Talbots has been extremely dependable for providing classic clothing that never goes out of style, as well as truly dedicated-to-the-customer personal shoppers.

  • Report this Comment On January 16, 2009, at 12:32 PM, SteveKanotz wrote:

    I worked at Circuit City in Louisville. This whole issue arises when W. Allan McCoulough took the CEO reigns. They got rid of our commissioned employees, which was the secret to our success and let companies like Lowes and Home Depot put us out of the appliance biz. We had it coming. However, Allan McCoulough escaped with his golden parachute after running this company into the ground!

  • Report this Comment On January 16, 2009, at 12:35 PM, SteveKanotz wrote:


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