Retailers nationwide must be breathing a sigh of relief, now that lender CIT Group
According to Bloomberg reports, specialty retailer Urban Outfitters
Retailers tend to pay their suppliers 90 days after they receive their goods. But in the gap between sending out their goods and receiving payment for them, those suppliers often need cash to cover short-term expenses. Lenders such as CIT provide such financing -- a practice known as factoring.
Roughly 7% of Urban's suppliers rely on CIT Group for financing. If CIT failed, the affected vendors could be crunched for cash, which could disrupt the flow of products to retailers.
Obviously, such a scenario could be a disaster as the all-important holiday season looms on the horizon. Urban Outfitters' offer not only avoided that dire possibility, but transformed it into an opportunity for profit. The company said it would shift some of the cash from its secure low-interest investments to factor invoices in need.
As of its most recent quarter, Urban Outfitters has $297.6 million in cash and securities and no debt. When a company's got such a fat net cash cushion that it can even consider extending help to its suppliers, you know it's a strong contender in the retail business. Although it operates on a vastly larger scale than Urban Outfitters, even Wal-Mart Stores
Retailers such as Chico's
Talbots represents the scarier flipside of Urban's balance sheet strength. I've long been leery of Talbots' high debt load and flagging business. Far from being able to help anybody else, it has often relied on a big helping hand from its majority shareholder, Japan's Aeon. That's why I maintain underperform rating on Talbots in our stock rating database, Motley Fool CAPS. (In contrast, Urban Outfitters' strong cash position earns a thumbs-up from me in CAPS -- and impressed me enough to make me a shareholder in the real stock market).
In retail and many other industries, strong balance sheets and cash positions matter. Investors need to pay close attention to their companies' cash and debt, since those figures may mean the difference between survival and failure when times get tough. It's always nice to see one of your favorite companies take advantage of its position of strength.
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