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.
|
Debt/Equity |
Operating Margin |
Quick Ratio | |
|---|---|---|---|
|
Circuit City (NYSE:CC) |
26.20% |
(3.60%) |
0.3 |
|
Talbots (NYSE:TLB) |
92.70% |
(0.80%) |
0.5 |
|
Borders (NYSE:BGP) |
110.20% |
0.20% |
0.1 |
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.
