Tuesday, December 30, 2008

retail bankruptcies

On November 23rd, I wrote:
This is my big worry right now. The US is “over retailed” (i.e., we have far more retail sales capacity than we do sustainable demand). That suggests a lot of retailers will be going out of business. Right now, a lot of them are barely hanging on hoping that a decent fourth quarter (holiday sales) will save them. To do that, they are slowing or stopping altogether payment to suppliers. But as the chart above shows, we know the fourth quarter is going to be disastrous. That will drive a lot of retailers under. And because their suppliers, too, have been barely hanging on and have been strung out by their customers, a lot of them will also go out of business. And no one is going to be getting a line of credit to save them – the credit markets have dried up. In other words, this is more likely the beginning of the bad news, not the end of it.

From yesterday’s
New York Times:

A rash of retailing bankruptcies is expected in the new year, but as the clock winds down on one of the weakest holiday shopping seasons in decades, the fallout has already begun. …

Challenging is hardly the word. This year, retailers including Circuit City, Boscov’s, Sharper Image, Mervyns, Linens ’n Things, Whitehall Jewelers and Steve & Barry’s filed for bankruptcy protection.

And that is very likely the tip of the iceberg. After studying more than 180 companies, AlixPartners, a restructuring firm, estimates that over the next 24 months there will be a fourfold increase in the number of retailers in deep distress — companies that do not have enough working capital or are unable to finance their debt. …

Retailers had one of the worst holiday shopping seasons in decades, with sales falling by double digits in nearly all categories, including apparel, luxury goods, furniture and electronics and appliances, according to SpendingPulse, a report by MasterCard Advisors that estimates retail sales from all forms of payment, including checks and
cash. …

From Bloomberg:

U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers [ICSC]. Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

… Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.” …

The ICSC predicts, using U.S. Bureau of Labor Statistics data, that 148,000 stores will shut down in 2008. … The total number of retail establishments will decline by
about 3 percent this year, also taking into account locations that were opened, [said ICSC Chief Economist Michael Niemira]. The U.S. had 1.11 million retail locations in 2002.

Another 73,000 locations may shut their doors in the first part of 2009, Niemira said. …

Things are going to be bleak in 2009. Don’t expect any good news for a while – things are going to get a lot worse before they get better.

This is from NYU economist Nouriel Roubini:
So what lies ahead in 2009? Is the worst behind us or ahead of us? To answer these questions, we must understand that a vicious circle of economic contraction and worsening financial conditions is underway.

The United States will certainly experience its worst recession in decades, a deep
and protracted contraction lasting about 24 months through the end of 2009.
Moreover, the entire global economy will contract. There will be recession in the euro zone, the United Kingdom, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial, and currency links transmit real and financial shocks to them. …

Today's global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.

Moreover, these pathologies were not confined to the US. There were housing bubbles in many other countries, fueled by excessive cheap lending that did not reflect underlying risks. There was also a commodity bubble and a private equity and hedge funds bubble. Indeed, we now see the demise of the shadow banking system, the complex of non-bank financial institutions that looked like banks as they
borrowed short term and in liquid ways, leveraged a lot, and invested in longer
term and illiquid ways.

As a result, the biggest asset and credit bubble in human history is now going bust, with overall credit losses likely to be close to a staggering $2 trillion. Thus, unless governments rapidly recapitalize financial institutions, the credit crunch will become even more severe as losses mount faster than recapitalization and banks are forced to contract credit and lending.

Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks. An emerging consensus suggests that the prices of many risky assets - including equities - have fallen so much that we are at the bottom and a rapid recovery will occur.

But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.

While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.

Happy New Year!

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