Holiday 2008: The kiss of death for retailers
Posted
Dec 29 2008, 03:51 PM
by
Anthony Mirhaydari
Rating:
The 2008 holiday shopping season looks like one of the worst in history. MasterCard reports that total retail sales fell 5.5% in November and 8% in December compared to last year. The worst affected were retailers of electronics, appliances and luxury goods.
Not even an epic fall in gasoline prices and the resulting boost to inflation-adjusted income could rekindle the acquisitive sprit as American consumers worked to strengthen their financial position.
While we won't know the true extent of the damage until same-store sales are reported next week, big changes are coming as the industry resizes to reflect new realities. Consultants at AlixPartners estimate that nearly 26% of the 182 large retailers it tracks are at significant risk of filing for bankruptcy over the next two years, up from just 4% two years ago.
For investors, all is not lost in this sector. Focus on companies best positioned to mop up the lost customers of bankrupt competitors and thrive in an environment of cheaper leases and fewer rivals. Also, capital conservation will be a concern, so look for retailers with low leverage and large cash reserves. You will also want to avoid the stocks of mall owners and any real estate investment trusts with significant U.S. mall exposure.
At issue is the repayment of debt, which fueled rapid store growth but is now becoming an inescapable burden for many as free cashflow dries up and lenders become more onerous. Changes to the bankruptcy code in 2005, along with a tightened market for bankruptcy financing, means many retailers will be denied a chance to fight for survival through restructuring and will instead be forced into liquidation a la Mervyn's and Linens 'N Things.
Using MSN Money's Stock Screener tool, I generated the following list of stocks worth considering if you have a contrarian bent:
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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