Cash-rich retailers stand to gain in credit crunch

By Kristina Cooke - Analysis

NEW YORK (Reuters) - The global credit crisis has been hard on retailers, but those with strong cash positions stand to benefit if their more indebted rivals are forced to shut down stores.

Companies with a lot of debt on their balance sheets could face increasing difficulty getting access to funds to expand or simply maintain their operations, which would enable rivals with stronger balance sheets like Wal-Mart Stores Inc (WMT.N) and Home Depot Inc (HD.N) to scoop up market share.

A case in point: Last week, book retailer Borders Group Inc (BGP.N) said it might put itself up for sale -- with bigger rival Barnes & Noble Inc (BKS.N) one of the potential buyers.

Also last week, CIT Group Inc (CIT.N), the largest player in factoring services -- an arrangement in which a company uses money owed by customers as collateral-- had to draw down all of its $7.3 billion in bank lines to fund itself.

Without factoring, many suppliers may not ship to less creditworthy or smaller retailers, further underscoring the importance of a strong balance sheet in the current environment, Credit Suisse analyst Gary Balter wrote in a note to clients.

"Companies like Wal-Mart or Home Depot have strong balance sheets and can weather the storm. So, as the weaker contenders close stores, they'll be in a good position to grab that market share and increase their brand awareness," said Fred Dickson, director of retail research at D.A. Davidson & Co.

Cash-rich retailers got off to a stronger start this year than their more leveraged competitors. Wal-Mart shares have risen more than 11 percent, Home Depot and Bed Bath & Beyond Inc (BBBY.O) have climbed more than 5 percent, and Lowe's Cos Inc (LOW.N) is up 4 percent.

Meanwhile, the more indebted Macy's Inc (M.N) has fallen more than 7 percent and Dillard's Inc (DDS.N) is down more than 5 percent. Among highly leveraged smaller companies, building supply retailer Building Materials Holding Corp BLG.N is down 19 percent and apparel maker Rocky Brands Inc (RCKY.O) is off 8.5 percent.

And proving that it's all relative, while Barnes & Noble has fallen more than 4 percent this year, that pales in comparison to Borders' 44.5 percent drop.

The tough economic backdrop, which makes consumers more reluctant to spend, coupled with rising cost pressures, has already prompted a number of retailers to close stores, and more are likely to follow.

In February, Macy's said it would close several regional headquarters and cut 2,300 jobs.

The credit crunch also has forced some retailers to fold. Wickes Furniture, owned by private equity firm Sun Capital Partners, filed for Chapter 11 bankruptcy last month, citing the impact of the housing slump.

"Many of our competitors are having substantial struggles and some are struggling to stay alive," Howard Lester, chief executive of upscale home goods retailer Williams-Sonoma Inc (WSM.N), said on an earnings conference call on Thursday. "While we're sorry it's happening for them, we are seeing that as an opportunity for us to gain share."

D.A. Davidson's Dickson said he was also keeping a close eye on some of the less creditworthy bigger chains, like Sears Holdings Corp (SHLD.O).

"While we're not saying Sears is going to fold, they have lost momentum and are losing market share," he said.