Debt crisis strains marriage of U.S. stores, vendors

By Martinne Geller and Emily Chasan - Analysis

NEW YORK (Reuters) - Facing the weakest holiday season in nearly two decades, retailers and the vendors who keep their shelves stocked are walking a fine line between helping each other stay afloat and protecting their profits.

As the credit crisis has dried up financing, and with store closings and liquidations on the rise, stores and suppliers are torn between trying to ride out the storm together, and looking out for their own survival first.

"It's a pretty difficult cat-and-mouse game. This next three months is when retailers can make or break their year," said Stacy Janiak, vice chairman of Deloitte & Touche's retail practice. "Vendors could have a very significant impact on what ends up flowing through to the bottom line of the retailer."

For example, Circuit City Stores Inc said on Monday that suppliers, pinched by the financial crisis, have tightened terms and in some cases are requiring up-front payments for inventory before they will make shipments.

Analysts forecast the struggling electronics chain, which just announced plans to close 155 stores, may still seek bankruptcy protection in the next few months.

Likewise, retailers can have a big influence on vendors, as when Jones Apparel Group, the maker of Anne Klein clothes and Nine West shoes, slashed its 2008 earnings outlook four days after one of its customers, Macy's Inc, did.

"We're working through these issues as partners," Jones Chief Executive Wesley Card told Reuters in an interview. "We're in this together."

In many cases, the tolerance of vendors is more important to retailers than that of landlords or banks, said Daniel Hurwitz, president and chief operating officer of shopping center operator Developers Diversified Realty Corp.

"If the vendor gives up on the retailer, then it's sort of lights-out for that retailer," Hurwitz said on a conference call last month. "The tenants that continue to receive vendor support will be able to limp their way through (the holiday season) and the tenants that don't won't make it."

The financial crisis that exploded in September has further shaken the confidence of U.S. consumers, who were already pulling back amid high food and fuel prices and a crumbling housing market.

The National Retail Federation, a trade group, expects holiday sales during November and December to rise by only 2.2 percent, the lowest gain in six years. The gloomiest forecasts expect the worst holiday shopping season in 17 years.

CREATIVE SOLUTIONS

Yet both groups are so strained by the sharp decline in consumer spending that the process has become more like couples counseling in a troubled marriage, where both sides are cautious and try creative problem solving.

For example, if a vendor cannot obtain enough credit to buy the supplies needed to fill an order, it may ask a retailer to pay up-front, trim the order or alter the products, said Barry Feld, CEO of home decor chain Cost Plus Inc.

"In some cases we go, 'You know what, let's take one slat out of the chair, let's re-engineer.' And in some cases we just say, 'Look, we'll talk to your bank or your lender and we'll bridge that gap for 30 days so you can do it,'" Feld said.