| NEW YORK/CHICAGO
NEW YORK/CHICAGO The conventional wisdom for retailers having financial difficulty has been to stave off bankruptcy until after the holiday season, but cracks in that thinking are starting to show and fewer companies may make it past the new year.
Tumultuous financial markets, flagging consumer confidence and cautious lenders are undermining the efforts of struggling retailers to stay in business, restructuring experts say. And many retailers hoping to ride out the storm face tough choices about store closings, and ways to raise cash.
Industry experts say some of these companies may even find themselves going straight to liquidation rather than restructuring.
"There are five or six public companies that are teetering right on the brink and given this credit environment frankly they could go away any moment. Anything can happen," said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates.
By this time of year, most retailers have their stock for holiday shopping, which enables them to hold out against financial pressure until after the season.
"Orders have long since been placed and shipments have been made. Inventories have been built up for the holidays," said Craig Johnson, president of Customer Growth Partners, a consumer consulting and research firm.
But that inventory build-up depletes cash, giving retailers few options if they run into trouble.
As a global financial crisis deepens, and consumers spend less over the holidays, this year could be different.
"My own opinion is that we will see more store closures before the holidays and more bankruptcy filings before the holidays," said Walter Jones, a turnaround consultant at J.H. Cohn LLP in New Jersey.
If they are facing bankruptcy, retailers must focus on keeping only their best stores going, he said. "By closing more stores, they produce more cash from the inventory in those stores, which would generally give them more options," Jones said.
Retailers' cash positions typically peak just before the new year, putting them in the strongest position to file for bankruptcy protection and reorganize, experts said.
"The way the game is played is to suck in the suppliers, build up your cash, then file. That puts you in the best position to come out on the other side," Davidowitz explained. "It buys you more time."
If retailers manage to come out on the other side of the holidays, the next hurdle will be finding sources for debtor-in-possession financing to get through bankruptcy. Many of those sources have dried up as credit markets tightened and banks became more risk averse.
Companies will have to turn to their existing lenders for a shot at securing increasingly pricey DIP funding, giving their current bankers a larger role in how those bankruptcies proceed.
"It's unclear to me whether existing lenders will think they are better off to wait until after Christmas," said David Heiman, a bankruptcy attorney at Jones Day. That is particularly true if loans are based partly on inventory, which will be reduced by holiday sales, he said.
But some merchants may not be able to take in as much stock as they would like to so they can compete during the holiday season, Johnson said.
He cited consumer electronics retailer Circuit City, which has been facing stiff competition from Best Buy and Wal-Mart. A Circuit City spokesman declined to comment.
Some retailers have come under pressure from credit rating agencies ahead of the holiday season. Standard & Poor's has assigned a "B-" or lower credit rating to Eddie Bauer Holdings, Claire's Stores Inc, Guitar Center, Loehmann's and Oriental Trading Co, meaning their debt is regarded as highly speculative or with substantial risks.
Department store group Gottschalks Inc recently said its stock would no longer be traded on the New York Stock Exchange, but that it had been working to shore up its liquidity.
"It's a safe bet to say that there is going to be some shakeout in the industry," said National Retail Federation spokesman Scott Krugman. "But at the end of the day, it's healthy. It's healthy because it creates a more nimble economy and from a retail industry perspective it creates an industry that's better poised for recovery."
(Additional reporting by Emily Chasan, Sarah Coffey)