NEW YORK, Jan 23 (Reuters) - U.S. retailers offering more discretionary products, like apparel or home goods, may find themselves squeezed between poor operating results and a need to tap outside financing sources in the next two years, according to a report released on Friday.
In a review of 41 retail and consumer product companies, Fitch Ratings said in a report that 26 are considered to have strong liquidity. Seven are rated as moderate, while eight rank as weak, meaning they will have to access external sources to meet financing needs over the next 24 months, which could be challenging.
“Cash flow generation for some of the more discretionary companies may be at risk, which, if impaired versus current expectations, could reduce their relative liquidity positions,” Fitch said.
The credit ratings agency said the liquidity of these companies is of particular importance in today’s recession, as consumers’ incomes, wealth and capacity to borrow erodes.
Blockbuster Inc BBI.N, Bon-Ton Stores Inc (BONT.O), Burlington Coat Factory, Neiman Marcus, Rite Aid Corp (RAD.N), Saks Inc SKS.N, Sears, and Toys “R” Us have weak liquidity positions relative to the rest of the sector, Fitch said.
It said Blockbuster, Neiman Marcus, Rite Aid, Sears Holdings Corp (SHLD.O) and Toys “R” Us have committed bank facilities that expire over the next two years and there is some risk of obtaining that funding.
The ratings agency said liquidity could be pressured at Bon-Ton, Burlington Coat Factory and Saks if the companies continue to generate negative free cash flow, face significant vendor financing related issues or violate any applicable covenants.
On the other hand, retailers and consumer product companies offering value-oriented and non-discretionary products should have more stable operating results and cash flow generation.
Of the consumer products companies in its coverage, Fitch said Alberto-Culver, Avon (AVP.N), Black & Decker Corp BDK.N, and Hasbro Inc HAS.N have large cash balances relative to debt maturities, also giving them strong liquidity.
Others with strong liquidity positions include Colgate-Palmolive Co (CL.N), Constellation Brands Inc (STZ.N), Fortune Brands FO.N, Kimberly-Clark Corp (KMB.N), Mattel Inc MAT.N, Levi and Stanley Works (SWK.N), helped by a combination of expected cash flow generation and cash support. (Reporting by Nicole Maestri, editing by Matthew Lewis)