By Aarthi Sivaraman - Analysis
NEW YORK (Reuters) - Deep discounts offered by bankrupt and struggling U.S. retailers will create unwelcome competition for healthier rivals already bracing to fight for sales in a dismal holiday season this year.
Taut consumer spending and tough credit markets have dealt a hard blow to many companies, forcing some like home goods retailer Linens ‘n Things and jewelers Friedman’s Inc and Whitehall Jewelers Holdings Inc to seek bankruptcy protection.
Circuit City Stores Inc, the latest to be hurt by the global financial crisis and credit crunch, is shutting 155 U.S. stores, as it struggles to rejuvenate its business.
Together, the companies are selling several billion dollars worth of merchandise at fire-sale prices, on top of the deep markdowns and promotions offered by the wider retail sector.
Whitehall began its sales in August, while Circuit City stores slated for closing started on November 5. Most of the sales run through December 31, piling on pressure during a holiday season already expected to be one of the worst in about 20 years.
“Stores that are closing will have going-out-of-business sales, deep markdowns,” said William Armstrong, an analyst with CL King & Associates. “As long as that lasts, that will have an impact on the other retailers in that area.”
Such liquidations are likely to be an even bigger draw this year for shoppers, who are battling higher prices for food, a housing slump and job losses.
“Retailers have learned to stand aside when competitors are running ‘going out of business’ events,” said Bernard Sosnick, a Gilford Securities analyst. “That’s because nothing they will do will stop bargain hunters from rushing to (these) events.”
Business at rivals suffers due to such sales, but mostly only on a short-term basis, analysts say. Healthier retailers will benefit in the long run, as they snap up customers from fallen competitors.
A top reason is that the good merchandise at liquidation sales is usually gone in the first few days.
“Shoppers are keen-eyed and walk off with the best merchandise first,” Sosnick said. “In short order, the appeal of the remaining assortment diminishes greatly.”
Also, liquidation sales are final, meaning purchased items cannot be returned or taken back for service. That may not seem alarming for those buying towels or sheets, but could deter consumers with items such as DVD players or jewelry in mind.
“Returns are an important part of the consumer mind-set for any category,” Diane Irvine, chief executive at online jewelry retailer Blue Nile Inc, said in an interview.
But the particular risk this year is tied to how badly retailers as a whole are already faring. U.S. retail chains posted this week the worst October sales results in more than three decades, according to the International Council of Shopping Centers, which pared its holiday sales forecast.
Jewelry sales, in particular, have languished, as consumers have shunned buying baubles in a tough economy.
Whitehall Jewelers, which filed for Chapter 11 protection earlier this year, began liquidating jewelry worth $750 million in August.
Jeweler Friedman’s was ordered by a court in April to hold a liquidation sale for jewelry worth about $400 million.
Sales at these events, expected to last till December 31, are robust, said James Schaye, president and CEO of Hudson Capital Partners, which is handling liquidations for Whitehall.
“I was a little surprised that they’re doing as well as they are, especially in light of the economy,” Schaye said.
Those fire sales have already been cited as a source of concern by high-end jeweler Tiffany & Co, and Signet Jewelers Ltd, which operates the mid-priced Kay Jewelers and Jared the Galleria of Jewelry stores in the United States.
Signet CEO Terry Burman said in August that liquidations had hurt sales at its U.S. stores open at least one year by an estimated 2 percent in the first half of the year. He expects a similar impact on same-store sales in the second half.
But some industry experts, like Jerry Ehrenwald, president of the International Gemological Institute, question shoppers’ readiness to buy gold or diamonds at a store that will soon cease to exist.
Going-out-of-business sales began around mid-October at Linens ‘n Things, which will close 371 stores throughout the United States. Liquidators expect to sell more than $1 billion of inventory and store fixtures.
Bankrupt department store chain Mervyn’s obtained court approval to start its liquidation sales, while discount department store chain Value City Department Stores is seeking court permission for the same.
One retailer that could face direct pressure from Linens ‘n Things’ is Bed Bath & Beyond Inc, which sells similar products. FBR Capital markets analyst Stephen Chick said he lowered his earnings view on Bed Bath & Beyond through 2009 as a result.
Circuit City has brought two liquidation firms on board as it shutters 155 stores. The stores being closed accounted for sales of about $1.4 billion in fiscal 2008, the company said.
The latest company to go dark was electronics chain Tweeter, which sought bankruptcy protection for the second time in two years and began store-closing sales.
Analysts worried that Circuit City’s woes could pressure rivals, such as Best Buy Co Inc, to consider aggressive discounts as the holidays near, but they said Best Buy stands to gain from Circuit City’s store closures in the long run.
“Once these stores close, the surviving retailers will have less competition,” Armstrong said.
Additional reporting by Chelsea Emery in New York and Karen Jacobs in Atlanta, editing by Gerald E. McCormick