Risk Management

Credit Squeeze Contracts the Retail Sector

Even before recent Libor and other short-term rate surges, a new BDO Seidman survey finds that retail CFOs were hurting as early as August.
Marie LeoneSeptember 30, 2008

The London interbank offered rate (Libor) posted a record rise early today, signaling increasing stinginess among banks in the wake of the bailout deadlock in Washington and posing new concerns for all areas of U.S. business. But the retail sector has been badly squeezed by the credit squeeze since as early as August, says a new survey of CFOs released this week

The Libor, which is essentially the rate that banks charge each other to borrow dollars overnight, rose 431 basis point to a all-time high of 6.88 percent today, according to a report from Bloomberg News. Meanwhile, the Associated Press says that the three-month dollar Libor rate climbed to 3.88 percent from 3.76 percent. Together, the rises in the benchmark rates suggest that while lending between banks is slowing to a crawl, corporate borrowing has also stalled, meaning that companies will be having a tough time securing short-term loans to make payroll or pay bills.

And that is sure to make the bad situation among retailers even worse.

The retail-CFO survey, sponsored by accounting firm and consultancy BDO Seidman, found that nearly half of the finance executives polled (41 percent) acknowledged that there has been a tightening of credit by their lenders. In addition, 37 percent of those CFOs reported a reduction of planned inventory purchases for 2008, according to the survey.

The telephone survey, conducted in August and September, polled the opinions of 100 chief financial officers of U.S. retailers that generate revenues of more than $100 million annually.

“There are a number of factors that are weighing on retailers, but the compounding affect of reduced consumer spending and a restricted credit environment has been especially challenging,” noted Doug Hart, a partner in the retail and consumer product practice at BDO Seidman. “We have read the headlines about the bankruptcies and government takeovers of financial institutions, but this shows the knock-on effect; retailers are now suffering from a drain on liquidity.”

In addition, 24 percent of the respondents said that they had made significant staff reductions — or are planning them — in 2008. Indeed, 32 percent of the largest retailers represented in the survey had been through a layoff already this year. Further, 36 percent of the CFOs say they have closed, or will close, stores in 2008 — with 27 percent claiming that they will close more stores this year than they did in 2007.

If the survey had a silver lining, it was that more than three quarters of CFOs (77 percent) had not delayed, or were not planning to delay, store openings slated for 2008. What’s more, 91 percent of retail CFOs reported that the weak U.S. dollar had not increased their concern of being acquired by an international entity.

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