CITs Failure Would Cut Money to Retailers

One of the biggest short-term threats to retailer health has not been not sales shortfalls, but rather the inability to acquire working capital to fund operations and purchases. Just look at Circuit City [a chain of corporate-owned retail stores]. It’s demise can be traced to an asset-based lender’s revaluation of its inventory (and consequent dramatic reduction of its borrowing base – followed by a Chapter 11 at the worst possible time). We can trace the dissolution of other retailers to their inability to get Debtor in Possession (DIP) financing, forcing them from Chapter 11 to Chapter 7, with no chance to re-organize. Now, just when it seemed like credit was loosening up a little, came the announcement that CIT was in danger of immanent failure.

While the Federal government doesn’t think CIT is important enough for a bailout, retailers might disagree. Just about everyone in the retail supply chain has heard of CIT. It is a prime financing source to both retailers and their suppliers. In that role, it has played both sides of the table – it factors, or buys the receivables of retailer orders to suppliers, and it provides asset-based loans to the retailers to help boost seasonal buying power (and help them pay the very receivables it purchases). Oh, and if a retailer defaults, it has a liquidation arm to help it get a return on at least some of its investment.

So what would the failure of CIT do? It would cut off money from retail suppliers (typically remittance in full does not happen until the goods are received by the retailers), and also cut off the borrowing base of retailers at exactly the worst time…right before the holiday season.

Now… here’s the thing. Just like it has become facile for companies to blame weak revenue and earnings on “macro-economic conditions,” it would be easy for retailers to blame coming out of stocks on the failure of CIT (if it does in fact, come to pass). However, RETAILERS ARE ALREADY UNDERBOUGHT FOR THE HOLIDAY SEASON. Pent-up demand coupled with serious, hack-saw inventory reductions are going to seriously cut into potential sales. Walmart is probably the only retailer to arrange for safety stock, and will be “retailer of last resort” for those who can’t find anything elsewhere.

In my firm's soon-to-be- released benchmark on inventory Management, respondents report their biggest concern is now that they have too MUCH inventory. This, after years obsessing over the problem of out of stocks. Retailers who have been surgical in their inventory reductions will over-perform if they can hold the line on prices. Those who have used hacksaws may find some serious coal in their Christmas stockings.

It is hoped that CIT finds a way out of this debacle. If not, retailing will take another serious hit.

Late Update: As of Monday afternoon, major news outlets reported that CIT bondholders have struck a deal to keep CIT afloat, at least for now. While it may not be a permanent solution for the troubled company, it does seem to insure a steady flow of merchandise to retailers, and the funds to pay for that merchandise at least through the holiday season. The lesson learned for the retailing ecosystem is pretty straightforward: the government is no longer in a “bail-out” kind of mood. CIT has been in business for 100 years. We have to find new ways to fund our ecosystems for the next 100.

Article by Paula Rosenblum, Managing Partner of Retail Systems Research, a provider of insights and consulting services into business and technology challenges facing retailers. This is a copyrighted article that is cross-posted by permission of RSR.