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The Retail Blues

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I've been talking recently with the owner of two women's boutique stores outside of Atlanta. She's been on a very solid track for a number of years, even running good increases over the past year and a half when the women's business as a whole has been really struggling. But that started to change late in the summer and over the last couple of months business has turned down pretty sharply. When I speak with her, I can hear the frustration and concern in her voice.

The collapse of overall consumer spending in October was stunning, and the worst part of it is that nobody yet knows whether it was an aberration or a harbinger. Some of the comp store decreases that the majors reported were jaw-dropping. And the retail headlines don't look like they're going to get better soon. As I write this, Best Buy said today they expect to be down between 5 percent and 15 percent for the rest of the year. The amount of the drop is concerning, but even more concerning is the huge spread between 5 percent and 15 percent. Even they don't know where things are going.

Having said that, I think the most important thing a small retailer can do in this environment is be as clear-headed and realistic as possible in assessing their situation It's every retailers instinct to do something -- anything! -- to drive traffic, but over the next couple of months it could be that running 10 percent down will be a success. We just don't know.

What I would suggest is focusing on gross margin dollars and percentages. If you can run carefully structured promotions, like I outlined in my last column, Fresh Thinking for Uncertain Times, and see a bit of a pop in your business without eroding margins, I would go that route. I would not, however, succumb to running promotions that begin to badly erode either margin dollars or percentages. You may not be able to move the top line a whole lot in this environment, so focus on getting as much as you can out of the gross margin line. The one caveat would be that if you see yourself coming in heavy at the end of the year due to the sales drops, do what has to be done to get inventories back in line.

Most smaller retailers are very growth oriented, but now is the time to temper that with prudence, and patience. It's hard to know where things are going to go, so until they become clearer, you've got to be very focused on your cash. Buy very cautiously, plan for decreases until you start to see increases again, keep your inventories lean. Turn weak sellers into cash sooner rather than later. Keep a close eye on expenses.

It's also very important right now to take the time to project your cash flow. I would recommend modeling cash flow under at least three scenarios -- best case, worst case, and something in between -- extending each model out at least six months, and updating them every couple of weeks. As you go along, you're going to want to be looking as far into the future as reasonably possible, and identify any pinch points as early as possible so you can take corrective actions as soon as possible.

Unfortunately, there's no magic bullet for turning this around. The customer right now is very frightened. It's going to take time for them to get their balance sheets in order, feel secure in their jobs, and regain their confidence. It's a mighty storm that's brewing, and for many small retailers the best they can do may be to ride it out with as little damage as possible.

Last updated: Nov 12, 2008




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