Gloomy Days Ahead for Retailers

(page 2 of 2)

Others are expecting even worse fates, similar to Sharper Image and Linens 'n Things, both of which have declared bankruptcy. "Another wave of bankruptcies is coming, and it's not going to be pretty," says Lawrence Gottlieb, an expert on retail bankruptcies at law firm Cooley Godward Kronish. "It is the perfect storm of high inflation, no liquidity, and negative consumer spending."

A Surfeit of Risk

As a result, many retailers are battening down the hatches, slashing capital spending, and preparing for worse. After all, if Americans spent their $600 stimulus checks primarily on food and other basic necessities, chances are slim that consumers will splurge on much else when the money from Uncle Sam dries up. Home Depot (HD), the nation's second-largest retailer, closed 15 stores, the first time in the company's 30-year history that it has closed stores because of underperformance. "We are seeing significant pressure on the cost side as the price of basic commodities goes up," CEO Frank Blake said on a May 20 earnings conference call. "There isn't a well-worn path guiding us on what all these pressures will do to our business…, but there is more risk than opportunities for the remainder of the year."

Wall Street has slashed forecasts for the retailers. Goldman Sachs (GS) retail analyst Adrianne Shapira lowered her 12-month price targets on retail stocks 16%, on average, to reflect reduced earnings expectations for the rest of the year. "Given the ongoing macro [economic] jitters and the prospect of further, extended weakness, we feel it prudent to take a more conservative stance," she wrote. Citi's (C) Deborah Weinswig warned that "consumers will continue to pare back discretionary purchases to meet rising food and fuel costs in the second half of the year."

Even better-performing retailers have failed to impress analysts. For instance, shares of Family Dollar Stores, which in June reported an 8% increase in same-store sales, didn't stir. Charles Grom, a retail analyst at JPMorgan (JPM), has an underweight rating on the stock.

Grom noted in a report that the discount stores' sales were increasingly coming from low-margin consumables, such as food, while sales of apparel, accessories, and home products were declining. Besides, he pointed out, the chain's current sales were boosted by the stimulus checks. "We'd question the sustainability of current sales momentum," said Grom. Indeed, that's exactly what worries all the discounters right now.

Gogoi is a contributing writer for BusinessWeek.com.