With all of the talk of large bankruptcy filings, Sageworks released a list of 10 types of private companies that are most likely to file for bankruptcy in the coming months. The list is based on the average debt-to-equity ratio in the industry over the last 12 months. A high debt-to-equity ratio generally means that a company has been aggressive in using debt to finance growth. 

It appears that recessionary forces have intensified in the 4th quarter for the private retail trade sector.

According to Sageworks Private Sector Index, both accounts receivable and accounts payable days are at a record high based on a study of month over month comparisons for the last three years.

The average number of AR days, or average number of days to collect on accounts due has increased 40% from previous Oct readings, up to 18.82 from 13.48 average days. AP days are also up from 22.50 average days to 31.88, an increase of 41%.

More means less in this case, and the jump in accounts receivables and payable days indicates that retail businesses are receiving payment for goods sold more slowly, while also paying down their own bills much later.

In a recent report from the WSJ, late payments from customers of privately held retail businesses have not only affected revenue collections from sales, but have also detrimentally slowed down payments to suppliers.

Several retailers from Sageworks Index reporting increased receivables include:

Managing receivables is a key to maintaining strong cash flow in a small business, and data from Sageworks, Inc. shows that retailers have been troubled with substantial decreases in cash flow over recent months.

According to Sageworks Index, cash flow for private retailers as approximated by the EBITDA margin is currently down -10.98% as of Nov 1 over the trailing three months.

Increases in AR and AP days may also indicate that businesses have extended credit to buyers and/or may be taking advantage of trade credits from suppliers, but underlying problems now in retail are more closely related to general economic conditions where consumers are more pessimistic than ever. The Oct Univ Michigan/Reuters Consumer Index reported the strongest monthly movement in over half a century, down 12.7 points to 56.7. IHS global economist Brian Bethune recently commented, “The economy is now navigating through the eye of the storm, with recessionary forces intensifying in the fourth quarter of 2008,”

In the wake of current economic turmoil sales and profitability have both slowed significantly for retail businesses since last year.   Sales growth for privately held retail businesses has fallen in 2008 to 3.18% from 3.85% in 2007.  A similar trend is evident for publicly traded retail businesses; sales growth was at 3.72% in 2007 and is currently a dismal 0.32%.  Net profit margins for private clothing stores have dropped to 2.88% in 2008 from 3.46% in 2007; for publicly traded clothing stores average net profit margins are currently 5.55%, down from 6.81% in 2007.

With rising prices for food, health care, energy, gasoline, etc., retail customers are left with fewer discretionary dollars to go towards retail spending. Consumers are pulling back on spending and focusing on the essentials. The fall in consumer confidence to near all time lows has caused a general slowdown throughout the economy, which also seems to be adversely affecting retailers. Rising energy and transportation costs are raising expenses in the retail industry, which is placing more strain on profit margins. Competition between retailers is currently intense, with superstores battling on price and direct marketers/online selling increasing competition to stores.

Net Profit Margins of Privately Held and Publicly Traded Clothing Stores From 2000-2008

Sageworks aggregates private company financial data from financial professionals that use our ProfitCents and Sageworks Analyst applications.

Related Links:

http://blogs.reuters.com/summits/category/consumer-retail-07/ - Reuters Summit Notebook Blog - consumer and retail analysis
http://www.nsba.biz/content/1993.shtml - NSBA Small Business Mid-Year Economic Report
http://abclocal.go.com/wls/story?section=news/consumer&id=6397582 - Holiday Retail Slump Expected
http://www.sageworksdatabase.com- Sageworks Data on Privately Held Companies