- By Margaret Moran
It's the holiday season in the U.S., with Christmas, New Year's and several other seasonal holidays either in progress or just around the corner. This type of year always brings with it a dramatic spike in buying activity, especially for non-essential items.
Normally, this is the biggest time of year for retail companies. According to a research report by Statista, somewhere around $755.3 billion worth of holiday spending will be up for grabs among the ever-competitive U.S. retail sector.
This year, however, the sector is still reeling from the blow dealt by Covid-19, and more consumers than ever are doing their shopping online as well, decreasing traffic to retailers that do not have a well-established online presence. For many companies in the sector, this holiday season will be a "make-or-break" moment: will they earn enough in holiday sales to pull through the next year, or will it still not be enough to keep the lights on?
Keeping the lights on
One of the main factors to consider when assessing whether a retailer can make it through the holiday season is financial strength. The economic recession has disproportionately affected retailers with high debt, as even the slightest shock can set them back on their debt payments, resulting in ever-increasing costs just to keep the lights on.
Companies that are nearing financial destitution have yet to see whether the influx of holiday purchases will be enough to pad their weak balance sheets. The next few weeks are thus likely to represent a make-or-break moment for them. On the one hand, they could face permanent financial issues, but on the other hand, if they can make it through this economic tough spot and increase profits beyond expectation in the future, they could represent opportunities for investors who are comfortable with a high level of risk.
According to the GuruFocus All-in-One screener as of Dec. 16, there are 111 retailers in the U.S. with an Altman Z-Score below 1.81, which indicates that they could be in danger of bankruptcy over the next two years. Among these companies, 44 have a market cap over $1 billion.
Among these big-box retailers that could face liquidity issues going forward, Macy's Inc. (NYSE:M), Nordstrom Inc. (NYSE:JWN) and The Michaels Companies Inc. (NASDAQ:MIK) stand out as well-recognized names with especially weak balance sheets.
Department store chain Macy's has a financial strength rating of 3 out of 10, driven by an Altman Z-Score of 0.7, a cash-debt ratio of 0.18, a current ratio of 1.11 and a quick ratio of 0.33, indicating that it is highly likely to face liquidity issues if it cannot secure additional funding via holiday sales or taking on additional debt.
Overall, the company's income has been in decline in recent years alongside its increasing debt. The three-year revenue growth rate is -1.6%, while the three-year earnings per share without non-recurring items growth rate is -3.6%.
Luxury retailer Nordstrom has a financial strength rating of 3 out of 10, driven by an Altman Z-Score of 0.77, a cash-debt ratio of 0.16, a current ratio of 0.89 and a quick ratio of 0.47, indicating that it is highly likely to face liquidity issues if it cannot secure additional funding via holiday sales or taking on additional debt.
The company's earnings have been in an uptrend in recent years, which is an optimistic sign if it can stay afloat. The three-year revenue growth rate is 5.8%, while the three-year earnings per share without NRI growth rate is 16.3%.
The Michaels Companies
The Michaels Companies, owner of the largest arts and crafts retail chain in North America, has a financial strength rating of 3 out of 10, driven by an Altman Z-Score of 1.38, a cash-debt ratio of 0.21, a current ratio of 1.22 and a quick ratio of 0.55, indicating that it is highly likely to face liquidity issues if it cannot secure additional funding via holiday sales or taking on additional debt.
In terms of its growth, Michaels has shown mixed results in recent years. The top line has shown overall improvement with a three-year revenue growth rate of 9.5%, though a downtrend has begun more recently. Meanwhile, the three-year earnings per share without NRI growth rate is in the negatives at -0.7%.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.