Predicting a recession can be a fool’s game, but it would be foolhardy to not prepare for any kind of economic slowdown given the current indicators. Consumers in the U.S. have been resilient over the last few months with retail sales up 7.8%, but the 8% inflation is wiping away any real increases despite the Federal Reserve’s latest in a series of interest rate hikes. And there are plenty of headwinds brewing. The continued interest rate increases won’t only hurt consumer disposable income but will also make the cost of borrowing for businesses materially more expensive.
Most retailers are expecting revenue shortfalls compared to their original FY’22 business plans, which were more optimistic off the back of record sales in 2021. Profit margins have also eroded this year as the growth in online sales continues to weigh on costs. Combined with the high levels of inventory retailers are currently sitting on, there may be a liquidity crisis coming for anyone that has not already taken measures to protect cash.
Lenders tend to be much more risk-averse when economic indicators are on a downward trajectory. Moreover, they are taking a long, hard look at the current landscape. If credit markets tighten, refinancing will become more challenging in the near-term, and likely even worse in the mid-term.
If asset-based loan availability decreases, retailers may be surprised by lenders implementing new reserves, which will further contract liquidity. Retailers should also be mindful of future inventory appraisals. If the current economic situation continues downward, it’s possible that future Net Orderly Liquidation Values will also be lower, further contracting one’s availability on revolving loans and again reducing liquidity availability.
So, what can a retailer do today to prepare?
Get financially current: Update your business plan with today’s realities and with a focus on downward scenarios to be able to accurately forecast potential liquidity low points through the remainder of this year and on a monthly basis through 2023.
Evaluate refinancing options today: If current debt is coming due in the next 6-18 months, consider starting the refinancing process immediately if it’s not already underway. Refinancing will likely be more achievable today than in the future, as very few economists believe a rebound is in the near term cards or that interest rate hikes will stop. Have frank conversations with your lenders today; don’t surprise them with bad news.
Prepare to discount now: If the updated business plan indicates liquidity challenges in the next 3-6 months and if sales are less than expected or certain categories of inventory are not moving as planned, take immediate actions today. This could include:
- slowing down or pausing future flows of inventory
- cutting costs across the board or executing on any planned cost-saving initiatives
- freezing hiring of noncritical positions
With continuing disruptions, the feeling of dread that many retailers may be feeling is understandable. However, freezing in fear and delaying action is the worst tactic. Instead, every smart retailer will prepare and get proactive about warding off a cash crunch, recession or not.