August 27, 2015

Retail Interest Payments

Have you ever looked at the profit and loss statement of your favorite retail brand?

In the past five years, they've paid $2,200,000,000 (yes, 2.2 billion) in interest ... INTEREST!

Think of it this way ... every time you waltz into your favorite Macy's and spend $100, banks get to take $1.40 right off the top ... that's how the math works. Heck, with a gross margin in the 36% range, the math is even more extreme. When you spend $100, Macy's gets to keep $36 ... and then the banks take $1.40 off the top of the $36 that remain, or 4%.

That, my friends, is what is called a toll ... a self-imposed toll, no doubt.

I worked with a retailer that wanted to pay down debt - the CFO told the investment community of his intent - the investment community then communicated their intent - if the debt were paid down, the stock price would be taken down as well. Who is in charge of that business, you might ask yourself?

Here's another way that math is working against retailers. For retailers, most of the debt came from store expansion. More stores, more square footage. That's the way life worked from 1990 - 2010.

From 2016 - 2025, the math is likely to work in an opposite direction. As business continues to leak online, the lowest third of the retail portfolio become unprofitable. Stores are going to close - they already are closing. As stores close, sales decline. The debt, however, remains. So the online channel must grow at an ever-increasing rate to make up enough profit to cover the debt. And we all know that online sales cannot grow forever.

Hence, there's reason to be concerned.

Look at your favorite retailers. Look at their interest payments. Then look at their comp store sales increases/decreases. The future of the business is right there, buried within the story of the numbers.

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