Earn What You Spend

Unsurprisingly, December sales in most retail stores were quite soft - and this time the impact didn’t spare discount retailers such as Wal-Mart, who have been rising above the competition because of their low prices:

Following the worst set of data in decades for November, sales were expected to be nearly as bad for December, thanks in part to some post-Thanksgiving sales getting pushed into the December reporting period as the holiday fell later this year. But sales were also weak last December, giving retailers a lower bar than typical to reach.

While we know that 2008 has been a tough, tough year - it is obviously important to start looking ahead to this year.  The problem facing retailers now is that their largest revenue-producing quarter, Q4, is now far behind them, and sales always fall in the Q1 months.  For example, 

Limited Brands Inc., parent of Victoria’s Secret and Bath & Body Works, reported a bigger-than-expected 10% drop to close out a year in which same-store sales fell every month. The company noted increased markdowns pushed margins below forecasts and that January same-store sales should fall by the mid-to-high teens on a percentage basis. 

So Limited Brands is looking at yet another 15-19% decrease in same-store sales for January.  A drop-off in sales is customary; but one of this magnitude, and one following such a disastrous previous year, makes it an incredibly tough time for any business.  

Credit, then, becomes that much more important as the lifeblood of a business.  Let’s say you are one of these retailers, and you are certain that the economy will pickup in mid-2009, and that by 2010 you’ll be back in great shape.  You will have been unprofitable - in same cases quite unprofitable - for at least eighteen months.  Unless you have significant credit to float you through times like these, you are out of business.  You simply cannot continue to spend more than you earn unless you have access to credit until you return to profitability.  

That’s why it is so critical banks, credit card companies, and the debt markets all perform to extend credit to those who need it (and, for the record, those who can pay it back).  If they don’t, even viable, strong, profitable-in-the-long-run businesses will fail.