Economies: The US battens down the hatches

US retailers are ahead of the game when it comes to admitting the truth - the USA is doomed to a recession and it is bound to last more than a couple of months.

The Fed and the IMF, having denied the reality and then delayed announcing it when it became undeniable, have both now given up using code and come out with it: the US is going to suffer recession.

They have been using words like "cooling" - but like a frostbite victim, retailers are realising that surgery is the only available option if the patient is to survive.

It's not just Foot Locker. Other chains are planning to close more than 100 shops. Notably, they are in the discretionary spending areas of e.g. jewellery.

But it is the statement from Ann Taylor Stores Corporation that chills: at the end of this article, we have reproduced a section from the company's latest results statement, published a month ago. Statements like this have made the Fed sit up, but also provided additional complications for consumers. Closing shops usually means reductions on closing down sales. So will consumers wait to see if their nearest shop is on the hit list? And if big public companies are worried about spending, does that tend to increase prudence by shoppers? After all, is it really such a big deal to wear a dress that's a year old instead of getting a new one? And when a company decides to stop issuing monthly financial reports in favour of quarterly only, does that mean that they expect to see figures that can appear less worrisome averaged out over entire seasons?

Zales, a jewellery chain, has more than 2200 shops under a number of brands across the US, Canada and Peurto Rico. In February it said it was taking steps to increase profit. That included redundancies of about 20% at head office, closing 105 shops, reducing stock in hand by around USD100 million, reducing planned capital investment by USD40 million - almost half of that previously planned. But it's not all due to the economy: a line in the 27 February announcement gives the game away: Zale President and Chief Executive Officer Neal Goldberg said, "In order to improve Zale's overall performance and provide our value-oriented customer with an exceptional experience, it is essential that we reduce the Company's infrastructure costs, which have outpaced its sales growth since 2002."

He went on ""Creating a culture of cost discipline and financial rigour is vital to Zale's ongoing success. While we recognise that expense saves will help drive efficiencies in the near-term, our ultimate success will come from optimizing the balance between top-line growth, margin expansion and expense control."

But these are the companies with fat to trim, and assets to charge to raise capital. It's in the next tier of shops that the chill is already killing businesses. Sharper Image, Levitz, Domain, Fortunoff, Harvey Electronics are some of the businesses that in other countries are large enough to dominate the market. But in the US are second league players. At least they were: now all are closed or seeking protection from creditors. And as in all insolvencies, it is the unsecured creditors whose businesses are also affected.

That means that, as companies collapse, manufacturers and service providers are likely to tighten up on vendor-financing, that is the heart of trade financing. As companies' credit ratings fall, so will the price of factoring sales to them rise. That all increases pressure on the margins of everything from manufacturers to delivery companies.

With other chains already closing, closed or cutting back the number of outlets, the situation for US retailers is bleak - and that's for those who foresaw the problems and started planning early. For others, who still have much debt and are likely to see falling sales, the bell is already tolling.

Extract from Ann Taylor Stores Corp annual statement 15 March 2008

Fiscal 2008 Outlook

The Company has planned its business conservatively for 2008, based on ongoing macroeconomic uncertainty and current weak traffic trends in the business. In this context, the Company expects earnings per diluted share in fiscal 2008, excluding one-time restructuring costs, to be in the range of $1.80 to $1.90.

The Company indicated that, given the current environment and potential volatility in performance based on factors outside of its control, it has decided to provide earnings guidance for the next few quarters on a quarter- by-quarter basis. At the same time, the Company noted that, effective immediately, it will discontinue reporting sales on a monthly basis, but will continue to report sales and earnings on a quarterly basis.

The Company expects the first quarter of fiscal 2008 to be the most challenging of the year, from a sales and margin perspective. Earnings per diluted share for the quarter, excluding one-time restructuring costs, are expected to be in the range of $0.35 to $0.40. The Company expects its performance to improve in the second quarter and throughout the year.

The primary drivers of the Company's full-year outlook are provided below.

• Total net sales growth in the low single digits, with comparable store sales flat to slightly negative for the year.
• Total square footage decline of approximately 2% at year-end, reflecting a reduction of square footage associated with the 64 stores being closed in fiscal 2008 related to the restructuring, partially offset by the opening of approximately 50-55 new stores.
• The sales reduction impact associated with stores closing during the year is estimated at approximately $35 million, with minimal operating income impact.
• Costs totaling approximately $15 million associated with the launch of LOFT Outlet in the summer and the New Concept launch in 2009.
• Restructuring program savings of approximately $20-25 million, excluding anticipated one-time restructuring costs of $7-10 million.
• Gross margin improvement expected for the year, with SG&A rate under pressure due to flat to slightly negative comps, costs associated with the Company's growth initiatives and an expected year-over-year increase in performance-based compensation.
• Capital expenditures of approximately $125 million.
• Continued repurchase of shares under the Company's existing share repurchase authorization.

In support of the Company's outlook for fiscal 2008, it plans to open approximately four Ann Taylor stores, 15 LOFT stores, 20-25 Ann Taylor Factory Stores and 10 Loft Outlet stores.

About Ann Taylor

Ann Taylor is one of the country's leading women's specialty retailers, operating 929 stores in 46 states, the District of Columbia and Puerto Rico, and also Online Stores at www.anntaylor.com and www.anntaylorLOFT.com as of February 2, 2008.