Sunday, December 21, 2008

Why retailers will sell you things at a loss.

When sales drop, you know that retailers will sell things at steep discounts just to get rid of inventory. It costs a lot of money to hold things in inventory, and if you hold things like televisions or clothes too long, you'll be stuck with obsolete products or last year's fashions.

But that's not what is happening here. Retailers aren't just doing the usual inventory clearance....they are actually dumping products to raise cash. Department stores such as Macy's operate on enormous leverage and carry huge debts. In this market they are facing a perfect storm. They can't raise any cash to pay off debts and no one will buy their current inventory. They have huge payments coming due, and the only way to get the cash and stay alive is to dump inventory just to raise cash. In this environment, it makes sense to sell things at a large loss because you are really needing the cash -- not the profit. This is why you can regularly see 70%-off sales and is also why I now have an entire closet full of Ike Behar shirts and Armani slacks purchased at prices so low I know for a fact that the local clothing shops can't even purchase the clothes for those prices. I've talked to them directly about it. That is a good measure of the insanity -- a clothing shop would be better off buying new stock off the retail rack from Neiman Marcus than they would buying from their supplier or directly from the designer. Unreal.

The market will be in shock when earnings come in. Several major regional retailers will go bankrupt and dissapear forever. Think of Mervyn's and think of it happening everywhere.

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