Credit Crunch Catching up With Outdoor Industry

While the recession started 14 months ago, only in the last three months does the credit crunch seem to have caught up with the outdoor industry. The most recent Outdoor Industry Association (OIA) Topline Report shows sales at core outdoor specialty stores dropped off 8 percent and 10 percent respectively in November and December after chugging along at an 8 percent growth rate in the first ten months of the year. While dollars sales rose 7 percent in the chain channel in December, the rise was due primarily to sales of lower ticket items and earlier than normal discounting. That has forced some sporting goods brands and chains to write down the value of inventory. Publicly traded companies in our industry are exploring “strategic alternatives” after defaulting on loan covenants. Discounting, meanwhile, seems destined to lower margins all around for the foreseeable future.

Under these circumstances, it’s not hard to imagine vendors and lenders tightening the reins on outdoor brands and specialty retailers. Even companies that have avoided debt could find themselves vulnerable if they’ve been slow to pay their suppliers. In the fourth quarter, many brands in the cycling industry stopped extending credit to their slowest paying dealers, reports retail consultant Jay Townley. First to go were those more than 90 days out. Then those who could not pay within 60 days were cut off. Thirty days could be next. Entrepreneurs using unsecured credit cards to get through slow months or periods of peak spending are being cut off with little warnings.

The result is that some small businesses are being forced into the credit markets at a particularly difficult time. Companies that do have banking relationships, meanwhile, are finding their bankers unwilling to loan as much against inventory, receivables, real estate and other assets.

The message for outdoor companies is – as President Obama noted in his February 9 press conference – “The credit crisis is real and it’s not over.” The flip side of that is that there is still time to get in front of it and there are plenty of banks – particularly community and regional banks – still lending money. With that in mind, OIA WebNews interviewed an array of consultants and bankers for advice on what retailers can and should do now to secure access to credit. Here are some of their tips:

Assume you will be affected. Operate on the assumption that you will need credit and that it will become more difficult, expensive and time consuming to obtain. Don’t wait until the last minute to investigate alternatives.

Establish a banking relationship. If you are relying on a credit card or internal funds to finance your business, you need to establish a banking relationship now.

If you’re a retailer, get to know the accounting module in your POS system. To mitigate their risk, banks are demanding weekly and even daily cash flow statements. If you don’t know how to do produce one, arrange a training session with your POS vendor.

GMROI analysis. Townley urges retailers to conduct GMROI analysis on as many SKUs as possible. Calculating “gross margin return on investment” reveals your most profitable products. By eliminating less profitable SKUs, you can free up cash, thereby enhancing your appeal to prospective lenders and increasing your leverage with the remaining vendors.

Learn the language. Bone up on your financial vocabulary and the key ratios bankers use. This tutorial from the Small Business Administration is a good place to start. If you are a retailer, attend today’s free Introduction to Financial Management Webinar at 2:00 p.m. (MST) to learn about the financial measurements you need to understand to make your business more profitable. It’s one of several programs OIA is launching this year to help outdoor retailers enhance their performance in 2009 and beyond. To see more resources for retailers, click here.