Want to sum up the economic crisis in a single word? Try "excessive."
Recklessly spending consumers tapped home equity, maxed out their credit cards, and whittled down their savings rate to negative levels, all to purchase items that were unaffordable from any realistic perspective. The trend was a ticking time bomb, but retailers got caught up in the moment.
Much like homebuilders such as Toll Brothers (NYSE: TOL), the retail sector capitalized on the aspirational consumer -- a category that emerged throughout the last several years of excessive lending and spending. Starry-eyed retailers saw opportunity to achieve extraordinary growth, and they began expanding at unsustainable rates.
A new era of frugality
But the spending bubble has exploded. In response to the recession, consumers have cut back on spending and begun saving. As of January 2009, the personal savings rate rose to 5% of disposable income.
From a long-term economic standpoint, this is welcome news. However, it has created a significant mismatch in the supply and demand for material goods. While fiscal responsibility may be a temporary response to the economic downturn (and temporarily detrimental to the economy), I believe it is vital for our economy's health in the long run. Hopefully, consumers learned a hard lesson from their past mistakes and will continue to save in the future.
But if they do, what will that mean for the retail sector?
The retail graveyard grows larger
Many retailers endured a painful 2008. Several companies declared bankruptcy, while plenty of others visibly struggled. If consumers continue to cut back on spending, I predict we will see the same pattern on an even grander scale over the next several years. The supply of consumer-oriented goods must readjust to new consumption levels, so that supply and demand can reach a new equilibrium. Retailers that either overexpanded or exposed themselves to financial weakness will be the least likely to escape the recession as solvent entities.
My Foolish colleague Alyce Lomax has already listed retailers whose unhealthy balance sheets earn them a place on her retail death watch. Here, I'd like to focus on companies that may appear financially sound, but are at risk because of their overexpansion.
Bag it and tag it
I consider Coach (NYSE: COH) a perfect example. As a business that sells luxury accessories, its target audience should be upper-middle-class women -- a segment that isn't really large enough to support high long-term growth rates. The company should have expanded more cautiously, to preserve brand reputation and avoid oversaturating its market. Coach did exactly that with great success for decades, but the company lost its focus during the consumer spending fury that followed the tech bubble.
Coach Metrics
FY 2002
FY 2008
Store Count
297
548 Continued... |