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April 14, 2009 6:26 PM

Business

Financial Analysis: Plumbing the Depths

One of the most unsettling things about economic booms is the knowledge, bitterly reinforced in the past year, that one day the bubble is going to burst. Similarly, it's one of the few consolations in an economic decline that it,...

One of the most unsettling things about economic booms is the knowledge, bitterly reinforced in the past year, that one day the bubble is going to burst. Similarly, it's one of the few consolations in an economic decline that it, too, will end one day and that recovery will at some point become unstoppable and undeniable.

WWD recently asked a lot of very smart people when the recovery would begin and what would precipitate it. Not surprisingly, few were able to predict the "when" and "what" with much certainty or commitment, and a few even had the candor to admit they had no idea. One source, who politely opted out when asked for an on-the-record comment, said, "The patient will get better when he stops being so sick."

Most informed observers in the apparel, beauty, retail and financial communities don't expect any great turnaround this year, although many figure that, as we approach the fourth quarter and the nominal one-year anniversary of the end of the world as we knew it, some metrics will start to look better, if only because the comparisons will be so lame. It will be a victory of sorts when a majority of stores reporting same-store sales can say they finished a month flat or slightly above dreadful year-ago numbers.

The more pressing long-term question is the shape of things to come. How will the fashion markets be different in a post-recovery world?

The retail industry has been overstored and overassorted for the better part of the postwar era. Companies pull back on expansion in a recession, and there are inevitably a few casualties that don't make it to the recovery, but that's never stopped the lopsided ratio of retail square footage to disposable income from growing.

That could change now. The familiar cycle of too many stores selling too much merchandise to too few consumers might actually be ready to be broken. As always, the strong will survive, and at most price levels and in all distribution channels, might find themselves with something they've been lacking since the repeal of fair trade and the blooming of Wal-Mart Stores -- price elasticity.

Living in famously overstored Nassau County on Long Island, I have recently, and for the first time in my adult life, had to drive more than a mile to find a discount shoe store after the one in my town closed and left one of those increasingly familiar gaping holes in what had once been an unbroken string of decorated storefronts.

Those empty storefronts won't be filling up all that quickly. The deflationary cycle that made profitability so elusive even during the growth years might be broken as competition contracts a bit and the playing field is left to the All Stars rather than the minor leaguers. The efficiencies forced on companies by the economic perfect storm won't be abandoned. In a few years, especially as the public cost of recovery is metabolized, we might be more concerned about inflation than its ugly stepsister, deflation.

And won't that be, at least, something?
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