Retailer credit risk

18 December,2018 | main author

One minute guide.

What is the issue?

There continue to be high profile casualties in the retail sector catching many exporters by surprise and leaving them with big losses.

The retail landscape is changing around the world and there are winners and losers.

Supplying the losers on credit can result in significant losses for exporters if non-recourse trade finance is not used.

How can I assess the risk of a traditional retailer?

Most retail businesses do not have significant assets save for their brand and the stock which they hold for sale. This makes the analysis easier but there is a significant variety of business models which means that each retailer has to be considered individually.

  1. Sales versus cost of goods: this ratio gives the gross margin of the business. Typically it would be 50-60%, but some business models works very efficiently with lower margins of 30-40%.

  2. Level of stock: as a general principle, stock should not exceed 15% - 20% of the cost of goods. If the level is higher than this, it implies that there is slow-moving stock which maybe is not being written off.

  3. Trade payables versus level of stock: this is how inventory is financed, and generally suppliers should not be asked to fund all of the stock level. Supply chain finance programs complicate this position, however.

  4. Debt to free operating cash flow (also called EBITDA): should not be more than 2x for most retailers but there are exceptions.

  5. Net margin - should be profitable and trending upwards.

Analysing a retailer in detail requires consideration of two more detailed areas:

  1. Like for like sales: comparing performance across time periods so that seasonal factors are stripped out

  2. Store contributions: allowing the different formats to be compared, and to see where trouble-spots may sit within the store portfolio and forecast the direction of the business.

What do I look at for an online retailer?

An online retailer has different considerations to a traditional retailer.

This includes versions of the above ratios and calculations and additionally:

  1. Cost of sales: how much is spent driving traffic and converting traffic into sales

  2. Lifetime customer value: customer loyalty

  3. Logistics strategy and costs: especially including management of returns

Many retailers have a mix between online and traditional and therefore a hybrid approach is needed.

Why are retailers getting into trouble?

Traditional retail is not dead, despite what people say. But there are abnormal pressures on retailers at the moment. The reasons are usually simple.

  • Traditional retailers are unable to flex their business as quickly as market conditions are changing. In some countries, like the UK, this is made worse because property leases are long term.

  • Private equity firms have bought retailing groups and put a lot of debt onto their balance sheets which is proving unsustainable as margins come under pressure.

  • In some countries, it is easy for retailers to enter an insolvency process to restructure debts, but this can leave unsecured creditors like suppliers with significant losses.

How can trade finance help?

PrimaDollar pays the exporter at shipment and takes the credit risk of the retailer. This is financing on a non-recourse finance. When PrimaDollar is involved in a trade, the exporter is protected.

How do I find out more about retail credit risk?

With 10 offices on three continents, talk to us: click here to connect to your local office. You can also read further articles on our site:


Retail | Credit

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