Is Your Supply Chain Ready for the Holiday Push? Indicators that May Say Otherwise
The recent bankruptcy of toy retailer Toys "R" Us, Inc. is rattling an already volatile retail industry. It parallels the ongoing hardships affecting retail giant Sears Holdings, Inc. and a plethora of bankruptcies at smaller shopping mall chains such as Wet Seal.
Adjusting to the fast-changing retail landscape is no simple task. With an uptick in everything from shipments to hours worked, the holiday season marks an important time to evaluate the companies that you rely upon to supply you with the products that stock your shelves. With the arrival of the fourth quarter and the holiday season fast approaching, we look at the impact felt during this kinetic time within the retail industry and what effect it is having on retail suppliers in 2017.
For example, Toys "R" Us represented but a small percentage of outstanding accounts at toy maker JAKKS Pacific, Inc. Still, how to collect on uninsured receivables is an unknown at this point. This wouldn't be a big issue for a financially stable company like Mattel, but JAKKS Pacific is already dealing with financial weakness. The toy maker is currently in the FRISK® "red zone,” which represents the companies most likely to file for bankruptcy on a 1-to-10 scale, “1” being companies with the highest risk of potential bankruptcy within the next 12 months (10-to-50%) and “10” marking companies carrying infinitesimal risk.
To date, the FRISK® score predicts bankruptcy with 96% accuracy within a 12-month window. JAKKS Pacific holds a worrisome FRISK® score of “2.” Mattel, Inc.'s FRISK® score, for reference, is an above-average “9” compared to a mean of roughly “7.” The bankruptcy of Toys "R" Us, coupled with an already low FRISK® score, is a strong indicator that customers need to actively monitor toy maker JAKKS Pacific, Inc. in an effort to avoid supply chain disruption.
JAKKS isn't the only company you need to worry about: there are other suppliers in the "red zone" as well.
- For example, Phoenix Footwear Group's FRISK® score is currently a “4.” Even though the score is on the high end of the "red zone," this doesn't necessarily mean that you should give the shoemaker a pass. The company's tangible net worth has declined roughly 50% over the past year. Sales were down 18% year-over-year in the company’s fiscal second quarter and working capital has declined sequentially, dating back to fiscal quarter three in 2016. The company lost money in 2016 and unless results pick up materially from here, 2017 could ultimately rank as another difficult year. If you count Phoenix as a supplier, add them to your watch list.
- Differential Brands Group, maker of jeans, casual wear and accessories, is another retail supplier worth monitoring. It’s FRISK® score is currently a “2,” having fallen from a “4” at the start of 2017. The company's tangible net worth is negative, and it has lost money in each of the last five quarters through the second quarter of 2017. In fact, it has recorded losses in each of its last three fiscal years, dating back to 2014. Total debt, meanwhile, increased roughly 20% year-over-year in the June quarter.
In most cases, your supply chain is likely strong enough for the holiday push. You’ve been cultivating your relationships and have had all year to assess the companies you work with. However, on occasion, one might slip under the radar.
Partake in some due diligence now to make sure you aren't shocked later by delayed or missed shipments this holiday season. As the retail sector continues its difficult adjustment to fast changing shopping trends, that legwork could provide the greatest gift of all to your organization.
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