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SURVEY: QUICK RATIOS SHOW RETAILERS IN GOOD HEALTH.

NEW YORK-The quick ratio is also called, somewhat ominously, the "acid test," and with good reason, since it is considered to be the most stringent measure of a company's liquidity and balance-sheet strength.

By that metric, the department store and mass retailers collectively appear to be in good health. Indeed, an HFN survey of the sectors' quick ratios showed that the majority of the retailers have enough, or more than enough, immediate liquidity in relation to current liabilities to meet any obligations in a matter of days or even hours.

Among the highest-scoring companies were luxury players such as Neiman Marcus Group Inc. and Nordstrom Inc., as well as Federated Department Stores Inc. and moderate chains such as Kohl's Corp. and Dillard's Inc.

To calculate quick ratios, HFN took companies' current assets, subtracted their inventories and then divided the result by current liabilities. As a general rule of thumb, an acid-test ratio of more than 1 gives potential creditors a greater degree of comfort.

Of course, there are always exceptions. If a company has an exceedingly high quick ratio, sure, it's good news that the company is so liquid, but it's bad news if it's sitting on too much cash. Investors prefer retailers to find a way to squeeze more profits out of cash, or get interest on it as an investment, than just have it sit idle in the company coffers.

Then there's Wal-Mart Stores Inc., which, exceptional as it is in so many other ways, is the exception here, too. At first glance, the world's largest company's acid test ratio of 0.2 looks a lot like its prices -- improbably low.

It's not. Wal-Mart is among a handful of companies whose inventories are so liquid, it's like having cash. Wal-Mart's logistics are so super-efficient, it can actually sell much of its inventory before it has to pay for it. M.B.A.'s call this "negative inventory," and by making money on the backs of its suppliers, Wal-Mart frees up cash that otherwise would be held in idle reserve.

Wal-Mart's competitors in the mass merchant and off-price channel, overall, had by far the lowest quick ratios in the industry. In some cases -- Target Corp., TJX Cos. Inc. and Ross Stores Inc., for example -- that's not a cause for concern because, once again, their inventories are unusually liquid.

However, investors and creditors would be wise to look more deeply into the balance sheets of Stein Mart Inc. and ShopKo Stores Inc., which have slight quick ratios in addition to some bottom- and top- line challenges.

As for Kmart Holding Corp., having emerged from bankruptcy less than a year ago, the company is flush with cash and largely debt-free, which explains that healthy ratio of 1.45.

In the department store channel, only Gottschalks Inc. appears to have a quick ratio that is disconcertingly low, but Saks Inc. couldn't hurt its standing with lenders if that acid test ratio of 0.61 were, say, 30 basis points higher.

Quick ratios are essential because when analysts, investors and, especially, creditors want to know how quickly a company can pay its immediate debts under the most apocalyptic conditions, they use the quick ratio. What this acid test indicates is how many current assets -- that is, how much cash and things it can sell quickly for cash -- a company has on hand, exclusive of inventories, to pay the bills.

These metrics are especially relevant these days, now that all eyes are on the Federal Reserve, waiting to see if it will raise interest rates in response to last month's spike in both retail sales and consumer prices.

When the Fed rate rises, as it almost certainly will eventually, the cost of short-term debt, and therefore a company's current liabilities, can, too. As a result, retailers holding a lot of short-term debt will feel their immediate liquidity pressured if they haven't had the foresight or wherewithal to hedge against that possibility.

Taken as a whole, however, most retailers are in the welcome position of having their short-term liquidity buttressed against any apocalyptic events, or even Alan Greenspan.

THE RETAIL ACID TEST

Company; Quick Ratio (1)

Neiman Marcus Group Inc.: 1.53

Nordstrom Inc.: 1.48

Kmart Holding Corp.: 1.45

Kohl's Corp.: 1.26

Federated Department Stores Inc.: 1.09

Dillard's Inc.: 1.04

Target Corp.: 0.91

J.C. Penney Co. Inc.: 0.89

May Department Stores Co.: 0.89

Bon-Ton Stores Inc.: 0.88

Sears, Roebuck & Co.: 0.81

Saks Inc.: 0.61

Burlington Coat Factory Warehouse Inc.: 0.45

Ross Stores Inc.: 0.39

Gottschalks Inc.: 0.35

TJX Cos. Inc.: 0.30

Retail Ventures Inc.: 0.26

Wal-Mart Stores Inc.: 0.20

Stein Mart Inc.: 0.19

ShopKo Stores Inc.: 0.16

AVERAGE: 0.76

MEDIAN: 0.85

(1) CALCULATIONS BY HFN BASED ON DATA FROM MOST RECENT QUARTER AVAILABLE.

SOURCE: COMPANY REPORTS.
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Title Annotation:Discount stores evaluation
Author:Burrows, Dan
Publication:HFN The Weekly Newspaper for the Home Furnishing Network
Geographic Code:1USA
Date:May 3, 2004
Words:813
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