MARKET WATCH: Okay, Let’s Calm Down - But Not Kid Ourselves
Jeff Harbaugh
- October 03 2008
- 813 views
- 12 comments
As I walked around ASR, I came to the unhappy conclusion that of all the people at the show- retailers and exhibitors- very few of them were old enough to have actually been through a real, honest to god, actual recession as business people. I came to the even unhappier conclusion that I was one who was old enough and, indeed, had.
I don’t mean the kind of minor inconvenience we had in 2000-2001 in the wake of the internet collapse where consumer spending hardly fell (or maybe it didn’t), and the action sports industry barely noticed it. I mean the kind where consumer spending falls and people lose jobs.
I don’t mean a “Great Depression” kind of thing, though if the financial markets don’t get freed up, this could be a severe recession. I mean a normal kind of recession that happens from time to time and is kind of normal as business cycles go. Pain, but not disaster.
Most of the people I talked with said things like, “Maybe it will be short,” or “I think it’s close to the bottom,” or “It won’t hit our industry.” I hope they are all right, but I’m pretty certain they aren’t.
My best guess is that this is going to be a normal, typical, standard kind of recession at best. And almost none of you have ever managed through one.
Just to put things in perspective, in 1987 the market dropped 22.6% in one day. So when the talking heads on TV tell you that the drop on Monday, Sept. 29 was the most ever in terms of total points, you should take that with a grain of salt and recognize that it was about 9%. Or at least you should have some perspective on it.
That doesn’t mean you should relax. The drop in 1987 was basically a glitch in the biggest bull market in history that started around 1982 and lasted until 2000. But we all know the phrase, “What goes up must come down.” In statistics they call it regression to the mean. Over the long term, the price earnings ratio on the S&P 500 has been about 15. At the peak of the last bull market, it was somewhere around 30. After the last couple of weeks, I’m thinking it’s around 21 (I haven’t seen a calculation after Monday). If we’re going to get back to an average P/E ratio of 15 that doesn’t mean it goes down to 15 and stops. It means it goes, say, down to 10 and then bounces. We had like an eighteen year bull market. Is it so hard to believe that we could have an eighteen year bear market? We have in the past.
I’ve had, over the years, a bad habit of telling people things they didn’t want to hear, and maybe I’m doing it again. Maybe, also, I’m being too negative. I hope so. My crystal ball is as cloudy as the next guy’s.
But I’m doing it in a good cause. I’m telling you that the odds are that you now have to manage your businesses in an environment you’ve never experienced before. You have no choice but assume I’m right, because the risk of doing otherwise is too high.
So build your balance sheet. Manage your extension of credit and collect your receivables. Work closely with your financing source to make sure you’ll have the credit you need. There are major companies out there (not in our industry as far as I know) who have gone out and borrowed their whole credit line before it could be pulled. Control your inventory. If it ain’t selling, mark it down hard and fast.
This is good advice any time, but especially now. And if you do have a strong balance sheet, look for opportunities. At extremes they always exist.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line.
For more information, visit www.jeffharbaugh.com.
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October 6th, 2008 at 8:23 am
I am far from any expert, but if we experience a bad snow year combined with this economic mess we are in, the strong and smart will survive, and I would have to think some companies are going to go out of business!
October 6th, 2008 at 12:06 pm
One quote I love is ‘The media has caused the last 2 recessions 18 times’. YES, i do believe this is in large part the issue, due to uneducated American’s who just dont know any better (and of course it is also due to the greed of certain American’s!!) BUT, I do know that people wont stop skating, wont stop snowboarding, wont stop surfing, and wont stop wakeboarding. So I feel that those of us who own businesses need to find ways to make the Action Sports community continue on doing what they love…boarding! The market WILL correct itself and will do so faster if we dont hoard our cash!
October 6th, 2008 at 7:27 pm
My personal feedback, also coming from someone who was involved in the last recession as a business owner involved in the Action Sports Industry ‘Down Under in Australia’
Short and Sweet.
You are living in a fantasy world if you think it will not
hit this industry hard.
Game On … Dont Forget To Tighten Your Belts Boy’s …………..
October 7th, 2008 at 12:25 pm
Shits tight son..
October 8th, 2008 at 10:22 am
It’s always like that I’d say.
October 8th, 2008 at 10:24 am
Just so long as you hoard enough cash to make sure a weak economy doesn’t kill you. Build that balance sheet!
October 11th, 2008 at 5:45 pm
It hasn’t even come close to hitting in Southern California (Santa Barbara to LA to OC to SD) as hard as it has hit in Hawaii, FL, Northeast (NY, Boston, Philly, DC) and the Midwest (Chicago). Wakeup out there. People are at a standstill and bunkering down in those regions.
If you depend on a customer that depends on income from any source other than Upper Upper Class, he is being affected. Maybe not last week, or today, or next week, but it’s going to happen in the next 2-4 weeks. That’s right, just in time for Christmas. The American consumers outside of the So Cal region are pulling back, tightening up and watching what they are spending. That means no more Starbucks, Fewer Dinners out, Making Coffee at home and driving less. Yes, coffee at home, not our beloved Starbies.
So check it. Hold your ish people. Be smart on your spending. We’re all in this together. We’ll all come out together. This too will pass.
Peace
October 12th, 2008 at 8:26 am
I hadn’t thought about the idea that Southern California might be less impacted so far. I guess, given the housing market decline there, I didn’t expect it to be true. If it is, you make a good point that companies there (ie, most of the industry) are in danger of looking at things through rose colored glasses.
October 12th, 2008 at 11:23 am
Southern California is being hit Real Hard, dont kid! I personally know the DC, Osiris and Fallen reps and its tough out there guys, especially for skate footwear. After losing Pac Sun theres no way to make it up amnd now even core is barely prebooking. Osiris pulled out of ASR for January now, so add them to podium and sole tech. BTS prebooks were 30% off, Holiday will be 40% off from 07 numbers. I expect to see more staff cuts and lay offs towards the end of this year. Companies have to adjust their budgets for next year. This recession could last 3-4 years easy. Those new AS companies launching now though will be poised perfect for the next upcycle.
October 12th, 2008 at 2:56 pm
The skate shoe business was already tough, and would have been tougher even without a recession. It’s possible this could be a 3-4 year recession, but that would imply that nothing successfully unfreezes the credit markets.