Despite Billions of Dollars in Debt, Toys ’R’ Us Lenders Seek to Reboot the Brand

After filing for bankruptcy in June, Toys ’R’ Us announced its doors may be reopening—still without promise to pay its former employees and the small promise of paying a mere 22 cents on the dollar it owed creditors after the company filed for bankruptcy. Lenders plan to sell the intellectual property of Toys ’R’ Us instead of continuing with a bankruptcy auction, which lenders are hoping will lead to a reboot of the chain.

According to National Real Estate Investor, Toys ’R’ Us lenders plan to open stores globally, and they are working with potential partners to fund the projects as they develop new ways to rebrand one of the most iconic children’s stores.

But with creditors already receiving so little back from the company and with about 30,000 employees still without their promised severance packages, Toys ’R’ Us’ comeback may not prove to be fruitful. Before filing for bankruptcy, Toys ‘R’ Us was more than $5 billion in debt. It’s unclear whether a rebrand can save the company once more, but credit managers should continue to remain cautious on whether to extend credit to the future Toys ’R’ Us.

—Christie Citranglo, editorial associate

International Monetary Fund, World Bank Bring Global Financial System Risks to Light

The International Monetary Fund (IMF) and the World Bank are gathering this week to discuss the state of the global financial system, which has many worried because of emerging markets and heightened trade tensions. The meetings are held in Bali and include a review of current risks to the world’s financial well-being.

On Oct. 10, Reuters reported “easy financial conditions,” such as high debt levels and “stretched” asset valuations, are fueling economists’ concerns, following IMF’s report that tightening financial conditions have caused near-term risks to increase. While economies may not feel pressure at the moment, IMF capital markets director Tobias Adrian said in the article that high inflation could cause interest rates to skyrocket when least expected.

“In the report, the IMF said economic growth appears to have peaked in some major economies while the gap between advanced countries and emerging markets was widening,” Reuters states. “The IMF on [Oct. 9] cut its global growth forecasts due to an escalating U.S.-China trade war and growing financial strains on emerging markets.”

Economic conditions in the U.S. are holding strong, despite an interest rate increase by the Federal Reserve in September and another expected to follow in December. Meanwhile, slow conditions are seen in the euro area and Japan, Reuters noted, with moderate conditions in China—a status that could change depending on the country’s trade dispute with the U.S. The IMF recommends global regulators “keep in place measures” enacted during the financial crisis a decade ago as a precaution.

—Andrew Michaels, editorial associate

September’s Strong Service Sector Hits 21-Year High

September was good to the U.S. service sector, where activity reached a two-decade high as the economy begins the fourth quarter. The Institute for Supply Management’s (ISM) non-manufacturing activity index indicated more hiring was behind last month’s results that were last seen in August 1997.

Following Federal Reserve Chairman Jerome Powell’s remarks earlier this week that the economic outlook is “remarkably positive” as well as last week’s interest rate hike, Reuters reported economists anticipate yet another rate increase in December, the fourth hike in 2018. Economists said in the Oct. 3 article they anticipate ongoing growth; however, there are still concerns among companies in the service sector, including “capacity, logistics and the uncertainty with global trade.”

“Industries are bumping against capacity constraints in a robust economy and tightening labor market conditions,” Reuters states. “Companies are increasingly reporting difficulties finding qualified workers to meet demand, leading to delays in delivering goods and services.”

The ISM findings are complementary with NACM’s Credit Managers’ Index (CMI) September report, showing an overall boost in favorables such as sales and dollar collections. September typically has “quite a lot of activity in the service sector,” said NACM Economist Chris Kuehl, Ph.D., who noted that retail usually thrives the most, while construction dwindles in the colder months. According to CMI reports since 2015, the service sector experienced growth three out of five times during September.

“The movement is subtle to be sure, but at least it is heading in the right direction, and for two
months in a row,” Kuehl said in his comparison between the September 2018 and September 2017 CMI reports. “Dare we hope for a longer trend?”

—Andrew Michaels, editorial associate

Retailers Struggling to Hire for the Holidays

The holiday shopping season is approaching quickly as shoppers will soon begin flocking to department stores and small businesses in the coming months. A busy shopping season calls for more retail hiring; however, CNBC reports not all retailers will successfully fill their vacant positions. Demands for higher wages lure some employees away from low-paying jobs, while those who remain are left to pick up the slack.

On Oct. 1, the news outlet shared findings from global consulting group Korn Ferry that first looked back to the 2017 holiday season when 23% of retailers were unable to reach their desired number of temporary hires—expectations that will likely worsen this year. While nearly 70% of the participating 20 major U.S. retailers want to hire similar employee numbers, CNBC states, just over 60% are instead giving permanent employees more hours to close the gap.

“There are more jobs out there than there are people looking for them. ... It's a hustle to find the talent,” Korn Ferry Senior Partner Craig Rowley said in the article. “Retailers are asking their existing employees if they can work more because they're already trained. This year more than ever we're seeing employers getting workers to work more hours.”

Rowley also told CNBC that hiring is the main speed bump for the 2018 shopping season, sales being troubling last year.

—Andrew Michaels, editorial associate

‘To No One’s Surprise,’ Fed Hikes Interest Rates

As predicted, the Federal Reserve followed through with its plan to hike interest rates on Sept. 26, increasing rates by a quarter point, while anticipating economic growth for the remainder of 2018 and into next year. The hike was of no surprised to anyone, said NACM Economist Chris Kuehl, Ph.D., who said the latest hike marks the eighth increase since 2015.

“The expectation is that Fed Chief Jerome Powell will reiterate the strategy touted all year: another quarter-point hike in December and perhaps three more in 2019,” Kuehl said. “The inflation threat is a little more pronounced than it was, but the bigger issue for the Fed has been trying to get rates up high enough so a future cut would make a difference. It is not that the Fed is expecting an imminent recession, but should there be one, they don’t have much ammunition with which to fight it.”

Although many economists believe economic growth will slow beginning in 2019, the Fed held its previous forecast of 1.8%, CNBC reported. Meanwhile, expectations were heightened for the next three months with a growth forecast of 3.1%. The forecast then dwindles in 2019 and 2020 to 2.5% and 2%, respectively.

President Donald Trump said at a press conference that he was displeased with the Fed’s decision to hike interest rates, saying he would “rather pay down debt or do other things, create more jobs.” Another interest rate hike is expected in December.

“I’m worried about the fact that they seem to like raising interest rates,” Trump said. “We can do other things with the money.”

—Andrew Michaels, editorial associate

Food, Chemical Products Amid Latest Chinese Retaliatory Tariffs on US

Tackling trade talks remains difficult for the U.S. and China as more of President Donald Trump’s tariffs go into effect today, placing a 10% tax on $200 billion of Chinese products such as furniture and appliances. According to CNBC, the tariff is expected to increase to 25% by the end of the year. This latest imposition was met with retaliation by Chinese President Xi Jinping, who said China plans to implement taxes on about $60 billion worth of U.S. imports.

The back-and-forth debacle between the world’s two largest economies has been ongoing since July when Trump put tariffs on $34 billion worth of Chinese goods, mainly industrial parts. On Sept. 24, CNBC reported that Beijing denied the U.S. president’s invitation to Washington, DC to discuss trade practices. Xi Jinpings’ recent tariffs announcement would put taxes on more than 5,200 imports, including a 10% levy on liquefied natural gas, coffee and several edible oils as well as a 5% levy on frozen vegetables, cocoa powder and chemical products.

U.S. Secretary of State Mike Pompeo recently told Fox News that if China does retaliate, Trump would implement even more tariffs on $267 billion worth of Chinese imports.

Although it is much too early to determine the effects of these tariffs, previous ones by the U.S. are showing negative impacts on certain industries. NBC News released an article last week that explored how the steel and aluminum tariffs are doing more harm than good for the U.S. auto industry. In the article, the Center for Automotive Research states car sales could drop by 2 million a year, causing a loss of 715,000 jobs and $62 billion of U.S. GDP.

“The impact could mean more than just higher costs,” the article states. “A number of medium-sized and smaller parts suppliers could be forced out of business, unable to afford the cost of relocating their operations back to the U.S.,” creating product shortages.

—Andrew Michaels, editorial associate

Consumer Demand, Not Trade War, Among CFOs Top Concerns

Risk assessment is part of the daily grind for any business, so when the U.S. stirred up trade controversies with other countries, economists saw American businesses’ concerns rise. While many believed the trade war was among these worries, a new CNBC survey suggests there are worse fears in the business community, specifically consumer demand.

On Sept. 20, CNBC released its Global CFO Council quarterly survey that ranked the “biggest external risk factor currently facing” businesses. In the first quarter of 2018, U.S. trade policy was the most concerning to CFOs at nearly 30%, but has since dropped to 10.4%. At that time, consumer demand was worrisome to about 21% of CFOs and steadily increased to almost 46% in the third quarter. In addition to U.S. trade policy, concerns of cyberattacks and over-regulation also decreased further into the year, while central bank policy increased minimally.

“The council’s global economic outlook remains finely balanced, with only two of 11 countries or regions—Brazil, and Latin America excluding Brazil—seen as ‘declining,’” CNBC reported. “All other areas were rated as ‘stable,’ except for the United States, which is ‘improving.’”

The majority of respondents in the third quarter noted that the technology sector will most likely see the biggest growth in the next six months, followed by the construction sector. The costs of labor are also expected to increase the most in those six months, as costs of raw materials and capital steadily rise.

—Andrew Michaels, editorial associate

Little Economic Impact Expected From Hurricane Florence

Natural disasters take a physical toll on impacted communities, the most recent example being the severe flooding from Hurricane Florence in North Carolina. With destruction and devastation comes economic hardship, but according to Moody’s Analytics, Hurricane Florence is expected to have a minimal impact on the U.S. economy. The latest hurricane hit the East Coast late last week and is responsible for at least 32 deaths as of Tuesday.

On Sept. 18, USA Today reported Moody’s analysis of the storm’s impact on the country’s economic growth, which predicts a drop of one to two tenths of a percentage point this third quarter. If economists’ earlier predictions are correct, the economy could still see expansion of about 3.7%; however, Oxford Economics anticipates slightly worse conditions, with a decline of two to three tenths of a percentage point. Moody’s and Oxford currently expect damage totals of $16 to $20 billion and $30 to $40 billion, respectively.

“Most of the lost economic output is likely to be made up in the fourth quarter as consumers make purchases they deferred and replace damaged vehicles, and repairs begin on effected homes and businesses,” USA Today reported.

Oxford Chief U.S. Economist Greg Daco said in the article that drops are possible in retail and services as well as manufacturing. While consumers may spend less on clothing, toys and jewelry, restaurants are likely to still see businesses. Hurricane Florence may also put a dent in industrial production in addition to overall employment, the latter of which is likely to bounce back in October or November.

Andrew Michaels, editorial associate

Lumber Prices Rise as Hurricane Florence Nears East Coast

As the East Coast prepares for Hurricane Florence to make landfall late Thursday or early Friday, the construction industry is already seeing the storm’s costly effects through lumber prices. According to Prosales magazine, the impending hurricane and any that follow are expected to bring a 10% lumber price hike that may last roughly two months.

On Sept. 11, Prosales reported this prediction after talking with lumber buyers in the construction industry, one of whom based the 10% hike on recent cost increases for Southern yellow pine. High lumber prices mean there’s a low supply because hurricanes not only close lumber mills, but also impact employees who focus their attention on repairing and/or rebuilding their own homes.

“Lumber prices look to be heading higher and are still sitting at levels that have hardly ever been reached before (with the exception of earlier this year),” Forest Economic Advisors-Canada Managing Director Russ Taylor wrote in his Wood Markets report last month. “As we’ve indicated for some years now, the North American lumber supply chain remains fragile, and any disruptions will only cause more price volatility.”

Despite increased costs of lumber, Associated Builders and Contractors, Inc. (ABC) reported Sept. 12 that construction material prices actually dipped about half a percent in August from the previous month. However, year-over-year (YOY), prices were much higher, coming in at just over 8%. Softwood lumber prices were among those materials to decrease—9.6% month-over-month—but were about 5% higher YOY.

ABC, in conjunction with Bureau of Labor Statistics data, said a likely reason behind the softwood lumber price drop is “a weakening single-family residential construction market” brought on by labor shortages, high land prices and high mortgage rates.

“In the final analysis, the falling input prices trend likely won’t continue,” ABC Chief Economist Anirban Basu said in a statement. “Inflation expectations have shifted, with purchasers of construction services now anticipating price increases and, therefore, more willing to accommodate them.”

Andrew Michaels, editorial associate

New Funding Option for UK SMEs

A new funding option is in the future for small- and medium-sized enterprises (SMEs) in the United Kingdom. New laws put forward by Small Business Minister Kelly Tolhurst this week will "make it easier for small businesses to access invoice financing," according to a release from the government. This will in turn provide a one-billion-pound boost to the economy.

"The U.K.'s 5.7 million small businesses are the backbone of our economy and central to our modern Industrial Strategy, with more than 1,000 starting up every day," said Tolhurst in the release.

Some smaller businesses accept contracts from larger firms with language stating invoice finance is prevented, but SMEs and suppliers agree to terms because of a weak negotiating position. The new proposed laws will void such restrictions in contracts entered into after the end of the year, with some exceptions.

"These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply," concluded the small business minister.

-Michael Miller, managing editor