How Banks Read Retailers

Every commercial credit is read in the same order — what grew, whether the earnings became cash, whether the request matches the need — but a retailer stresses that reading in four places. Its year is decided by a season: weeks of trading that pay for months of buying, so the facility has to be the shape of the season and the season has to close. Its largest asset is stock with a date on it, worth what it cost only until the season it was bought for has passed. Its largest fixed commitment is rent, one lease for every door. And its profit can grow while its cash shrinks, because stock, supplier terms and the timing of markdowns and rebates move the two apart more easily in retail than almost anywhere.

This page is the desk's reading of those four, written for both chairs: the banker learning the sector, and the retailer who wants to know what the reader across the table is weighing. It is worked on two published files — a seasonal homewares chain, and a listed fashion group — which fail in opposite ways.

A seasonal facility funds a loop: cash becomes stock months before the season, stock becomes cash during it, and the line returns to zero after it. The clean-down is the whole point — it is what makes seasonal lending different from a term loan in disguise — so the first question the desk asks of any seasonal request is whether last season's loop closed.

Kowhai's loop did not close. Last Christmas did not sell through, January and February became clearance months, and more than a sixth of the stock is last season's. So part of the “seasonal uplift” being asked for is not seasonal at all — it is the unsold past, asking to be refinanced under the season's name. The senior read funds the season fully, at the peak the business has actually demonstrated, with the clean-down intact and the aged stock's proceeds reducing the core as it clears; the increment above that is a merchandising conviction, and convictions are funded by the people who hold them, or by evidence. That is the general rule for a retail line: size it to the demonstrated peak, and treat everything above the peak as a question about this season's buying rather than about the bank's appetite.

A retailer's balance sheet shows stock at cost; the desk reads it at what it will become. That means the aged-stock share, season by season — what was bought for a season that has passed — and the sell-through by category, which says whether the buying and the selling still meet. It means the gross margin read alongside the stock, because a margin that fell after a clearance is the price the last season's mistakes were sold at, and a margin that held while aged stock grew is a markdown that has not been taken yet. And it means this season's buy set against last season's sell-through: an order book up sharply on a year that did not sell is a claim about consumer behaviour months from now, and the file cannot tell a merchant who has learned from one who is doubling down.

As security, retail stock is thinner than it looks. A lender values it at forced-sale value, which for fashion and seasonal goods is a fraction of cost and falls as the season passes. That is why most bank lending to retailers rests on cash flow, a general security agreement and the season's clean-down, rather than on the stock itself.

Rent is the retailer's biggest fixed commitment, and it has to be paid whether or not the season sells. A desk therefore reads a retailer's cover with the rent in it — fixed charge cover rather than debt service cover alone — because a lease default disturbs a business as surely as a loan default does. It asks for the lease schedule, with expiries and renewal options, and for contribution store by store, because a chain's profit is usually a few strong stores carrying some weak ones, and a weak store is still owed rent until its lease ends. A retailer that owns none of its premises has little the bank can hold beyond the business itself, which puts the weight of the reading back on the cash. The DSCR guide works fixed charge cover on a published file.

Coastline fails the other way from Kowhai. Its season closed, its covenants pass, its accounts are audited and followed by analysts — and its profit rose while its cash fell. In retail the levers that open that gap are ordinary ones, and Coastline's file shows three of them: supplier rebates recognised when the orders are placed rather than when the goods sell, store refits capitalised where earlier years expensed the same work, and a stock provision released after a stocktake. Each is defensible on its own; together they can make a soft year look like a good one. Read through them, Coastline's underlying profit is down roughly a third, and a dividend rise in a year like that is funded, in the end, by the facility.

The lesson for the sector is that a covenant can pass on the number that is least reliable. The senior read renews the facility and declines the dividend consent until cash conversion holds above 90% for two consecutive halves — a yes and a no for one borrower. The book names the discipline behind that read, Quality of Earnings Triangulation; the file shows it applied.

Everything above turns into preparation. Bring last season's peak drawing and the date the line cleaned down, before the bank works them out. Bring the aged stock by season with the plan for clearing it and the margin you expect to clear it at. Bring sell-through by category, and this season's buy set against it, with whatever makes the buy more than a conviction — confirmed trade orders, a changed mix already showing in the early weeks. Bring the lease schedule and store-level contribution. And if profit and cash moved apart last year, say why, line by line, before the desk reconciles them for you. A retailer who arrives with those has answered the first round. The general version of this preparation is How Banks Read You, and both files can be read from the retailer's own chairs: Kowhai's merchant and Coastline's CFO.

Both files are free, each with a call to commit to before the senior read opens and the full credit file behind it: Issue 06 for the season and the stock, Issue 07 for the gap between profit and cash. The revolving credit facility file covers the clean-down from the product side, and Cash Flow Analysis covers the conversion test in general.