COVID-19: Protecting and Positioning Retail Business for the Future

David Filice • June 30, 2020
David Filice

A Fuller Landau interview with leading retail consulting firm HRC Retail Advisory.

The environment in which retail stores are re-opening will be far from business as usual. The team at Fuller Landau strives to provide the best advice and insights to our clients and network of lenders and other business relationships. David Filice, Partner in our Corporate Restructuring and Insolvency group, interviewed Antony Karabus, CEO, and Farla Efros, President, of HRC Retail Advisory to obtain their perspectives on the current retail environment. HRC Advisory has extensive experience working with more than 100 retail chains at all stages of the economic life-cycle and in various stages of adapting to the digital  transformation. In this interview, David explored the most significant implications of this “new normal or even abnormal” environment with Antony and Farla.

FL: What has been the biggest impact of the COVID-19 pandemic on retail?

HRC: Malls and stores are slowly starting to reopen as governments remove COVID-19 shelter-in-place measures. However, the environment in which stores will reopen will be far from business as usual given all the costly new sanitization and distancing practices being put in place. Total consumer demand for “non-essential” items will likely be reduced as much as 50% for the next quarter and as much as 20-30% in the crucial holiday quarter. Non-essential retailers suffered revenue losses in the first quarter of 2020 in the order of 40-60% while stores were closed. This was very serious as stores were fully stocked in the middle of March when the closures began. As stores have begun to open, they are opening with excess inventory and offering large discounts to generate traffic and clear out older inventory.

 

FL: Many retailers have filed for Creditor Protection on both sides of the border since the middle of March. Is this Creditor Protection due to COVID-19 or was it a bigger issue and COVID-19 was simply the accelerator?

HRC: We have already seen numerous well-known Canadian retailers file for CCAA, including Reitmans, Henry’s, SAIL, Aldo Shoes, Frank and Oak, and Lolë. In the US, Neiman Marcus, JC Penney, Pier 1, Tuesday Morning, J. Crew, GNC and others have already filed for Chapter 11 in 2020. Most of these retailers were already losing money or had significant debt on their balance sheets before COVID-19. COVID-19 was the accelerator to take the CCAA/Chapter 11 actions. Retailer industry profitability had already been in gradual decline due to the shift of store sales to digital channels and the ongoing transfer of market share to online-only retailers. We expect additional retailers will also file for creditor protection in the coming weeks and months.

 

FL: For retailers that have filed, what are the best actions to take before emerging from CCAA?

HRC: Retailers need to ensure they comprehensively evaluate their store footprint and reject every lease that doesn’t have long-term potential. They should actively re-negotiate all continuing store leases and try to move to a percentage-only rent model. In addition to this, retailers need to develop and implement a new viable business operating model so they can emerge as a viable retailer with the right resources, strategies, and other capabilities in place. The one lesson for all is to be nimble and be able to pivot, especially if a second wave hits.

 

FL: Is brick-and-mortar retail dead and what part, if any, will it represent of total retail sales going forward? Is on-line shopping the new model for retail?

HRC: Brick-and-mortar will never be dead as consumers will always want to visit stores to experience the touch and feel of the retail store environment and their product. However, it will be tough for non-essential physical retail stores before there is a vaccine. Before 2020, brick-and-mortar stores still represented 85% plus of total retail sales. After 2021, if there is a vaccine, we expect brick-and-mortar stores will account for 70% plus of total retail sales.

 

FL: What are the key characteristics of the retail winners vs. losers?

HRC: There will be three groups of retailers after COVID-19. The first is the essential retailers who will survive and, in fact, grow market share. These include grocery chains, alcohol stores, convenience stores, pharmacies, auto service, pet stores, active, and home improvement chains. The second group is the non-essential or discretionary retailers, such as apparel, shoes, and specialty stores, who are the authority in their sectors and who will take market share from the third group – the discretionary retailers. Many in this latter group have weaker balance sheets, are incurring losses, and have not adapted their business model to effectively compete in the rapid shift to digital retail.

 

FL: What actions should lenders be taking to protect their exposure to retailers?

HRC: Lenders need to be very close to their retail borrowers’ borrowing base availability, ensure they have valid, updated inventory valuations, and have robust 13-week cash flows that are updated weekly. In addition, ensuring the retail borrowers have viable business operating models so they can determine whether to continue providing support to their borrowers and under what conditions. This is particularly relevant for asset-based lenders. Lenders should also try wherever possible to get retailers’ intellectual property (IP) added to their security as IP is increasingly becoming more valuable, especially domain names and strong private labels.

 

FL: In conclusion, what should retailers do in the short-term and in the longer-term?

HRC: In the short-term, retailers should first and foremost strengthen liquidity so they have the cash availability to fund near-term operations. Nobody goes out of business for “having too much cash”. After that, retailers need to develop a Viable Business Operating Model to be able to operate profitably in the future. This is very hard for most retailers to do without an objective expert advisor as it will almost certainly mean significant changes to the way they do business and  operate if they want to survive and, hopefully, thrive beyond the immediate time. We recommend to our retail clients that they include key elements such as developing a more robust scalable digital capability, shrinking their physical store footprint to the most important locations to showcase their brand, restructuring their lease portfolio, developing a more differentiated brand to remain relevant, managing their inventories much more effectively, and, last but not least, re-inventing their supply chains and cost infrastructure.


To learn more about HRC Retail Advisory, visit www.hrcadvisory.com.

David Filice, CPA, CA, CIRP, LIT, is a Partner in our Corporate Restructuring and Insolvency group. David can be reached at 416-645-6506 or  dfilice@fullerllp.com.

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