This article was published in the April edition of Turnarounds & Workouts. Buy the full issue.
The so-called “retail apocalypse” started long before the coronavirus and COVID-19 pandemic. Nearly 10,000 stores closed in 2019 alone, and bankruptcy filings were up 59% over the prior year. It’s been a long slide, fueled by the steady decline of foot traffic at brick-and-mortar stores and the relentless pressure of online and direct-to-consumer sales.
Strategic Planning for Pandemic Survival
In hindsight though, we may have gotten a little ahead of ourselves in proclaiming the retail apocalypse. The U.S. Department of Commerce announced an overall 8.7% decline in retail sales from February 2020 to March 2020—with apparel sales falling more than half. Other retail areas that were heavily impacted were autos, furniture and home goods. Even with the offsetting lift from behemoths like Amazon, Walmart and Costco, it’s the largest one-month drop in the nearly three decades the government has tracked the data. Tens of thousands of stores, from Anthropologie to Zales, temporarily shut down in just a matter of days. And more than a million employees have been furloughed.
Now, even retailers who have already filed for bankruptcy are having to wait out the pandemic, as many cases have been put on hold. As long as stores remain closed, struggling retailers can’t hold going out of business sales to liquidate inventory. And with no revenue streams, it is difficult to put together a viable restructuring plan. This is the case with Pier 1 and Modell’s whose plans have been put on hold because the current crisis has made liquidation of assets impossible.
Meanwhile, apart from grocery stores and other businesses that provide essential services, retailers as well as businesses in almost every industry sector are hunkering down, doing everything they can to hoard cash and reduce expenses while they wait for the all-clear to reopen.
Retail Recovery Plan: Shelter in Place
No one knows how long this is going to last, so right now, companies are doing everything they can to preserve the cash they have—or that they have access to. For example, some companies, like Macy’s, have drawn down funding from lines of credit while they are still available. Even if there’s a risk of defaulting, they have made the calculated decision to do what they have to do today—and manage the fallout later. Furthermore, Macy’s recently announced they have hired financial and debt advisors to help find options to boost finances and enrolled debt-restructuring lawyers to help manage their liabilities.
Even with the offsetting lift from behemoths like Amazon, Walmart and Costco, it’s the largest one-month drop in the nearly three decades the government has tracked the data.
Every business should plan for how they will survive this crisis and, ultimately, return to financial health. It is vital to continuously update their weekly cash flow projections, with a focus on operational, rather than GAAP, cash flow. This is the lens through which most lenders will view the health of a borrower’s financial statements. By looking at the 13-week time frame, it is possible to spot trends and make timely corrections.
It is crucial to set up a process to track actual performance vs. the forecast to identify shortfalls. This should be a continuous, rolling forward forecast, with an appropriate balance between accuracy and range: accurate enough to identify any potential liquidity issues while allowing enough time to resolve them.
Of course, today’s environment is not only unprecedented, but also unpredictable. That means scenario planning is more important than ever. Businesses should not only plan for the situation they expect, but also for possible upside and downside scenarios.
Much like household budgets, the cash forecast for a business must account for both inflows (income) and outflows (expenses). And it should be updated on a weekly basis, revising assumptions as variables change. With uncertainty about when businesses will reopen, weekly assessments are a critical part of decision-making.
Curbing Costs to Conserve Cash
As every restructuring consultant knows, “Cash is king.” Like other hard-hit industries, retailers are taking drastic action to slash nonessential expenses and preserve cash. They’re making tough decisions—like whether or not to continue paying their employees and paying rent.
- In addition to tapping a $2.5 billion credit line, Macy’s closed stores until further notice and furloughed most of their 130,000 employees.
- Best Buy furloughed more than 50,000 employees.
- Urban Outfitters, which initially continued to issue paychecks, announced a furlough at the beginning of April. The company also told landlords they would stop paying rent, as did Pier 1, Mattress Firm and many others.
- To conserve cash, J.C. Penney decided to not make a $12 million interest payment by the due date, but instead to utilize the 30-day grace period available to them, in order to evaluate certain strategic alternatives.
- Neiman Marcus Group Inc. is the latest retailer to skip a payment owed to bondholders as the coronavirus pandemic keeps stores closed, setting a clock ticking for the company to restructure its debt or file for bankruptcy.
It almost goes without saying that apart from grocers, pharmacies and other essential categories, most retailers have suspended new store openings and hiring. The common denominator? Stopping the outflow of cash for as long as possible.
We don’t know how long the crisis phase of this pandemic will last, so retailers must quickly determine where they can strategically cut costs. Where is most of the money going and how can expenses be reduced? For retailers, or any other business that is looking for cost-cutting strategies to weather the COVID-19 storm, a spending checklist should include:
- Analyze historical spend to identify the biggest expense categories. This should go back at least a year to avoid overlooking one-time payments such as insurance premiums, property taxes, etc.
- Identify potential savings or deferments. Quantify variable vs. fixed costs. Defer any unnecessary disbursements and capital expenditures. Depending on how dire the situation is, what is absolutely necessary to stay alive?
- Review accounts receivable and payable. Develop an effective action plan based on cash flow health and be prepared to update this forecast on a weekly basis, revising assumptions as variables change.
- Consider options for reducing operating
- Employee furloughs and layoffs
- Salary reduction
- Job sharing
- Reducing or eliminating overtime
- Reducing or eliminating capital expenditures
When it comes to employees, suppliers and vendors, it’s important to be as transparent as possible. Even if it’s bad news, it’s better to be upfront. Drastically cutting expenses might be necessary to protect company finances, but clear communication is critical.
Bankruptcy Offers a Critical Lifeline
We can expect to see a surge in bankruptcies in the second half of the year, as retailers that were already struggling are able to file and start liquidating inventory. Those that had already filed, or were planning to, have now been joined by others that saw their already-thin margins shattered because of the pandemic.
No one knows how long this is going to last, so right now, companies are doing everything they can to preserve the cash they have—or that they have access to.
For companies with long-term leases, bankruptcy offers a way to reject leases for unprofitable locations. But bankruptcy is expensive. That means companies must be strategic about how they approach the bankruptcy process, whether it’s necessary for short-term survival or longer-term strength and flexibility. Now is a great time to get a plan in place, so when the market reopens, they are ready to act swiftly.
We see both retailers and restaurants deferring rent payments and starting negotiations with landlords. There are incentives for both parties to get to a mutual resolution. Landlords are in a tough spot, as it will not be easy to replace their current tenants, and tenants may argue that they do not have to pay rent because malls are closed. There’s no single right answer for all instances—each party will need to examine the lease’s force majeure provisions in detail to determine what, if any, leverage they may have in rent deferral discussions.
True Religion recently filed for chapter 11 and requested to suspend rent payments to landlords for 60 days. Per True Religion’s filing, the debtors are seeking to engage real estate advisors to negotiate rent concessions, such as waivers of April and May 2020 rent. While the debtors’ hope most landlords will consent to the waivers, they maintain that they are not required to make such payments under contract and/or applicable law.
We can expect to see a surge in bankruptcies in the second half of the year, as retailers that were already struggling are able to file and start liquidating inventory.
The outcome of negotiations between tenants and landlords will eventually impact retail bankruptcies. It could be the deciding factor for some retailers to file for bankruptcy, especially if they want to invest in the expansion of their ecommerce platforms and dispose of unprofitable or no longer desirable locations. Can the retailer use the bankruptcy process to revamp their business model? It seems prudent for retailers to use this time to evaluate their strategic options and be prepared for the best alternative when things reopen.
It is encouraging to see that restructuring professionals and debtors are getting creative to reduce the cost of bankruptcies. For example, True Religion has requested alternative procedures for the filing of pleadings for an interim period to help reduce professional expenses.
Back to Normal or Back to the Future?
No one can say for sure when or if the retail industry will “get back to normal,” if such a thing even exists anymore. Even when stores reopen, customers might not return right away, and they may not be ready to open their wallets. A new survey from Morning Consult finds 24% of U.S. consumers do not expect to feel comfortable going back to a shopping mall for at least six months. Another 26% were not sure when they would feel comfortable. And that doesn’t even account for the impact of the economic implosion that has caused mass unemployment.
Employees also might not come rushing back. In addition to health and safety concerns, people who have qualified for unemployment relief may find they are better off financially to stay at home, at least as long as the benefits last. Industries such as retail and hospitality often experience high turnover—even when there’s not a pandemic. Now, it will be an even bigger challenge to attract employees, unless they can offer more pay and benefits.
Adding to the challenge, the ongoing shift toward online commerce and on-demand entertainment has only accelerated. Pioneers like Amazon and Walmart continue to race ahead of the rest of the market. And for consumers who have quickly grown accustomed to having everything from diapers to dinner delivered to their door, the convenience of at-home shopping could become a permanent habit.
It is encouraging to see that restructuring professionals and debtors are getting creative to reduce the cost of bankruptcies.
As long as shoppers—and revenue—continue to shelter in place, traditional retailers will face a stark landscape of shuttered shopping malls. For companies that were already struggling to respond to changing consumer habits and compete in this new digital economy, there may never be enough “Black Fridays” to bring them back to life. But for those who are able to nimbly respond and transform their business model, this could be the catalyst for a return to financial health.