Ben Nortman
CEO
ReStore Capital

As we look toward the point at which the COVID-19 curve will flatten here in the U.S., it is difficult to digest that more than 40% of retail square footage in the country is currently closed. According to research firm Global Data Retail, retail sales are expected to be down 12.4% for March, 11.6% in April and 6.1% in May, and that may be optimistic based on information from the CDC. All told, by some current estimates, close to 15,000 retail stores may ultimately close their doors for good this year.

By comparison, retail store closings in 2019 totaled near the 9,000 mark, an increase of nearly 60% from the previous year and, notably, the largest number recorded since such data has been tracked in the U.S., according to CNN Business. Among other contributing factors, mounting debt brought on by necessary transformation initiatives and the associated strategies pursued by both private equity investors and long-time management have crushed retailers in recent years.

In the early stages of developing this article, prior to any pandemic-driven stay at home or business closure actions, a 60-year-old furniture retailer, one of the Midwest’s largest with almost 180 stores, announced that it was shuttering all of its locations. An East Coast private equity firm acquired a majority stake in the company in 2017, after which the retailer engaged in a significant expansion strategy which included buying competitor chains and opening new stores in the very locations vacated by other retailers.

These are tricky times for senior leaders at the helm of retail and consumer goods behemoths as well as for those that invest in these businesses and drive strategy. Accurately forecasting the scope of the liquidity crisis requires answers to questions that remain unknown at this point in time. How long will this overall “hibernation” period last? When will retail stores open nationally? How quickly will consumers re-engage with those retailers? And, how long will it take until retail returns to some level of “normalcy”?

Retail Outlook and Omnichannel Offerings

We expect to see comp sales during the first 30-days following a national retail restart down by approximately 80%, with sales down 50-60% at 60-days out and 25-40% at 90-days out. The hope is that comp sales will slowly build to flat by some time in Q4/20, but that may be optimistic because the future is so uncertain. Of course, we could return to a level of normalcy sooner, in which case these numbers may be too conservative.

When things do return back to normal, retail customers who wanted the ability to shop seamlessly across every channel before the crisis will demand it. In 2019, 86% of consumer respondents in a BRP Unified Commerce Survey expressed interest in a personalized and consistent experience across all shopping channels. Indeed, the ability to easily cross channels as consumers research, shop and purchase was important with 82% of consumers browsing online or via mobile and then purchasing in store (webrooming) and 56% shopping in a store and then purchasing online or via mobile (showrooming).

Ian Fredericks
President
ReStore Capital

Yet, heading into the crisis, only a small percentage of retailers, provided such an experience, and for good reason. For starters, beginning a sale in one channel and completing it in another was barely on the radar when many retailers made their first move into ecommerce. Adding to the problem, many companies’ follow-on mobile apps and other implementations were created in a vacuum when viewed through the lens of current interoperability expectations. As a result, seamlessly synching today’s customer experience across channels is no small task from either a financial, systems or scope standpoint.

For those who think this is an issue of serving younger consumers, it should be noted omnichannel engagement has become a cross-generational expectation. In fact, according to a 2019 study by the CMO Council in partnership with Pitney Bowes, 91% of consumers indicate that omnichannel experiences are either important or critical to them, while 29% suggest that companies should be where they want, when they want and ready to share and communicate in the manner they, the consumer, expects.

Translation for retailers? As we move past a (hopefully) flat Q4 and into some level of growth again in 2021, retailers need to be prepared to engage and meet consumer research, shopping and purchase expectations via touchpoints ranging from traditional mail, in-store, web, phone, email, social media and increasingly popular and intricate video-centric experiences.

Source: 2019 BRP Unified Commerce Survey

While the omnichannel experience itself is crafted for the end user, optimizing it is a complex, costly and painstaking endeavor that requires far more than a focus on the consumer. Managing inventory effectively across all channels is of paramount importance to delivering an optimal omnichannel experience for buyers. Doing so means ensuring that vendors, those working in the store, in call centers, the warehouse and points in between, have access to stock levels, inventory, logistics and related data to enable them to obtain information about where products are and will be at any point in time.

Mounting capital expenditures associated with building or enhancing the ecommerce channel and improving stores to meet customer expectations will drive the need for additional liquidity that retailers may not believe they have. The reality is even in extraordinary times like these, most companies possess certain assets with as-of-yet unrealized economic potential that can be tapped to fund capital and other expenditures to drive customer engagement and sales. Even many of the largest and most sophisticated companies, however, fail to recognize this potential or struggle identifying a viable approach to access the funds required for these needed endeavors. This may be exacerbated by little to no cash coming in the front door during the COVID-19 pandemic. To offset this, many businesses are drawing down their lines of credit, but these companies could quickly burn through these funds. Some analysts have suggested that most department stores, for example, have only six to eight months of cash reserves on hand (including cash from borrowings), depending upon their burn rate.

Strategic Debt Placement & Inventory Procurement

In instances such as these, we have seen retailers greatly benefit by augmenting an existing ABL facility with FILO (first-in-last-Out) or term loans designed to unlock the maximum asset value of their holdings. Since this expertise rarely exists within a retail organization itself, from a best practices perspective, doing so effectively requires engagement of a third-party resource.

At ReStore Capital, we serve retail and consumer products industry leaders in this capacity to develop and leverage innovative, yet highly practical, strategies that unlock the additional untapped value within their companies’ existing assets. Working in close partnership with prospective borrowers throughout this process, we utilize a variety of approaches that range from mezzanine loans with option or warrant-based equity-upside and asset-secured term loans designed to assist with longer term initiatives or restructurings to bridge loans designed to meet short-term capital needs. While mezzanine and term loans often are used for CapEx, in the current environment, an approach such as a bridge loan may be better suited for short-term liquidity needed to “keep the lights on” if stores remain closed on a widespread basis beyond April 30.

On the other side of this equation, we have observed situations all-too-often in recent years where the stress or distress — or even the perceived stress or distress — of a retailer has a cascading effect on the vendors and manufacturers with which it does business. Given existing retail climate challenges and the additional uncertainty now presented by the current COVID-19 outbreak, there is a heightened sensitivity among suppliers in this regard, which can prove highly detrimental to both suppliers themselves as well as to the retailers upon whom they rely to move their products.

Under normal or moderate circumstances, for example, a supplier might choose to sell receivables associated with an individual customer, or a group of customers, to a factor in order to optimize cash flow or insulate against the potential of those retailers defaulting. In taking this step, suppliers weigh the downside of accepting only a percentage of the full receivable value against the upside of the cash flow or protection they receive. Alternatively, they may choose to secure trade/credit insurance for a fixed premium, specifically to protect against concerns of a retailer’s pending default.

As a premiere partner to both leading retailers and those along the supply chain, at ReStore Capital, we are often among the first to identify evolving trends that hold significance for the industry and those on both sides of the retail equation. In the current climate, we are approaching a time point where some retailers will be at risk of missing an entire selling season. With stores already stocked with spring merchandise that they are unable to sell, retailers may not have the funds to bring in summer or fall inventory. Even leading into the current crisis, an increased incidence of situations where broad-based knowledge of a retailers’ stressed or distressed position was making it expensive or undesirable for factors and insurers to engage. We can expect this condition to have worsened by the time we emerge from the current environment.

With these alternative sources unwilling to accept the risk associated with assuming liability, vendors/suppliers and many retailers will find themselves in difficult situations with few options for moving forward from this crisis. Additionally, we view the aforementioned unknowns of consumer behavior following the COVID-19 outbreak as having the potential to further exacerbate this situation in the months ahead.

Unlike factors and insurers, the breadth of ReStore’s experience enables us to approach challenges such as these from an informed recovery value perspective rather than from the traditional risk of non-payment standpoint. This frequently makes it possible for us to step into the middle of a vendor/retailer relationship to provide a unique inventory procurement-based solution to our clients. Leveraging our affiliates’ expertise in asset valuation and disposition, we will underwrite the value of specific assets based on a thorough assessment of what those assets would recover in a liquidation scenario, should it become necessary.

By selling their goods directly to ReStore Capital at an agreed-upon discount to value, suppliers concerned about credit risks can receive either the shortened risk-free terms they require or even COD. This enables them to remain insulated from any downside risk associated with a given retailer and maintain historical cash flows. Moreover, the retailer is able to procure goods that might otherwise be unavailable due to liquidity constraints and/or credit concerns.

Under this approach, ReStore Capital will hold title to the goods and make them available for purchase in the retailers’ stores/online, but the retailer pays nothing until the goods sell. In exchange, once the goods sell, ReStore Capital receives the cost of the goods, plus a small share of the retailers’ gross margin. This creates a winning combination of positive cash flow, product on hand to display in-store and drive traffic, and improves retailers’ GMROI (gross-margin-return-on-investment).

We encourage you to become familiar with all of the options available to fund and protect your business in these tumultuous times. In doing so, it’s important to remember that many industry best practices considered “tried and true” today were “nuanced and new” only yesterday. At ReStore Capital, we strive to bring fresh, strategically-creative thinking to the industry and our clients every day; and we follow that up with a dedication to precise execution to drive value in everything we do.

If you feel that a stressed or distressed situation is, or may soon be, inhibiting your business potential, give us a call. Chances are we can assist your need directly or even help you to assist your counterparts on the other side of the supplier/retailer equation to your mutual benefit.

This article was repurposed with permission after originally appearing at marketing.hilcoglobal.com.