Distressed Retailers

The most important element of a successful turnaround is the development of a truly feasible plan from the start. If there’s a prospect of achieving an out-of-court turnaround, then a strategy based on store closures, marketing optimization, and merchandising transformation may be right.

In some markets retailers are facing challenging time to keep the business running. For many of them it is already distressed situation.If a best-case scenario for a retail debtor gives the debtor only three or four months before liquidation becomes almost inevitable, then pre-bankruptcy-petition planning is imperative. As such, distressed retailers should consider the following steps to potentially improve their prospects for a successful turnaround.

1. Buy time

Distressed retailers need the lengthiest runway possible to achieve an out-of-court turnaround or a well-planned bankruptcy. A critical first step is to develop a detailed understanding of the retailer’s liquidity position, debt covenants, and other potential filing triggers. At the same time, so as to maximize the runway available, the company should also implement a variety of liquidity-generating initiatives such as curtailment of capital expenditures, reductions in general and administrative expenses, and optimization of borrowing base. The runway is important both because it provides time to negotiate a turnaround or planned restructuring and because it gives the flexibility to choose the best time to file – for instance, possibly before the winter holidays in order to maximize the ease of selling excess inventory or after the holidays, when retailers are likely to have more cash on hand.

2. Be realistic

Retail turnaround successes have advance planning in common. Retail turnaround failures share a predictable sequence of missteps: first, a company believes it can avoid a bankruptcy filing through an amendment to its existing debt facilities or through a debt refinancing or through a pickup in sales that never materializes; then it enters bankruptcy planning to close only its lowest-performing stores; and next, it announces that a reorganization couldn’t be orchestrated and going-out-of-business sales begin at all stores. Perhaps the most important element of a successful turnaround is the development of a truly feasible plan from the start. If there’s a prospect of achieving an out-of-court turnaround, then a strategy based on store closures, marketing optimization, and merchandising transformation may be right. But if a filing seems unavoidable, then preserving cash may help fund an in-court turnaround.

3. Understand the market

An understanding of viable capital markets options is a pillar of a sound plan. There are relatively few distressed retail investors, and based on a viable restructuring plan, it’s vital to begin a dialogue with them well in advance of a filing. As time progresses, retailers should also make sure they consult existing lenders both to explore the potential structure of debtor-in-possession financing and to assess the lenders’ appetite to support reorganization. The goal is to secure either a stalking-horse bidder or support for a prearranged plan prior to the point of filing.

4. Focus on operations

Even though retail bankruptcies have become tougher for some period of time, the bankruptcy process still offers valuable and otherwise unavailable tools for retail turnarounds. The ability to reject store leases is perhaps the most valuable of the tools, and store closures were used as part of almost every successful restructuring. A retailer should conduct a four-wall profitability analysis well in advance of a filing and in many cases also initiate rent negotiations with landlords against the backdrop of a potential filing – both to achieve rent savings and to inform store closure decisions with an understanding of potential go-forward lease expenses. In addition to store closures, the ability to reject other executory contracts is a powerful tool for renegotiating and improving marketing, logistics, transportation, and other third-party agreements.

Plan, don’t perish

Long after the global recession has ended, labor cost increases, declining mall traffic, spotty consumer demand, and the continued growth of e-commerce will ensure that retail remains a tough business. Indeed, retail bankruptcies have been on the rise in Europe and US since 2012, and as many retailers filed for bankruptcy in 2015 as in 2014.
For retailers looking to manage the challenges associated with a potential filing, the key lies in planning. As tough as retail bankruptcies can be, almost half of all retailers in our study emerged as going concerns. Retailers that want to be able to do the same in the future should begin planning long before the bankruptcy filing date, should file with either a stalking-horse bidder or a prearranged plan, and should embrace a restructuring that incorporates significant operational improvement