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Smarter Perspectives: Retail

Hilco Global Smarter Perspectives Podcast Series: Retail Solutions

Guest Ian Frederick, Steve Katz (Host)

Ian Fredericks, president of Hilco Merchant Resources, joins the Hilco Global Smarter Perspectives Podcast Series to share some timely and relevant COVID period insights from the  Hilco Retail Group.

 

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Steve Katz  0:09  
Hello again and welcome to the Hilco Global Smarter Perspective podcast series. I'm your host Steve Katz. Today, we're pleased to have Ian Frederick's president of Hilco Merchant Resources on the podcast to share some very timely and relevant COVID period insights from the collaborative Hilco retail focus team. From what Ian has been telling me, I think it would be an understatement to say that he and others across the Hilco platform have been very busy during the pandemic, based in large part on the vast number of bankruptcies that have occurred both in the U.S. and globally. Just to put things into perspective, and I jotted down a few notes this morning, as Ian and I were speaking, Hilco has been involved in closing more than 2,900 stores across big-box in-line malls, strip centers, outlets, and other categories during the course of COVID-19, and is currently operating liquidation events at stores across all 50 states, 10 Canadian provinces, and throughout Australia as well. Ian, you're a busy guy. I know you guys have been extremely occupied over the course of the past few months. So thanks for making time for us. We're glad to have you on today. 

Ian Fredericks  1:12  
Great. Thanks, Steve. Pleasure to be here. Thanks for having me.

Steve Katz  1:16  
Ian, I have a two-part question to start us off. But let me ask you the first part, and then we'll get into the second. We seem to see in here more and more about retail store closings just about every day now. Is this the continuation of a trend from previous years? Or is it really a spike-based primarily on COVID-19?

Ian Fredericks  1:33  
I think it's a combination of both. If you think back a few years, you'll recall that the term retail apocalypse had been coined. And I would say part of the store closures that we're seeing in 2020 are just a continuation of the retail apocalypse and a part of them are also accelerated by COVID. So if you think back to 2000, the 2008-2009 period, that was sort of the last big financial disruption. Records were set during those years in terms of store closures. And basically every year thereafter, new records in terms of store closures have been set in large part that's been a result of the rise of e-commerce and other types of digital shopping experiences. But it's also a product of the fact that consumer behavior has changed. And that really accelerated beginning in 2017. 2017 saw another new record of store closures. 2018 saw a little bit of a drop-off and then 2019 and 2020 both set new records. I would say the 2019 store closures were definitely a continuation of the retail apocalypse and the early closures in 2020 were as well. What COVID essentially did was accelerate store closures for other retailers. No balance sheet was built for the shutdown that happened in March and continued basically for most of the country through to the end of May. And since then it's been a struggle for retailers to regain those sales and adapt to the changing environment. Couple that with an acceleration of consumer behavior changes and moving more and more to e-commerce and digital and it was just a recipe for accelerated store closures. 

Steve Katz  3:09  
Okay so then as a follow-up to that, based on what you're saying, are there any types of common attributes that you can ascribe to the companies we've seen filed for bankruptcy in terms of either their condition or their level of distress prior to the pandemic?

Ian Fredericks  3:24  
Sure, I think that the companies that have filed probably would have all filed at some point, especially the ones that filed later in the year. Those were companies that had been struggling to some extent did have significant leverage in the terms of ABL, an asset-based loan, revolver term loan, maybe a FILO as well. Those were pretty common attributes and what had happened was as a result of COVID, essentially the lenders got nervous, frankly, everybody got nervous in the country. And that accelerated some of the bankruptcies where people were worried about whether or not the company could survive until the holidays, and then what the holidays would look like. So I think companies advanced their filings to deal with that. There were many liquidations probably some that didn't need to happen. But the common attributes would be overleverage, large concentration in stores, and generally not a great e-commerce or digital platform.

Steve Katz  4:21  
Interesting. So as we sit here now towards the end of January, vaccines are rolling out but progress in terms of shoppers returning to stores at least is still likely to be slow going. So thinking about that how well prepared from a liquidity perspective are retailers in general now to weather the continued storm of limited capacity stores and the impacts of COVID moving forward?

Ian Fredericks  4:44  
I would say in general retailers are not set up well for the type of liquidity they're going to need. If you think about a traditional retail selling period, whether your best sales are during the holidays or some other time of year, most of your year is spent in the red, and then at some point as you move into peak, you move into the black. But if your peak is lower than historically is, then that constrains your liquidity. And it's sort of constrains it in two different ways. And what we've kind of been seeing is that generally, the ABLs are usually paid off for lenders that peak around the holidays in early to mid-December. And then the retailers start building cash for the Q1 period which is generally retailers lowest period. What happened here is essentially that didn't happen. Where historically various retailers have paid off their asset-based loans and build that cash. What you're finding coming out of Q4 is that many of those retailers still have borrowings on their revolvers and have less cash than they historically would. So you put those two things together, and it's going to make for a very challenging Q1. The question then becomes what can retailers do to prove their liquidity? I think those that have had the ability to access the capital markets because they had a balance sheet that was still capable of adding debt on that. I think you saw recently Express out of a term loan where historically they hadn't have one, but you're seeing Belk right now try to go through some kind of financial restructuring. And if you think back to the spring, you saw companies like Gap and Macy's access the capital markets in a big way to put that liquidity on the balance sheet. So clearly whether there are still retailers out there large retailers that have the ability to access the capital markets in a meaningful way to be able to weather what is likely going to be a challenging Q1. And depending on how the vaccine rolls out and the consumer demand once things reopen, that will dictate how the rest of the year will go for them.

Steve Katz  6:44  
Yes, consumer demand is going to be the question right? How quickly do people get back in stores just in terms of comfort level after they've had the vaccine? So before the podcast, you were telling me about how quick adaptation has been the key to survival during COVID, not only for those in retail but for companies like Hilco that support them as partners. What can you tell us about changes that you and the collaborative team at Hilco have made in areas such as valuations and field exams, to stay effective and efficient in your client engagements? And from your standpoint, how frequently should this type of diligence be performed by retail businesses during the ongoing pandemic?

Ian Fredericks  7:23  
Well, I would say what we've done pretty much across all of our business units, and this would be no different than what any other companies had to go through is we've had to adapt, and we've had to adapt quickly to meet our client's needs. And we've done that through the use of technology. We probably advanced our own systems more quickly than we had ever anticipated to be able to do virtual meetings with clients, virtual tours of distribution centers, virtual tours of stores, and in general just adapted to the work from home environment. It's made it more challenging to try to visit different regions of the country with travel restricted but fortunately, we have a robust team that is available to step in basically across the country to not only support our store closing sales, but also our evaluation and field exam businesses. This enables us to get a more accurate picture of what's going on in different regions of the country and incorporate that into our valuation field exam work.

Steve Katz  8:22  
Okay, let's move it along and talk about something parallel in nature to that. And it's a lot based on the collaborative work that you do. I know what really sets Hilco apart from others in the retail and monetization space is the both the breadth and depth of your capabilities in unlocking value across all asset classes. So clearly, inventory monetization is a big strength as is intellectual property. In terms of IP, what trends is the team noting in retail right now in regard to brands and licenses?

Ian Fredericks  8:54  
It's been pretty remarkable. You have had a lot of big-name brands, look at a Brooks Brothers or a Lucky come on to the market and there has been a significant uptick in interest. And I think that's a combination of a couple of things. Number one, there really are some great brands that became available during this period that with the right stewardship could continue to be very strong brands going forward. You also have new entrants into the market. For a long time, it was largely the licensing businesses so the Authentic Brands, the Marquee Brands of the world, those companies were buying the brands largely requiring some type of an operational or store operations platform. In the case of ABG they have sparked through their partnership with Simon Property Group. And what you've had now is a new entrant that is an e-commerce operator who largely is focusing on growing the brand through digital marketing. And they're buying up these brands and really pushing prices up to levels that we hadn't seen historically. And I think they're also doing it's not just the brand it's also the nameplate which has been a little bit different. So take a Pier One Imports or a Catherines, those Pier One Imports was obviously a well-known nameplate, but was not necessarily known as a brand. That intellectual property traded pretty early in the pandemic or about appraised value actually was a little bit north of appraised value. Catherines traded at multiples of appraised value. And largely what was happening was these new e-commerce marketing entrants were looking at it and saying you have a built-in customer base, and they frequent the site. You do x millions of dollars in sales during the year and what can I do to try to replicate that and can I bolt it on to another platform where I have either similar product or even different products, but create one infrastructure to support all of these different e-commerce nameplates, and thereby capture sales and hopefully, EBITDA through or positive EBITDA through operating these as e-commerce only platforms. And it's really driven prices up very high. The third piece, I would say is you have a large amount of capital in the market for specifically investing in intellectual property and e-commerce businesses. So you have a lot more competition at auctions than I think you would have typically seen. And in general, those three components are what's really driving a massive shift values of the intellectual property.

Steve Katz  11:33  
Okay, great. Thanks again. Let's talk about retail landlords for a minute. They are under immense pressure right now. There's a lot going on and it's extremely complex. Just how severe is that situation and what steps are mall operators and others taking, and are those steps working are likely to work?

Ian Fredericks  11:50  
It's interesting. It's difficult to tell how severe the situation is with retail landlords. Judging by some of the stock prices that you'll see for some of the retail landlords, it would seem to be not that severe. But I think you have to dig more into what's actually been happening over the last several years. Retail landlords have, especially the really large ones, have decided that owning some of the brands or having an investment in some of the brands and continuing to operate stores for those brands within their malls is in the best interest of their companies. And it started with Aéropostale back in 2016 you know, largely in the United States and its continued thereafter. You have an alliance between Simon Property Group and Authentic Brands. They've bought Forever 21, they bought Lucky they bought Brooks Brothers, they obviously bought Aéropostale, and there have been others along the way as well. So that's keeping the lights on and it's a different operating model when the goal of the retailer is essentially to pay rent to the landlord and pay licensing fees to the brand companies. And then the brand company thereafter licenses the brand outside of the United States or in other contexts other than the stores that are in malls. So that I think has generally been a positive result for landlords. But with all of the big-box department store closings that have been happening, take a JC Penney, for example, that's a much more dire situation because you don't just necessarily lose the JC Penney, you also potentially lose a lot of inline mall tenants because you cannot satisfy the co-tenancy requirements in those leases anymore. So I think when you saw Simon and Brookfield acquire JC Penney and spend nine figures to do so, it wasn't because they viewed it necessarily as an opportunity to replicate an Aéropostale or a Lucky, or Brooks Brothers, it was much more defensive. I'm sure they're going to try to replicate those other deals but it was a much more defensive play to make sure they could keep the leases inside the mall continuing. The other thing that mall operators have been doing and it's gonna be really interesting to see what happens. If you think back to early 2019, the most recent example, all the discussion was around experiential retail and potentially creating situations where senior or other type of living arrangements to these malls where essentially you have a captive consumer base that will frequent the inside of the mall. Look for that experiential retail, restaurants, brands, things like that, query what that looks like, once you come out of COVID, especially when you consider that seniors and people who are older are the ones most likely to be impacted by COVID couple those two factors will that model that they had been implementing they'll be a viable model. And will consumers want to go into stores and touch and experiment with things in a way that they would have in early 2020 but are very reluctant to do now, given the pandemic? I don't know what the right answer is. But I don't believe that experiential retail is going to be the new craze, again, once sort of COVID lifts and people go back to some level of normalcy.

Steve Katz  15:24  
Okay. Well, we're getting, we're getting near the end here. I have a two-part question to wrap it up today. The first part is, what do you and the team foresee in terms of retail sales growth or losses ahead for 2021? And whether the potential for growth hinges on any particular factors?

Ian Fredericks  15:42  
Well, what I would say is retail sales have grown and continue to grow year over year, that's largely been driven by e-commerce. I think last year, we had the equivalent of three years of e-commerce growth in one year. Conversely, I would tell you brick and mortar sales are struggling and I don't necessarily see a growth opportunity in the immediate future for brick and mortar retail. I think retailers are also trying to figure out what brick and mortar looks like. If you think about it now, so much of brick and mortar is potentially having that real-time available inventory very close to the consumer, but not necessarily where the consumer wants to come into the store. So you saw this rise of kind of micro, what we've been terming micro-fulfillment centers. Where orders through the e-commerce platform or through other digital means are fulfilled by the store either through buy-online pick-up in-store or through actual store fulfillment, because retailers can cut down one of the largest expenses of running an e-commerce business and that's shipping. By shipping from a store that is closer to the consumer that's buying it, as opposed from a centralized distribution center, they're able to cut down those shipping costs and actually get the goods there faster. And in many instances, the consumers willing to come pick them up, if there are things like curbside pickup, so I think how retailers adapt and how quickly they're able to adapt to that will dictate what kind of growth they can expect. But I overall expect you're going to continue to see growth in retail during 2021, especially since we saw it in 2020. And I think brick and mortar is going to continue to be a challenge. But there is a place for it, once retailers implement the right model for what their consumers demand.

Steve Katz  17:33  
All right. Lastly, today, any final thoughts on proactive steps that retail companies should be taking right now to ensure they have access to the liquidity they need when they need it and also to ensure that they can achieve maximum monetization of those assets regardless of the circumstances that we see moving forward?

Ian Fredericks  17:51  
You know, it's very difficult for a lot of retailers to implement the kind of change that I think is necessary to survive in this kind of new world, unless they can access the capital markets and get liquidity. The best way to do that is obviously to have reappraisals of your assets regularly, whether that's every three months or six months, depending on how your business is performing. Look for other assets, where you can potentially access liquidity, whether that's owned real estate, or intellectual property, or something else, find that liquidity. And don't be afraid to go to the capital markets and look for what kind of leverage you may be able to get off of those assets. And then what I would say with those assets is invest in technology, but invest in the right technology. Really look for the easiest ways to implement technology for the least amount of costs. And make sure that you're using the products the way that they're designed. Really give careful consideration and thought to what types of software and what types of services your consumer wants.  Leverage your database to ask your consumer what things they're looking for, take different surveys, get their feedback, they're happy to provide their feedback if they're a loyal customer. And at that point, you're able to drive incremental sales by proving your overall relationship with your customer. So I think that's the way that I would recommend approaching it.

Steve Katz  19:22  
Well, this has been tremendously informative, very timely, and thank you and I think it would clearly behoove retail operators and lenders with retail portfolios, who have questions or concerns about those businesses to reach out to you and your team for perspective on their situation. So with that in mind, Ian's email is IFredericks@hilcoglobal.com that's IFredericks@hilcoglobal.com. Ian, it was absolutely a pleasure having you on with us today.

Ian Fredericks  19:52  
Thanks, Steve. Glad to be here. Really appreciate the opportunity.

Steve Katz  19:55  
Absolutely. And listeners we hope that today's Hilco Global Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global, I'm Steve Katz.

Transcribed by https://otter.ai     

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