Ian Fredericks on COVID’s Continuing Challenges For Retailers

Unknown Speaker : 0:10

Hello, and welcome to the Hilco Global Smarter Perspectives Podcast Series. I’m your host, Steve Katz. And with us today is Ian Frederick’s president of Restore Capital, which as its name would suggest, provides customized capital solutions to leading retailers and consumer products companies across the US and North America. Ian, welcome to the podcast.

Ian Fredericks : 0:30

Hi, Steve. Glad to be here. Thanks for having me.

Steve Katz : 0:32

Yeah, absolutely. Glad you could join us. So Ian, let’s dive right in. It goes without saying that the retail environment is beyond challenging right now. And I’m sure that based on some of the feedback that we’ve been receiving from listeners on both the retail and supplier sides, they would be very interested in getting your take on what strategies in terms of debt placement and inventory procurement are working well to address those challenges. So let’s start with prioritizing and maximizing liquidity. What are you and Restore Capital seeing that’s working there?

Ian Fredericks : 1:02

It’s an interesting question. Since the onset of COVID it’s been something that finance departments you know, in all companies have been faced with, many of them drew down on their lines of credit as much as they could to preserve liquidity. They extended payment terms with their vendors, and did various other things to try to preserve and maximize liquidity as we’ve moved back into reopenings. Now, these same companies face new challenges, part of it is many of them did not pay rent. So working with their landlords to try to push off those rent payments into the future, spread them out over time, so they can continue to preserve that liquidity. That’s one option that some companies have taken advantage of. Others have actually been able to access the capital markets, despite some early turbulence and as a result of many of the things that were implemented through the CARES Act. And several strategies that the Federal Reserve undertook, the credit markets have for the most part stayed open. And companies such as Macy’s were able to take advantage and open up, you know, quite a bit of liquidity. So those have been some of the things that companies have been able to do. But now that the stores are open, and employees have come back, furloughs have ended rents due again and you know, these retailers have new challenges. And one of the things that they really need to do is to continue to preserve liquidity because as you’ve seen, there have been recent spikes and there have been some limited shutdowns in some geographic areas of the country. And but nobody knows what’s going to happen. And a lot of the experts or supposed experts are predicting that we’re likely to see another spike in the fall. So making sure that your business has adequate resources to get through to the fall and ultimately into the all important holiday season retail should really be focused on that as much as possible. There are options out there in the debt markets to access capital that otherwise may not have been available. And there are some different creative solutions to try to procure inventory to push out the timing of when payment is due to your vendors or suppliers. One of the unique things about COVID and the impact that it’s had is everybody’s been sort of similarly impacted. Right, there was really just a complete freeze in the supply chain and order cancellations and you know, in various other things where normally in their sort of the pre COVID environment retailers were maybe struggling more than some of their suppliers. In the post covert environment, they’re all struggling similarly, and so you can come up with solutions that will benefit both the retailer from a liquidity standpoint and the supplier where supplier could increase their or shorten their terms to increase their liquidity. And a retailer could push out the timing of having to pay for those goods until things like they’re sold. So, you know, really meshing those two things together to maximize and preserve liquidity, you know, is critical. And that’s just from the inventory standpoint. One of the other things that retailers should really focus on is what CapEx do I really need to spend. And in particular, you had a lot of retailers that were moving into sort of more experiential retail; trying to create a better shopping experience for the consumer, have other reasons for the consumer to come into the stores, you know, really try to create some excitement around that to differentiate. And, you know, now there’s a question of, do you really want to continue to do that because, you know, consumers are less likely to want to touch things they otherwise might have wanted to touch, and really, they’re focused more on safety, so maybe ending some of those CapEx programs and focusing a little bit more on safety and preserving that liquidity could really be beneficial.

Steve Katz : 5:05

Okay, well, that’s, you know, everybody’s struggling together from working with landlords to accessing capital markets, those are certainly great insights and options for preserving that liquidity, especially with that second spike likely in the fall. So thanks for that. But let’s move let’s move on, you know, we talked in the past about the importance of establishing a compelling and efficient omni channel offering just to remain competitive. And I would imagine that that’s become even more critical in this environment. But at the same time, figuring out how to fund those efforts must be exceptionally challenging right now. What light can you shed on how retailers can and should approach that type of catch 22 in this situation?

Ian Fredericks : 5:43

It’s another great question. And it’s really interesting what and challenging for retailers in terms of what they’re able to accomplish. And I think COVID has even sort of created new opportunities for omni channel that maybe people hadn’t previously thought of. One of the things that we’re seeing is and this was happening pre COVID and I think COVID has even introduced a new twist on it would be the buy online pick up in stores. That was something that retailers were implementing, and consumers were definitely taking advantage of pre COVID and it seems to have accelerated post COVID because of limitations on how many people can be in a store at one particular time, or even just a consumers willingness to go into the store. So I think more and more retailers are offering that as an option. And I think that’s a fairly easy systemic way to increase your omni channel options without a significant amount of investment in infrastructure. The goods are already in the store. The consumers are geographically close to the store. You don’t necessarily need to have any incremental shipping expense or offer free shipping and things like that which are generally one of the added expenses of online business, especially in an environment where you need to offer a lot of free shipping options to consumers. So while there are some technology pieces around it, generally retailers understand what they have in stock in stores, they understand what they have in stock for their e commerce platform. So it’s really just a question of whether or not when the consumer goes to the website can the consumer access sort of what is in real time what’s in the stores, and that definitely requires for some retailers some investment in that infrastructure. But I think it can be accomplished at a relatively small cost in comparison to sort of building out or expanding your e commerce business or having more distribution centers or warehouses which in the current environment seems like a crazy investment but you’re seeing such spikes in digital sales and e commerce sales at the same time where you have contraction in the amount of goods that you can actually or orders you can actually fulfill at any particular time because there are limitations on how many people can be in the distribution center and limitations on social distancing and masks. So you have a spike in demand for e commerce, but you actually have government impose struggles that are restricting your ability to meet that demand. So that’s one way. One of the other things that we’ve seen, and you’re starting to hear this sort of micro fulfillment center and using your retail stores as an ability to fulfill ecommerce placed orders, so where the consumer isn’t actually coming to the store to pick them up, but you can ship out of that store. It’s a way to actually keep your employees engaged, especially if you have reduced staffs in the store because you don’t see a lot of store traffic. If you can, again, open up that store as a potential fulfillment center and have the store staff actually pack the goods for the e commerce orders directly in the store and then ship them, you can also potentially cut down on your shipping expense because you can fulfill orders geographically closer to where the consumer is then out of your sort of centralized fulfillment center. So that’s another option if the technology is able to support it. And if the cost wouldn’t be too much to actually do that, you do have to get supplies out to those stores in terms of packing supplies, and shipping things and stuff like that. And a lot of retailers have already gone that route. But that’s an option of creating these micro sort of fulfillment centers where your stores can stay open for the consumer that wants to buy online pick up in store, for the consumer that wants to come into the store, and then you’re also fulfilling nearby orders. So, you know, those are some options for retailers. They have to be creative. Try to open up as many options as you can, in the fastest possible time period at the least cost. Nothing easy about that, but certainly worth looking into.

Steve Katz : 9:58

Okay, great. I know a lot of our listeners probably have seen more of that buy online pick up in stores themselves. I know that I have certainly geographic fulfillment that’s closer to the consumer that’s advantageous for the retailer under any circumstance. So good insights there as well. All right, let’s move on. So, I know a big part of what Restore and Hilco Global bring to the equation is the ability to combine innovative thinking and proven methodologies, and quite frankly, a whole lot of historical proprietary data to create custom solutions. So with that in mind, how do you think businesses should be thinking about monetizing their unencumbered assets in this environment?

Ian Fredericks : 10:39

Sure, this is another interesting side effect of COVID that I think was a little bit unexpected some asset values have held and some asset values have increased post COVID and some asset values have decreased post COVID. So I think for any company taking action fresh look at the universe of your assets and understanding what’s currently encumbered, what maybe is not fully encumbered and what’s unencumbered and then evaluating whether or not there’s an opportunity to utilize those assets to create that additional liquidity that we were talking about earlier. So for example, one of the asset values that we have actually seen a large spike in values has been sort of ecommerce fulfillment centers, distribution centers or warehouses. Now, obviously, if you’re a retailer, you don’t want to necessarily divest those assets from a liquidity standpoint because you need them to support the omni channel options for your consumers. But at the same time, this may be a great time to capitalize on sort of increased asset value, either by refinancing any existing loans on those assets to access and pull out you know more equity that’s in them or leveraging up and borrowing against those assets if they’re unencumbered or even doing something like a sale leaseback transaction, where you actually if you own the asset, you’re able to sell that asset to a third party and they lease it back to you. So, in any one of those three circumstances, you’re able to continue to utilize that facility capitalize on the fact that there is equity or, you know, liquidity in that asset that you can extract and then continue to support the business going forward, you know, not just with those assets, but you know, with other options, you know, available to the company. Another asset category that is often on tap is intellectual property. Now for retailers, consumer good companies, a lot of times that would be the brand, the customer data, you know, the web addresses, trademarks, things like that. This is an area that we are actually seeing spikes in interest. There are where typically you may have had outside your private equity money that was interested in investing in this, we’re seeing some really exciting activity from the sort of brand conglomerates, you know, an authentic brand. Some are key brands, you know, they are very active in the space right now. They’re paying large sums of money for the right to own those assets and then license you know, license that brands you know, out either back to the existing retailer or to third parties in new markets, you know, and to really exploit the intellectual property so that’s a significant way to access capital and liquidity. One of the other options is you know, you have these third party sort of digital innovation companies that are looking at brands that wouldn’t typically have value but looking at them as an option to. So for example, a Pier One Imports, you know, that’s not necessarily a brand that’s associated, you know, with clothing or a type of furniture, but it is a destination where people often went to, you know, shop for value oriented, you know, home furnishings and furniture that recently sold as well and sold to one of these, you know, digital innovation companies. You know, another way to access the liquidity would be to borrow against it. There are several lenders that specialize in lending against those types of assets. You know, it’s a way for you to access liquidity if you don’t currently, if you’re not currently borrowing against it, and they’re oftentimes that that liquidity is available at very attractive yields and rates. So there are several different ways to look at your existing, you know, balance sheet and the assets available on it and figure out ways to access liquidity. You know, those are just a handful, but really taking a fresh look at your assets and making sure that you’ve maximized your capital needs is critical.

Steve Katz : 14:56

Yeah, wow. Well, I’ll tell you what, stepping back and looking at that universe of assets holistically isn’t always something you got to do when business is good, right. But clearly, it’s essential now. So good insight there. I’m sure those listening will, will take a lot away from that. All right, so we’re kind of headed into the homestretch here. But before we wrap up, I wanted to ask you, Ian, is there anything else that you can share with our listeners, either in terms of specific action steps or maybe recommended timing as we head into the fall and towards the holiday season? I know typically, of course, the holiday season helps to put retailers into the black for the year, but this is anything but a typical year. So what’s the thinking on that?

Ian Fredericks : 15:37

Sure. One of the things that I’ve been recommending to anybody that we’ve been speaking to is to act now and act fast. I think retailers did a really good job of overestimating the sales drop that they would experience once stores opened. I think a lot of retailers were thinking they were going to calm down 60 to 80% as compared to LY sales and have ended up performing better than that, maybe only copying down 40 or 50%. Those are still pretty significant downhill trends but they’re better than what they had forecast. So that is certainly a plus for for the retailers as they move into this final quarter, fourth quarter coming up in another couple of in another month or so. What’s important, though, is not to wait and rely on the fact that you’re going to hopefully comp or come close to comping to last year’s holiday sales. I think that’s anything but a give in. And if I think a lot of retailers where they overestimated how much they were going to come down coming right out of COVID maybe also underestimated the countdowns going into the fourth quarter. You know, it’ll be really interesting to see what type of consumer behavior we see in the fourth quarter during the holiday season. I suspect that you’re going to see some records broken in terms of Cyber Monday and ecommerce sales, and that can cut both ways for retailers. That could mean that they’re able to comp over last year or it could mean that they’re not, because they just don’t have the capacity to be able to meet that kind of demand in the fourth quarter. So all that’s a long way of saying if you wait until after the holiday and you have a bad holiday, there’s a very strong possibility that you’re not going to be able to get a bridge to basically get you through 2021 and hopefully, bluer skies. The what I would recommend right now because the capital markets are so open, and because the yields and rates are so favorable to companies because of a lot of the Federal Reserve’s policy on interest rates that taking advantage of those markets now, when people are willing to take maybe a different bet then they would as you go into the holidays, is critical for retailers. You know, we’re seeing that pretty much across the board that because retailers have so much liquidity on their balance sheets potentially and because they’re in that cash preserve mode, that they’re in a bit of a wait and see, what I would recommend to anybody is look and see what’s available to you now, get an idea of what your assets are worth and what maybe additional liquidity you can access and then make a fully informed judgment about whether or not it makes sense to access that capital now. You can always repay it after the holidays if it outperforms. If you’re if the business outperforms your expectations but going the other way and trying to get it if your business underperforms your expectations is going to be a lot more challenging.

Steve Katz : 18:38

Well, if those countdown trends are likely to be deceiving when it comes to how the holidays will play out, it does seem like sooner is better than later in this situation. So thanks for that Ian. And all right, well, listeners if you feel that a stressed or distressed situation is or may soon be inhibiting your business potential, it certainly sounds like Restore Capital can assist you directly or even help you to assist your counterparts on either side of the retailer supplier equation. So with that in mind, Ian can be reached at the following email which has the features his initials if so it’s i f @ restore hyphen cap.com. It’s if @ restore hyphen cap.com. Ian, thanks again for joining us.

Ian Fredericks : 19:21

Thanks so much for having me, Steve. I really hope that the listeners found the information useful.

Steve Katz : 19:27

I’m sure they will. 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 a client to help make them that much more successful moving forward. Until next time, I’m Steve Katz. Transcribed by https://otter.ai