April 17, 2025 • 43 mins
Tariff chaos has tossed retailers into a crisis similar to Covid in 2020, leaving them unable to plan ahead, according to AlixPartners, the financial advisory and global consulting firm. “It’s a little crazy and retailers are canceling orders,” Holly Etlin, a partner at the firm and restructuring veteran, tells Bloomberg News’ Reshmi Basu and Bloomberg Intelligence’s Stephen Flynn in the latest Credit Edge podcast. There’s a “real crisis, everybody going nuts,” she added, referring to pricing, inventory and shipping decisions that retailers are trying to make. Etlin also discusses the impact of elevated bankruptcy costs, the outlook for more coercive liability management exercises, how retailers are using asset-based loans as a lifeline and the turnaround of Tailored Brands.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets proadcast.
My name is Rushmebasu. I am a senior reporter at
Bloomberg and I'm Steve Flynn, a senior analyst covering media
and Telecoms at Bloomberg Intelligence. This week, we are very
pleased to welcome Holly Etlin, Managing director at Alex Partners,
the financial advisory and global consulting firm.
Speaker 2 (00:41):
How are you today, Holly, I'm great, other than it's
a little rainy outside.
Speaker 1 (00:46):
Holly is an experienced executive with over thirty years of
experience in providing turnaround services for companies in the retail, distribution,
consumer products, financial services, media, and hospitality industry. She's a
certified turnaround professional and has been admitted to the American
College of Bankruptcy and the International Insolvency Institute. The Turnaround
(01:10):
Management Association has recognized Holly several times for her deal work,
and she's also been named Women of the Year in restructuring. Holly,
it's been a crazy time for the markets because of
the kind of escalating trade war. How is this impacting
the retail space?
Speaker 2 (01:28):
You know, the only way I can like in it
is it's very similar to the crisis that we had
during COVID, with the exception of the retailers are not
being forced to close, but every other element of disruption
is happening for retailers. You know, the time of the year.
Most retailers right now have to place fourth quarter orders,
(01:52):
I eat Christmas orders in the May time frame, and
this happening in April just couldn't be more terrible timing
from that perspective. They're trying to figure out how much
is consumer demand going to fall, whether tariffs are going
to be paused not paused. I mean, I don't even
(02:13):
know where we are today at this point. It's gone up,
it's gone down, it's gone sideways. And even though many
of them have diversified post COVID away from a dependence
on China, there's still are substantial components of their business there.
And then frankly, they're in They're in Vietnam, they're in Indonesia,
they're in Mexico, and all of those places are going
(02:38):
to have increased prices, so really difficult conversations. And you know,
and I sit in with these management teams, and you know,
the divergence of opinion, just like Frankly, we have divergence
of opinion in America today about what's going to actually
stick and what's not going to stick, and the spirited debates,
(02:58):
but they're they're coming at a point at which they
have to accelerate what their decision making process is. And
many retailers, particularly the very large ones, are very methodical
in their data analytics around consumer demand and what's selling,
what's not selling, What are we going to bring in
at what price point? What retail price point do we
(03:19):
have to hit? And so the debate is, you know,
first of all, do we order the same amount and
then second of all, how are we going to price
it to still hit the target price points that we
have known they create consumer demand, and so it's a
little crazy, you know, and retailers are canceling orders that
(03:41):
we've heard from some of our major clients that what
they're going to do is they're going to live with
most of the Q three inventory that they've already ordered,
that's already in work and ready to ship, and just
going to do fill in for Q four for the
holiday season. So real divergent, real crisis, everybody going nuts.
Speaker 1 (04:05):
And one thing that we saw in December was we
saw a slew of retailers file for Chapter eleven protection
before the end of the holiday season. Why was that
and what does that tell us about the health of
the retail and the consumer? And then what does that
mean for twenty twenty.
Speaker 2 (04:23):
Five retailers filing in either December or January? Historically is
I guess it would be We would say it's a
high frequency time for retailers to file, and it's mainly
because that's a time of the year when they have
a lot more cash. You need cash, you need liquidity
(04:44):
to make it through a Chapter eleven process or frankly
even to just successfully liquidate in a Chapter eleven process.
And so typically we see people file in that sort
of holiday timeframe when they haven't necessarily paid all their
bills for holiday, but they have all the cash so.
Speaker 3 (05:04):
To follow up on your liquidity point there, So how
do a lot of retailers think about financing themselves? Now,
we've seen a ton of volatility underlying rates, spreads have
moved a lot in the high yield market. We're seeing
a slowdown in issuance in high yeld and levered loans.
So retails, if you're preparing for this uncertainty. What sort
(05:25):
of liquidity maneuvers can you do right now?
Speaker 2 (05:27):
Boy, it's tough if you're distressed the lower performing retailers
while they do some of the larger people have public
data outstanding. You're also financing your business day to day
using an asset based lending facility, and those facilities are
predicated on the liquidation value of your inventory. And those
(05:51):
values have been moving down because we have seen in
the last few major liquidations liquidation results not be equal
to what the appraised value or the or the estimated
liquidation value was of that inventory. It's often referred to
the term of art as net orderly liquidation value or
(06:12):
n ol V, and that's the piece. You know, while
you may have your bonds in place, you're going to
be as someone who's underperforming, you're going to be just
making sure that you're in compliance, you don't trip a
trigger in your bonds, but you're also living with your
ABL facility, and if that starts to contract, that's going
(06:36):
to be problematic.
Speaker 1 (06:38):
Are you seeing asset based lenders become more conservative with
providing money to companies.
Speaker 2 (06:44):
Well, there's a move afoot to try to bring these
net orderly liquidation values, or these appraised values of inventory
more into line with the results that have been seen
in the last few major liquidations. And then you know,
you've got the whole issue of tariffs and what is
(07:05):
Terift's going to do, because again, the net orderly liquidation
value is an appraisal done by a liquidation firm. It's
really it's their stamp behind what they believe the company
will really liquidate at. And it's very sensitive to the
cost retail relationship or the net gross margin relationship. And
(07:27):
if the retailer, for example, takes an increase in the
cost value the inventory but doesn't pass it along to
the consumer, that's actually going to cause the net orderly
liquidation value to go down, not up, because again it's
very sensitive to that relationship. So retailers and their lenders
(07:50):
were already worried about what had been seen with these
major retail liquidations not coming in on value either. Because
Shrink was and shrink is. Everybody thinks of Shrink as being,
you know, theft. It's not mainly theft. What it is
is accumulated errors in the system, in the accounting system
(08:11):
of the company or in the inventory system. And we've
seen companies that, for example, had shrink reserves in there
NOLV that said, well, when we liquidate it, we're going
to have this much less inventory to sell. And maybe
those were estimated at three percent or four percent and
(08:31):
the actual came in at fifteen to twenty percent. That's
material and that reduces the recovery that the asset based
lender gets, and so that causes them to be concerned
going forward in how much of a reserve can we
have in that?
Speaker 1 (08:47):
Does that mean reserve if you can explain sure.
Speaker 2 (08:50):
So let's say I, you know, I'm X y Z retailer,
and I've got a billion dollars worth of inventory, and
and I want to have an asset based facility based
upon that, and there is a net orderly liquidation value,
let's say, of eighty cents on that billion. In addition
(09:14):
to that eighty cents, the lender will only lend eighty
five ninety ninety five percent of that eighty cents, and
then they will put in additional blocks and reserves that
either exist all the time or arise when the availability
(09:35):
under the loan falls below a certain value. So when
you fully drawn, let's say, so if I gave you
eight hundred million dollars of actual borrowing capability. Once you
get up to seven hundred, I might have a springing
reserve that goes in which reduces the amount that you
can borrow. And those are typically intended to, among other things,
(09:58):
cover the cost of a proceeding a liquidation proceeding in bankruptcy,
And of course that's the other issue. The costs of
winding down a business for those that have liquidated has
exceeded those reserves. So you've got maybe not all the
inventory is there, and it's maybe more or maybe it's
(10:19):
bringing in less than the appraisal, and the block or
the reserve that you had in place gets exceeded, and
now all of a sudden, the bank is having to
look to other assets in the liquidation for their recovery.
Speaker 3 (10:33):
Now, when things start to move and where in periods
of stressed like we're seeing now, how willing are the
lenders to work with the company and give some sort
of relief and give them some maybe extra time to
solve some of these issues.
Speaker 2 (10:46):
If the lenders believe that the company is headed in
the right direction, management's got to turn around and process
there are let's say they need to do a reset
of how their stores are configured or their merchandise. They've
got some tests doors up and running. Those are showing
great results. You know, the chain may be down by
one or two percent in sales, but the test stores
(11:07):
are running at a plus ten. Now, all of a sudden,
the bank can see that management really is addressing the
issues with the business and headed in the right direction.
They're going to work with them. And no asset base
lender likes to liquidate a customer. That's not what they're
there for. They're there to provide a needed line of credit.
(11:29):
And so if they think the company is heading in
the right direction, yes, they will work with them. If
they don't think the company is heading in the right direction,
they will be less inclined to, you know, release reserves
or do something else for some period of time. Again,
these asset based lending facilities are also very dynamic as
(11:53):
to advance rate. Often they have monthly or quarterly changes
depending on how seasonal particular retailer is, where they'll advance
more in the high season and less in less times
of the year. So they do want to work with them,
it's just they also want to get their money back
(12:16):
if things don't go well and the company liquidates, and unfortunately,
a very high percentage of distress retailers end up liquidating
these days.
Speaker 3 (12:27):
Now, I know you're an expert in retail, but if
we've broughten out a little bit to either more consumer
discretionary or other sectors, what other groups you see as
exposed to the tariff uncertainty that we have now.
Speaker 2 (12:40):
Well, everyone consumer producing any kind of a consumer product,
be it apparel, be it hard goods, be it furniture.
The vast majority of lower cost items are produced outside
of the United States. So it just goes to reason
that you're going to get hit with higher costs.
Speaker 1 (13:00):
And who's going to take those costs? Is it up
to the retailer to eat the cost or pass it
down to the consumer? And how those the retailer and
the supplier, how those negotiations going.
Speaker 2 (13:13):
There's some very tough negotiations because you've not only got
the issue around the price of the goods potentially changing,
but the quantity because again, as I mentioned, the retailers
are really looking at it it prior downturns. And let's
set COVID aside for a second, but if we look
at eighty seven. We look at the recession, we look
(13:33):
at some of the other blips in the economy, you
generally saw consumer demand going down by more than the
SMP average. So the S and P went down by ten,
the consumers went down by twelve, you know, And so
if you're looking at where we are today, those are
(13:53):
the numbers that retailers are looking at. They're looking at,
you know, where's our demand going to go? Is it
going to go down by ten? Is it going to
go down by fifteen? So not only are you negotiating
on price, because it's critical to maintain your margins, particularly
in a lower sales environment, but it's also about you're
(14:14):
cutting back the amount you're even going to place with
the vendor in the first place. So very very tough
negotiations going on right now and trying to figure out
which categories are continue going to continue selling. Again. We
you know, everyone's seen the consumer typically in tough economic times,
trades down, they trade down in price, they go from
(14:38):
shopping at a department store to shopping at a discount
store or shopping at a dollar store. So you've got
that issue going on, so huge price sensitivity, and so
what the retailers are trying to do is see how
much whether they can split it, you know, whether the
(14:59):
vendor can absorb some piece of it and the retailer can,
so that maybe that if it's a small enough percentage
that then they can try to hold price. And remember
a lot of the goods that they're going to be
placing orders for in May are going to be the
promotional items for the holiday season. So those are things
that are typically produced in volume at a very sharp
(15:21):
price point with the vendor. And so now the vendors
looking at this and going, well, can I even meet
this price point which was a stretch for me before
because I was giving you a deal because you were
given the customer a deal.
Speaker 1 (15:34):
With then vtail which segments are or categories are going
to hurt the most from the tariffs.
Speaker 2 (15:41):
It's kind of across the board depending on where the
goods come from. But people who traffic in smaller in
it more inexpensive items, you know, like craft stores or
small costume jewelry things like that, small all electronics, things
(16:01):
that you might give somebody as a stocking stuff or
you might order on Amazon. Those products are less diversified
away from China, So those kinds of products are going
to be more harder hit. And also because they're already
a very low cost item, small increases in price. The
(16:22):
consumer is very price sensitive. You know, if they're looking
for a five or ten dollars item to you know,
do in a gift exchange or whatever, and the price
of the item goes up to twelve or thirteen, they're
probably not going to buy it, right. So, you know,
all of the kinds of businesses or the segments of retailers,
even the stuff you know, the non food aisle at
(16:45):
the grocery store, those kinds of items. You know, anything
that's a lower priced item is going to be impacted.
Speaker 3 (16:54):
We talked a little bit about the retailers that have
too much debt and working with their asset based lenders,
but think about companies in general that have too much debt.
A lot of high healed companies, particularly my sector, communications sector,
we've seen a ton of this and we'll probably see more.
A lot of companies will pursue liability management exercises, whereby
bondholders agree to exchange their bonds or loans for longer
(17:18):
dated obligations that are often better positioned than the capital structure.
Likely they'll have security if they were unsecured before, or
being a better part of the capital structure, But they
often have to take a haircut to the principle that
own companies benefit. Right, they push out debt maturities, they
lower their overall debt. But in your experience, do these
(17:40):
exercises really put the company in that much better of
a position. Do they solve any issues or do they
just delay the problem?
Speaker 2 (17:47):
Depends on what management has planned for the company very much.
If what this is intended to do is to give
management the breathing space to finish a turnaround that's already
in progress, then it's a great thing. If, however, it's intended,
and this is obviously my personal opinion having seen a
(18:08):
bunch of these, it's intended to provide a substantial amount
of additional working capital of the business, a cash infusion
that rarely happens, because while the headline number may be
that you're getting an extra two hundred million dollars, by
the time everybody gets done with their sinking fund for
(18:30):
interest and their fee and their fee on the fee.
Oh and then there's the additional fee that all gets
added or sweeps away cash or adds to debt. What
you end up with is way less cash than what
the goal was originally and way more debt. And unless
the business is really rebounding, it just it just kicks
(18:54):
the cand down the road.
Speaker 3 (18:55):
Gotcha. And if you're a management team this may sound
a little cynical, but do you want to drink this
right before things are turning around?
Speaker 1 (19:02):
Right?
Speaker 3 (19:02):
So that you're trying to incentivize debt holders to participate, right,
so you want them to move forward? So is it
best to do it when you know you've reported a
few bad results quarterly results, as you're getting ready to
turn around, but you foresee that things are about to
turn around, and now's the time to do it.
Speaker 2 (19:20):
Everybody's got a theory around that, right. You know. On
the one hand, you don't want to show your cards
because then they'll say, well, why do I need to
do this at all because it looks like you're actually
going to be able to pay me in the future.
On the other hand, you may really need the money,
you really need the relief, and have no choice. You know,
every situation is unfortunately different and different in because of
(19:43):
the parties that are in it. It's you would like
to think that there's an empirical way to just run
the numbers. Right, we're all data people, and let's run
the numbers, and well, this will be the good time
to do it, because you know, it'll take this much
time to get the deal done and this is when
we need the money and all of that. But most
people try to paint a relative leak somewhat dire, but
(20:09):
not we're going to liquidate dire situation because obviously if
you're can liquidate, then why would somebody give up their position,
right or compromise their position. But it has to be
negative enough that somebody will think that at least if
they do this, then there'll be money good on that
other piece. I mean, you know, so many of these
(20:32):
just turn out to be somebody just not wanting to
mark down their book and what they've got in the business.
And you know, we even see that in bankruptcies. You
see things that in the past, you know, the debt
would have converted to equity, you would have left the
company highly unleveraged. And we saw a bunch of those
during COVID for consumer companies and retailers that then the
(20:57):
company has thrived, right because it's debt free or it's
highly deleverage. But then you see these other things where yeah,
they take equity, but they also leave the vast majority
of debt on the books because they don't want to
give up their position if there's a further downturn. They
want to be in a lender seat rather than an
equity holder seat, and that just further straps the company
(21:19):
and you know, basically ends up with the inevitable liquidation.
Speaker 3 (21:24):
So in dealing with management teams who are working down
this road, have you seen any sort of big difference
between a management team where it's family owned or significant
stakes in the equity as opposed to a broadly held
public company, right, because there's been some articles written that
it's the family controlled companies are much tougher negotiators because
(21:44):
it's much tougher forget than to kind of give up
equity with regard to any sort of a structuring.
Speaker 2 (21:48):
Well, you could put family owned and private equity owned
in the same boat. Yeah, you know, family owned, they
may or may not be have the same degree of
sophistication as a private equity owner. Private equity owners are
tough negotiators with regard to these lemies. You know, they're
looking to maintain their control of the business and their
(22:11):
investment in the business.
Speaker 1 (22:13):
Do you expect to see more elemies in twenty twenty
five or do you think more companies are just going
to skip that process and go straight to chapter eleven.
Speaker 2 (22:23):
You know, the problem with chapter eleven today is the
cost of the process has gotten so high that you
really do a cost benefit analysis of what are the
fees going to be? And you know, while the company
professionals may be able to control their fees to some degree,
you can't control the professionals for the various creditor groups.
(22:45):
And some people just go off the reservation completely and
just go out there and run up all sorts of
fees just because that's in their interest and it's not
necessarily productive to the case, and so it's become a
huge disincentive to actually do a real restructuring in a bankruptcy.
(23:07):
People try to get in and get out as quickly
as they can to minimize the feeburn, and they don't
often use the process in the way it can be
used to shut unproductive plants, exit unproductive contracts. You know,
you need time to do that, You need to be able,
you need to have negotiating time with your significant counterparties
(23:31):
in those and people just don't want to do it.
They want to go in and go out, restructure the
balance sheet, put everybody into the place that they agreed
to be, and nothing in that addresses the underlying business issue.
So I think there's a huge disincentive these days to
go into bankruptcy unless you really have a clear path
(23:54):
that you've already laid out and you've convinced your stakeholders
is the best path to take. And so I suspect
we will see a bunch more elemies.
Speaker 3 (24:04):
So experts like yourself are here to help management teams.
So when would you normally get involved with a company
or management teams willing to hire outside experts at first
signs of trouble? Or is it more when companies get
into real distress and you have outside parties. So are
your relationships more with management teams, with investors or all
(24:24):
the above.
Speaker 2 (24:25):
It's a little bit of all of the above. I'm
a true turnaround person. I don't My work is not
here to just facilitate your bankruptcy and do the administrative
components of the bankruptcy and the cash flow forecasts. My
work is to help you actually save the business. If
management and the board are thinking well enough ahead of
(24:46):
what needs to happen, they definitely you will hire us earlier.
Often though in my industries that I work in, we
get hired way too late. But you know, if you
don't mind, I'll tell you about a really wonderful success story.
Speaker 3 (25:02):
We love post stories.
Speaker 2 (25:04):
So Taylor Brands. Taylor Brands is the parent company of
Joseph A. Banks and the Men's Warehouse, and leading into COVID,
the company had experienced many quarters public company, many quarters
of sales declines. There had been incorrect pricing decisions, there
(25:27):
had been they weren't following their market obviously. You know,
the Men's Warehouse is an entry level product for young
man coming you know, their first their first prom their
first wedding, their first job interview, So entry level price points.
(25:47):
And you know, those guys are very sensitive to fit
and they're very sensitive to price, and they want to
buy something updated that doesn't look like they're dressing like
their grandfather. And the company had kind of missed the
boat on all counts. The board made a change and
put in a very very forward thinking, e commerce savvy
(26:09):
new CEO National and Densh was very much about modernizing
his management team, looking at data et cetera. And so
when Covid and he had been having this whole discussion
with his board about the fact that they needed to
exit about a thousand stores, they needed to completely re
merchandise the remaining store base all of that, and the
(26:30):
board was very reticent to do anything like that because
it would affect earning so drastically. So now you can
see where I'm going. Covid starts and he and I
sit down. We pulled together the rest of his new
management team and we talked through restructuring undercover of COVID.
Covid was going to ruin their earnings no matter what,
(26:54):
so why not be bold and take this once in
a lifetime opportunity to actually restructure the business. And that's
exactly what we did. We spent six months planning what
was going to happen before we even filed, so that
when we filed, we were in and out very quickly.
And it's been a huge success. The company is just
(27:17):
has really really done well in a tough category, you know,
because I mean, you're not wearing a suit today, you know.
The listeners can't see that. But he's not wearing a
suit at nor does most anybody wear a suit anymore
unless they really are in a situation where they need
to do one. And so, you know, it's a very
tough category. And you know, men want things with a
(27:38):
little bit of stretch in them. They don't want an
old fashioned white cotton dress shirt that doesn't have any
movement in it and all that. So they were able
to use that process to liquidate access inventory through the
closing stores and have room and liquidity to re merchandise
the stores in a way that then the company's been
(27:59):
exceed eating its business plan ever since we exited it. So,
you know, really great success story, but not everybody is
that bold to want to do that.
Speaker 3 (28:11):
That's great.
Speaker 1 (28:12):
You know one thing though, during the COVID pandemic, the
FED built out the economy and we had access to
you know, cheap cash. It's likely that we're not going
to see that happen again. So how is retail going
to cope with that?
Speaker 2 (28:26):
Well, the retail knows what its barring based is right now.
I mean again, you know, if you've got bonds in place,
you know those bond interest rates are not going to change, right,
So it's only your ABL and your ABL facilities are
at very very low interest rates to begin with, so
I don't see that issue at least short term impacting retailers.
Speaker 1 (28:50):
What are you telling retail You know, you see them
day today, so you know, kind of going back to
what you said, what is your advice to them?
Speaker 2 (28:58):
Well, alex Partners has a Terra for Room in place,
as do most major consulting firs, but I think ours
is better because we've got two of them. We've got
one focused on retail and consumer products and we went
one focused on automotive and industrials because they're very different
storylines as to what you're capable of doing in the interim.
On the retailing consumer products side, it's about cost reduction.
(29:22):
It's about making sure you're as diversified as you can be.
If you had been looking at diversifying as far as
your supplier base into other sectors but hadn't pulled the
trigger yet, now is the time to do it, and
really helping people manage through those issues. And then it's
you know, making sure that you're using sophisticated data analytics
(29:46):
in choosing your price points so that you're really capturing
as much of the consumer demand as you possibly can.
You're hitting those sensitive consumer prices. So you know, we're
working with any large scale retailers who again have this
very most of them, very long decision making cycle that's
(30:07):
got to be a lot shorter, and so helping them
build consensus internally using data to then make quick decisions
and have confidence in the decision that they're making and
how it's going to impact their business. Most people are
planning to be down. Most people are managing their fourth
quarter purchases down to take into account what they're anticipating
(30:32):
to be softness in consumer demand, being very careful with
their purchases and making sure that they're not stuck with
a bunch of excess inventory. I mean, we all remember
during the recession the racks and racks of on sale
clothing and on sale everything everywhere. They learned a lot
of really good lessons about inventory management from that cycle,
(30:52):
and a lot of them have incorporated it into their business.
And then it's really just getting your models up to
date on that. And then if you really think that's
going to cause you a liquidity issue, because there are
retailers who are still i mean black Friday is a
real thing, you know, which means you're in the black.
That's where Black Friday came from, is that a retailer
loses money the whole year and then they finally make money. Well,
(31:14):
while it's no longer the Friday before Thanksgiving because they
break price and break promotions earlier in November, it still
is a real thing. And so if you believe your
fourth quarter is going to be depressed to some degree,
you're negotiating with your lenders now to see what additional
(31:34):
liquidity relief you can get to get through that period
of time after Christmas where you're going to be paying
off your suppliers. And it's typically a low liquidity period
for retailers. It's a high liquidity period generally for consumer
products companies because then they're getting paid right after the
(31:55):
holidays because typically you're selling into retailers with extended terms,
more extended terms. So if you're you know, if your
typical terms with the retailer thirty forty five sixty days,
retailers will negotiate ninety to one hundred and twenty day
terms for that holiday period and then pay you after
(32:16):
so and then of course you need to put that
right back to work, because then you're trying to finish off,
you know, spring merchandise and get it into the stores.
Speaker 1 (32:24):
And is that something we're saying now longer payment.
Speaker 2 (32:26):
Term, Yes, okay, that is one of the things that
people are negotiating. The problem is is that during COVID,
additional capital for many of these consumer products and apparel
companies really just got destroyed. And so there are a
lot of companies overseas, and again we have to take
(32:50):
into account that the majority of this stuff comes from
outside the US. These are smaller factories, they work on
on less working capital, and they're still recovering from the
hit they took during COVID when they had to shut
their factory completely or they had massive orders canceled when
they already had purchased things and started them into work.
(33:14):
So there are many vendors who today at least have
less capability of negotiating that because they just don't have
the working capital to float for the retailer. Some are
doing better. Some the governments themselves have created private credit
(33:35):
funds that work sort of as a local factoring relationship
for those factories and granting credit to retailers. But if
you don't have that kind of backstop working with you,
then you really are going to find it very difficult
to get some of those longer terms. And less you're
working you're a very very very large business. You're a Target,
(33:57):
you're a Call's, you're a Macy's. You know, then you're
working with very large factories, and then you may have
a little bit more latitude to negotiate some of those things.
Speaker 1 (34:07):
Can you kind of explain what the factory means?
Speaker 2 (34:10):
Oh, factoring is the ability to sell your receivable or
borrow against your receivable under certain terms. When you're larger
as a consumer products company, you can get a traditional
credit line from a regular bank, you know, if you're
a US based company, But if you're small and you're
overseas that the factoring basically helps you manage your credit risk.
(34:33):
It's credit insurance essentially, and it also accelerates your ability
to get that cash. So if I've just shipped something
to Macy's and it's you know, multiple containers, it's a
very large order, it's a multimillion dollar order. Macy's has
sixty day terms with me, then I'm not going to
(34:53):
see that cash for sixty days. Well, I can go
to a factor. The factor will buy the receivable from
the equivalent and I'll get the cash today. Now I'll
get instead of getting the ten million dollars for the order,
maybe I'll only get nine because there'll be a discount
rate associated with it. But that's what factoring is.
Speaker 1 (35:13):
And what's the appetite for credit insurance providers? Given escalation
and tariffs? Do they have a big appetite to provide
insurance to distressed retailers? Are they starting to scale back?
Speaker 2 (35:26):
I think the answer is it depends if it's if
it's a large, well capitalized retailer. I think credit insurance
will continue to be there. The kinds and terms of
the insurance may change, the charge on it may change.
But the more distressed you are, the more difficult your
(35:48):
suppliers are going to find getting credit insurance, and so
that will force them to change their terms, shorten the terms. Basically,
so if I was able to in the past grant
you a sixty day term, I may now need to
get part of the cash up front. I may need
to get a deposit to put the goods into work
in the first place, you know, sort of a production
(36:11):
deposit against the materials. Costs, so I'm not out if
for some reason I don't get paid the balance.
Speaker 1 (36:17):
Do you expect to see a lot of suppliers at
liquidity issues.
Speaker 2 (36:22):
I think it depends on the supplier. The less well
capitalized suppliers are going to have issues, and the people
who are concentrated in China still are going to have
issues less so for places where the tariffs may be
(36:43):
moderated to lower levels. You know, the problem we have
right now is that American business, and particularly in the
consumer sector, which is where I primarily work, thrives on predictability,
at least the ability to believe you can predict what's
going to happen with the consumer. This is so unpredictable
(37:07):
moment by moment that you really can't figure out how
to react. You know, you're trying to predict consumer behavior,
and you're also trying to predict price, ultimate price, and
if both of those are moving on you constantly, what
you're going to do is you're going to default to
(37:30):
the most conservative view of the world and have the
point of view that if things are going well, you
can do what's called chase product, which means I placed
an original order with you for a million units, and
now I'd like to upsize it to a million two
(37:50):
because things are going well and things have moderated. So again,
it makes it really tough upstream on the suppliers because
they don't want to lose the sale. But what they're
going to have to do is they're going to have
to authorize over time and rush things into work and
maybe air freight things because the order has upsized. So again,
(38:14):
it creates additional cost for the supplier, and you know
they're going to have to just decide whether or not
they can even accommodate that if that happens, if there's
a recovery, for example, in the second half of the year,
and what if.
Speaker 1 (38:28):
Your most contrained view on the market.
Speaker 2 (38:31):
I think consumer demand across the board in the fourth
quarter will be down somewhere between five and ten percent.
That's kind of the data that I've seen that would
show that based upon what's going on today, particularly if
price increases hit to the degree that we think they
(38:55):
may if these tariffs stay in place. But we'll see,
I mean, maybe we'll be the chip industry and we'll
get a pass. On a day to day basis, you
just sort of don't know what's happening. And that's given
the lead times in producing product to sell to the customer.
Other than grocery, which is immediate, everything else has about
(39:17):
a four month plus lead time depending on where it's
coming from. So you know, you're trying to predict what
the consumer is going to want. You probably have a
good idea of what they want, but the question is
how much they're going to spend it at what price point?
You're trying to predict that four to six months out.
(39:37):
That's that's pretty hard in this environment.
Speaker 1 (39:40):
And as an advisor, how do you deal with that?
Speaker 2 (39:43):
If your lender is going to work with you, and
you have extra capital and you're willing to potentially take
market share, which some people are looking at. Am I
going to be the person that's going to be in
stock if the demand comes back, and I'll just take
the risk of having to deal with heavier markdowns. That's
one school of thought that people are doing. But a
(40:06):
lot of people who don't have excess capital are being
forced more into the other position, which is basically assuming
that demand is being down and playing very conservatively in
what they do because they can't afford to take the loss.
Speaker 1 (40:20):
And what do you worry about the most given of
this chaos.
Speaker 2 (40:25):
I worry that there are going to be some retail
and consumer boards that are going to be so stuck
in their debate about what to do or whether they
agree with management's recommendation, that the company will miss an
(40:46):
opportunity to do what it needs to do to succeed
through the next couple of years. And you know, once
a retailer in particular is out of cash, there is
very little place to go to generate additional liquidity to
fund a turnaround. And so you know, having seen several
(41:08):
of these, unfortunately over the past few years, where management
doesn't work seriously to do something about the business, or
where the board prevents them from doing it or whatever,
to the point that then when they're out, then, at
least in the sector in which I work in, unfortunately,
your unless you can do a very quick sale of
(41:29):
the business, you know, you're looking at a liquidation. And
so what I fear is that we will lose some
segments of the industry that could have been saved, that
there was a reason for them to continue to be
there because of this, you know, frozen decision making while
the company trails down.
Speaker 1 (41:49):
Holly This has been great stuff. Thank you so much,
Holli Utland, Managing director at Alex Partners. It's been a
real pleasure having you on the Credit Edge.
Speaker 2 (42:00):
Many thanks for joining us my pleasure.
Speaker 3 (42:03):
For more credit analysis, go to BI cred that's BI
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(42:28):
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us spread the word, and please do tell your friends.
I'm Steve Flynn. It's been a pleasure having you join
(42:48):
us again next week on the Credit Edge.
Hello, and welcome to the Credit Edge, a weekly markets proadcast.
My name is Rushmebasu. I am a senior reporter at
Bloomberg and I'm Steve Flynn, a senior analyst covering media
and Telecoms at Bloomberg Intelligence. This week, we are very
pleased to welcome Holly Etlin, Managing director at Alex Partners,
the financial advisory and global consulting firm.
Speaker 2 (00:41):
How are you today, Holly, I'm great, other than it's
a little rainy outside.
Speaker 1 (00:46):
Holly is an experienced executive with over thirty years of
experience in providing turnaround services for companies in the retail, distribution,
consumer products, financial services, media, and hospitality industry. She's a
certified turnaround professional and has been admitted to the American
College of Bankruptcy and the International Insolvency Institute. The Turnaround
(01:10):
Management Association has recognized Holly several times for her deal work,
and she's also been named Women of the Year in restructuring. Holly,
it's been a crazy time for the markets because of
the kind of escalating trade war. How is this impacting
the retail space?
Speaker 2 (01:28):
You know, the only way I can like in it
is it's very similar to the crisis that we had
during COVID, with the exception of the retailers are not
being forced to close, but every other element of disruption
is happening for retailers. You know, the time of the year.
Most retailers right now have to place fourth quarter orders,
(01:52):
I eat Christmas orders in the May time frame, and
this happening in April just couldn't be more terrible timing
from that perspective. They're trying to figure out how much
is consumer demand going to fall, whether tariffs are going
to be paused not paused. I mean, I don't even
(02:13):
know where we are today at this point. It's gone up,
it's gone down, it's gone sideways. And even though many
of them have diversified post COVID away from a dependence
on China, there's still are substantial components of their business there.
And then frankly, they're in They're in Vietnam, they're in Indonesia,
they're in Mexico, and all of those places are going
(02:38):
to have increased prices, so really difficult conversations. And you know,
and I sit in with these management teams, and you know,
the divergence of opinion, just like Frankly, we have divergence
of opinion in America today about what's going to actually
stick and what's not going to stick, and the spirited debates,
(02:58):
but they're they're coming at a point at which they
have to accelerate what their decision making process is. And
many retailers, particularly the very large ones, are very methodical
in their data analytics around consumer demand and what's selling,
what's not selling, What are we going to bring in
at what price point? What retail price point do we
(03:19):
have to hit? And so the debate is, you know,
first of all, do we order the same amount and
then second of all, how are we going to price
it to still hit the target price points that we
have known they create consumer demand, and so it's a
little crazy, you know, and retailers are canceling orders that
(03:41):
we've heard from some of our major clients that what
they're going to do is they're going to live with
most of the Q three inventory that they've already ordered,
that's already in work and ready to ship, and just
going to do fill in for Q four for the
holiday season. So real divergent, real crisis, everybody going nuts.
Speaker 1 (04:05):
And one thing that we saw in December was we
saw a slew of retailers file for Chapter eleven protection
before the end of the holiday season. Why was that
and what does that tell us about the health of
the retail and the consumer? And then what does that
mean for twenty twenty.
Speaker 2 (04:23):
Five retailers filing in either December or January? Historically is
I guess it would be We would say it's a
high frequency time for retailers to file, and it's mainly
because that's a time of the year when they have
a lot more cash. You need cash, you need liquidity
(04:44):
to make it through a Chapter eleven process or frankly
even to just successfully liquidate in a Chapter eleven process.
And so typically we see people file in that sort
of holiday timeframe when they haven't necessarily paid all their
bills for holiday, but they have all the cash so.
Speaker 3 (05:04):
To follow up on your liquidity point there, So how
do a lot of retailers think about financing themselves? Now,
we've seen a ton of volatility underlying rates, spreads have
moved a lot in the high yield market. We're seeing
a slowdown in issuance in high yeld and levered loans.
So retails, if you're preparing for this uncertainty. What sort
(05:25):
of liquidity maneuvers can you do right now?
Speaker 2 (05:27):
Boy, it's tough if you're distressed the lower performing retailers
while they do some of the larger people have public
data outstanding. You're also financing your business day to day
using an asset based lending facility, and those facilities are
predicated on the liquidation value of your inventory. And those
(05:51):
values have been moving down because we have seen in
the last few major liquidations liquidation results not be equal
to what the appraised value or the or the estimated
liquidation value was of that inventory. It's often referred to
the term of art as net orderly liquidation value or
(06:12):
n ol V, and that's the piece. You know, while
you may have your bonds in place, you're going to
be as someone who's underperforming, you're going to be just
making sure that you're in compliance, you don't trip a
trigger in your bonds, but you're also living with your
ABL facility, and if that starts to contract, that's going
(06:36):
to be problematic.
Speaker 1 (06:38):
Are you seeing asset based lenders become more conservative with
providing money to companies.
Speaker 2 (06:44):
Well, there's a move afoot to try to bring these
net orderly liquidation values, or these appraised values of inventory
more into line with the results that have been seen
in the last few major liquidations. And then you know,
you've got the whole issue of tariffs and what is
(07:05):
Terift's going to do, because again, the net orderly liquidation
value is an appraisal done by a liquidation firm. It's
really it's their stamp behind what they believe the company
will really liquidate at. And it's very sensitive to the
cost retail relationship or the net gross margin relationship. And
(07:27):
if the retailer, for example, takes an increase in the
cost value the inventory but doesn't pass it along to
the consumer, that's actually going to cause the net orderly
liquidation value to go down, not up, because again it's
very sensitive to that relationship. So retailers and their lenders
(07:50):
were already worried about what had been seen with these
major retail liquidations not coming in on value either. Because
Shrink was and shrink is. Everybody thinks of Shrink as being,
you know, theft. It's not mainly theft. What it is
is accumulated errors in the system, in the accounting system
(08:11):
of the company or in the inventory system. And we've
seen companies that, for example, had shrink reserves in there
NOLV that said, well, when we liquidate it, we're going
to have this much less inventory to sell. And maybe
those were estimated at three percent or four percent and
(08:31):
the actual came in at fifteen to twenty percent. That's
material and that reduces the recovery that the asset based
lender gets, and so that causes them to be concerned
going forward in how much of a reserve can we
have in that?
Speaker 1 (08:47):
Does that mean reserve if you can explain sure.
Speaker 2 (08:50):
So let's say I, you know, I'm X y Z retailer,
and I've got a billion dollars worth of inventory, and
and I want to have an asset based facility based
upon that, and there is a net orderly liquidation value,
let's say, of eighty cents on that billion. In addition
(09:14):
to that eighty cents, the lender will only lend eighty
five ninety ninety five percent of that eighty cents, and
then they will put in additional blocks and reserves that
either exist all the time or arise when the availability
(09:35):
under the loan falls below a certain value. So when
you fully drawn, let's say, so if I gave you
eight hundred million dollars of actual borrowing capability. Once you
get up to seven hundred, I might have a springing
reserve that goes in which reduces the amount that you
can borrow. And those are typically intended to, among other things,
(09:58):
cover the cost of a proceeding a liquidation proceeding in bankruptcy,
And of course that's the other issue. The costs of
winding down a business for those that have liquidated has
exceeded those reserves. So you've got maybe not all the
inventory is there, and it's maybe more or maybe it's
(10:19):
bringing in less than the appraisal, and the block or
the reserve that you had in place gets exceeded, and
now all of a sudden, the bank is having to
look to other assets in the liquidation for their recovery.
Speaker 3 (10:33):
Now, when things start to move and where in periods
of stressed like we're seeing now, how willing are the
lenders to work with the company and give some sort
of relief and give them some maybe extra time to
solve some of these issues.
Speaker 2 (10:46):
If the lenders believe that the company is headed in
the right direction, management's got to turn around and process
there are let's say they need to do a reset
of how their stores are configured or their merchandise. They've
got some tests doors up and running. Those are showing
great results. You know, the chain may be down by
one or two percent in sales, but the test stores
(11:07):
are running at a plus ten. Now, all of a sudden,
the bank can see that management really is addressing the
issues with the business and headed in the right direction.
They're going to work with them. And no asset base
lender likes to liquidate a customer. That's not what they're
there for. They're there to provide a needed line of credit.
(11:29):
And so if they think the company is heading in
the right direction, yes, they will work with them. If
they don't think the company is heading in the right direction,
they will be less inclined to, you know, release reserves
or do something else for some period of time. Again,
these asset based lending facilities are also very dynamic as
(11:53):
to advance rate. Often they have monthly or quarterly changes
depending on how seasonal particular retailer is, where they'll advance
more in the high season and less in less times
of the year. So they do want to work with them,
it's just they also want to get their money back
(12:16):
if things don't go well and the company liquidates, and unfortunately,
a very high percentage of distress retailers end up liquidating
these days.
Speaker 3 (12:27):
Now, I know you're an expert in retail, but if
we've broughten out a little bit to either more consumer
discretionary or other sectors, what other groups you see as
exposed to the tariff uncertainty that we have now.
Speaker 2 (12:40):
Well, everyone consumer producing any kind of a consumer product,
be it apparel, be it hard goods, be it furniture.
The vast majority of lower cost items are produced outside
of the United States. So it just goes to reason
that you're going to get hit with higher costs.
Speaker 1 (13:00):
And who's going to take those costs? Is it up
to the retailer to eat the cost or pass it
down to the consumer? And how those the retailer and
the supplier, how those negotiations going.
Speaker 2 (13:13):
There's some very tough negotiations because you've not only got
the issue around the price of the goods potentially changing,
but the quantity because again, as I mentioned, the retailers
are really looking at it it prior downturns. And let's
set COVID aside for a second, but if we look
at eighty seven. We look at the recession, we look
(13:33):
at some of the other blips in the economy, you
generally saw consumer demand going down by more than the
SMP average. So the S and P went down by ten,
the consumers went down by twelve, you know, And so
if you're looking at where we are today, those are
(13:53):
the numbers that retailers are looking at. They're looking at,
you know, where's our demand going to go? Is it
going to go down by ten? Is it going to
go down by fifteen? So not only are you negotiating
on price, because it's critical to maintain your margins, particularly
in a lower sales environment, but it's also about you're
(14:14):
cutting back the amount you're even going to place with
the vendor in the first place. So very very tough
negotiations going on right now and trying to figure out
which categories are continue going to continue selling. Again. We
you know, everyone's seen the consumer typically in tough economic times,
trades down, they trade down in price, they go from
(14:38):
shopping at a department store to shopping at a discount
store or shopping at a dollar store. So you've got
that issue going on, so huge price sensitivity, and so
what the retailers are trying to do is see how
much whether they can split it, you know, whether the
(14:59):
vendor can absorb some piece of it and the retailer can,
so that maybe that if it's a small enough percentage
that then they can try to hold price. And remember
a lot of the goods that they're going to be
placing orders for in May are going to be the
promotional items for the holiday season. So those are things
that are typically produced in volume at a very sharp
(15:21):
price point with the vendor. And so now the vendors
looking at this and going, well, can I even meet
this price point which was a stretch for me before
because I was giving you a deal because you were
given the customer a deal.
Speaker 1 (15:34):
With then vtail which segments are or categories are going
to hurt the most from the tariffs.
Speaker 2 (15:41):
It's kind of across the board depending on where the
goods come from. But people who traffic in smaller in
it more inexpensive items, you know, like craft stores or
small costume jewelry things like that, small all electronics, things
(16:01):
that you might give somebody as a stocking stuff or
you might order on Amazon. Those products are less diversified
away from China, So those kinds of products are going
to be more harder hit. And also because they're already
a very low cost item, small increases in price. The
(16:22):
consumer is very price sensitive. You know, if they're looking
for a five or ten dollars item to you know,
do in a gift exchange or whatever, and the price
of the item goes up to twelve or thirteen, they're
probably not going to buy it, right. So, you know,
all of the kinds of businesses or the segments of retailers,
even the stuff you know, the non food aisle at
(16:45):
the grocery store, those kinds of items. You know, anything
that's a lower priced item is going to be impacted.
Speaker 3 (16:54):
We talked a little bit about the retailers that have
too much debt and working with their asset based lenders,
but think about companies in general that have too much debt.
A lot of high healed companies, particularly my sector, communications sector,
we've seen a ton of this and we'll probably see more.
A lot of companies will pursue liability management exercises, whereby
bondholders agree to exchange their bonds or loans for longer
(17:18):
dated obligations that are often better positioned than the capital structure.
Likely they'll have security if they were unsecured before, or
being a better part of the capital structure, But they
often have to take a haircut to the principle that
own companies benefit. Right, they push out debt maturities, they
lower their overall debt. But in your experience, do these
(17:40):
exercises really put the company in that much better of
a position. Do they solve any issues or do they
just delay the problem?
Speaker 2 (17:47):
Depends on what management has planned for the company very much.
If what this is intended to do is to give
management the breathing space to finish a turnaround that's already
in progress, then it's a great thing. If, however, it's intended,
and this is obviously my personal opinion having seen a
(18:08):
bunch of these, it's intended to provide a substantial amount
of additional working capital of the business, a cash infusion
that rarely happens, because while the headline number may be
that you're getting an extra two hundred million dollars, by
the time everybody gets done with their sinking fund for
(18:30):
interest and their fee and their fee on the fee.
Oh and then there's the additional fee that all gets
added or sweeps away cash or adds to debt. What
you end up with is way less cash than what
the goal was originally and way more debt. And unless
the business is really rebounding, it just it just kicks
(18:54):
the cand down the road.
Speaker 3 (18:55):
Gotcha. And if you're a management team this may sound
a little cynical, but do you want to drink this
right before things are turning around?
Speaker 1 (19:02):
Right?
Speaker 3 (19:02):
So that you're trying to incentivize debt holders to participate, right,
so you want them to move forward? So is it
best to do it when you know you've reported a
few bad results quarterly results, as you're getting ready to
turn around, but you foresee that things are about to
turn around, and now's the time to do it.
Speaker 2 (19:20):
Everybody's got a theory around that, right. You know. On
the one hand, you don't want to show your cards
because then they'll say, well, why do I need to
do this at all because it looks like you're actually
going to be able to pay me in the future.
On the other hand, you may really need the money,
you really need the relief, and have no choice. You know,
every situation is unfortunately different and different in because of
(19:43):
the parties that are in it. It's you would like
to think that there's an empirical way to just run
the numbers. Right, we're all data people, and let's run
the numbers, and well, this will be the good time
to do it, because you know, it'll take this much
time to get the deal done and this is when
we need the money and all of that. But most
people try to paint a relative leak somewhat dire, but
(20:09):
not we're going to liquidate dire situation because obviously if
you're can liquidate, then why would somebody give up their position,
right or compromise their position. But it has to be
negative enough that somebody will think that at least if
they do this, then there'll be money good on that
other piece. I mean, you know, so many of these
(20:32):
just turn out to be somebody just not wanting to
mark down their book and what they've got in the business.
And you know, we even see that in bankruptcies. You
see things that in the past, you know, the debt
would have converted to equity, you would have left the
company highly unleveraged. And we saw a bunch of those
during COVID for consumer companies and retailers that then the
(20:57):
company has thrived, right because it's debt free or it's
highly deleverage. But then you see these other things where yeah,
they take equity, but they also leave the vast majority
of debt on the books because they don't want to
give up their position if there's a further downturn. They
want to be in a lender seat rather than an
equity holder seat, and that just further straps the company
(21:19):
and you know, basically ends up with the inevitable liquidation.
Speaker 3 (21:24):
So in dealing with management teams who are working down
this road, have you seen any sort of big difference
between a management team where it's family owned or significant
stakes in the equity as opposed to a broadly held
public company, right, because there's been some articles written that
it's the family controlled companies are much tougher negotiators because
(21:44):
it's much tougher forget than to kind of give up
equity with regard to any sort of a structuring.
Speaker 2 (21:48):
Well, you could put family owned and private equity owned
in the same boat. Yeah, you know, family owned, they
may or may not be have the same degree of
sophistication as a private equity owner. Private equity owners are
tough negotiators with regard to these lemies. You know, they're
looking to maintain their control of the business and their
(22:11):
investment in the business.
Speaker 1 (22:13):
Do you expect to see more elemies in twenty twenty
five or do you think more companies are just going
to skip that process and go straight to chapter eleven.
Speaker 2 (22:23):
You know, the problem with chapter eleven today is the
cost of the process has gotten so high that you
really do a cost benefit analysis of what are the
fees going to be? And you know, while the company
professionals may be able to control their fees to some degree,
you can't control the professionals for the various creditor groups.
(22:45):
And some people just go off the reservation completely and
just go out there and run up all sorts of
fees just because that's in their interest and it's not
necessarily productive to the case, and so it's become a
huge disincentive to actually do a real restructuring in a bankruptcy.
(23:07):
People try to get in and get out as quickly
as they can to minimize the feeburn, and they don't
often use the process in the way it can be
used to shut unproductive plants, exit unproductive contracts. You know,
you need time to do that, You need to be able,
you need to have negotiating time with your significant counterparties
(23:31):
in those and people just don't want to do it.
They want to go in and go out, restructure the
balance sheet, put everybody into the place that they agreed
to be, and nothing in that addresses the underlying business issue.
So I think there's a huge disincentive these days to
go into bankruptcy unless you really have a clear path
(23:54):
that you've already laid out and you've convinced your stakeholders
is the best path to take. And so I suspect
we will see a bunch more elemies.
Speaker 3 (24:04):
So experts like yourself are here to help management teams.
So when would you normally get involved with a company
or management teams willing to hire outside experts at first
signs of trouble? Or is it more when companies get
into real distress and you have outside parties. So are
your relationships more with management teams, with investors or all
(24:24):
the above.
Speaker 2 (24:25):
It's a little bit of all of the above. I'm
a true turnaround person. I don't My work is not
here to just facilitate your bankruptcy and do the administrative
components of the bankruptcy and the cash flow forecasts. My
work is to help you actually save the business. If
management and the board are thinking well enough ahead of
(24:46):
what needs to happen, they definitely you will hire us earlier.
Often though in my industries that I work in, we
get hired way too late. But you know, if you
don't mind, I'll tell you about a really wonderful success story.
Speaker 3 (25:02):
We love post stories.
Speaker 2 (25:04):
So Taylor Brands. Taylor Brands is the parent company of
Joseph A. Banks and the Men's Warehouse, and leading into COVID,
the company had experienced many quarters public company, many quarters
of sales declines. There had been incorrect pricing decisions, there
(25:27):
had been they weren't following their market obviously. You know,
the Men's Warehouse is an entry level product for young
man coming you know, their first their first prom their
first wedding, their first job interview, So entry level price points.
(25:47):
And you know, those guys are very sensitive to fit
and they're very sensitive to price, and they want to
buy something updated that doesn't look like they're dressing like
their grandfather. And the company had kind of missed the
boat on all counts. The board made a change and
put in a very very forward thinking, e commerce savvy
(26:09):
new CEO National and Densh was very much about modernizing
his management team, looking at data et cetera. And so
when Covid and he had been having this whole discussion
with his board about the fact that they needed to
exit about a thousand stores, they needed to completely re
merchandise the remaining store base all of that, and the
(26:30):
board was very reticent to do anything like that because
it would affect earning so drastically. So now you can
see where I'm going. Covid starts and he and I
sit down. We pulled together the rest of his new
management team and we talked through restructuring undercover of COVID.
Covid was going to ruin their earnings no matter what,
(26:54):
so why not be bold and take this once in
a lifetime opportunity to actually restructure the business. And that's
exactly what we did. We spent six months planning what
was going to happen before we even filed, so that
when we filed, we were in and out very quickly.
And it's been a huge success. The company is just
(27:17):
has really really done well in a tough category, you know,
because I mean, you're not wearing a suit today, you know.
The listeners can't see that. But he's not wearing a
suit at nor does most anybody wear a suit anymore
unless they really are in a situation where they need
to do one. And so, you know, it's a very
tough category. And you know, men want things with a
(27:38):
little bit of stretch in them. They don't want an
old fashioned white cotton dress shirt that doesn't have any
movement in it and all that. So they were able
to use that process to liquidate access inventory through the
closing stores and have room and liquidity to re merchandise
the stores in a way that then the company's been
(27:59):
exceed eating its business plan ever since we exited it. So,
you know, really great success story, but not everybody is
that bold to want to do that.
Speaker 3 (28:11):
That's great.
Speaker 1 (28:12):
You know one thing though, during the COVID pandemic, the
FED built out the economy and we had access to
you know, cheap cash. It's likely that we're not going
to see that happen again. So how is retail going
to cope with that?
Speaker 2 (28:26):
Well, the retail knows what its barring based is right now.
I mean again, you know, if you've got bonds in place,
you know those bond interest rates are not going to change, right,
So it's only your ABL and your ABL facilities are
at very very low interest rates to begin with, so
I don't see that issue at least short term impacting retailers.
Speaker 1 (28:50):
What are you telling retail You know, you see them
day today, so you know, kind of going back to
what you said, what is your advice to them?
Speaker 2 (28:58):
Well, alex Partners has a Terra for Room in place,
as do most major consulting firs, but I think ours
is better because we've got two of them. We've got
one focused on retail and consumer products and we went
one focused on automotive and industrials because they're very different
storylines as to what you're capable of doing in the interim.
On the retailing consumer products side, it's about cost reduction.
(29:22):
It's about making sure you're as diversified as you can be.
If you had been looking at diversifying as far as
your supplier base into other sectors but hadn't pulled the
trigger yet, now is the time to do it, and
really helping people manage through those issues. And then it's
you know, making sure that you're using sophisticated data analytics
(29:46):
in choosing your price points so that you're really capturing
as much of the consumer demand as you possibly can.
You're hitting those sensitive consumer prices. So you know, we're
working with any large scale retailers who again have this
very most of them, very long decision making cycle that's
(30:07):
got to be a lot shorter, and so helping them
build consensus internally using data to then make quick decisions
and have confidence in the decision that they're making and
how it's going to impact their business. Most people are
planning to be down. Most people are managing their fourth
quarter purchases down to take into account what they're anticipating
(30:32):
to be softness in consumer demand, being very careful with
their purchases and making sure that they're not stuck with
a bunch of excess inventory. I mean, we all remember
during the recession the racks and racks of on sale
clothing and on sale everything everywhere. They learned a lot
of really good lessons about inventory management from that cycle,
(30:52):
and a lot of them have incorporated it into their business.
And then it's really just getting your models up to
date on that. And then if you really think that's
going to cause you a liquidity issue, because there are
retailers who are still i mean black Friday is a
real thing, you know, which means you're in the black.
That's where Black Friday came from, is that a retailer
loses money the whole year and then they finally make money. Well,
(31:14):
while it's no longer the Friday before Thanksgiving because they
break price and break promotions earlier in November, it still
is a real thing. And so if you believe your
fourth quarter is going to be depressed to some degree,
you're negotiating with your lenders now to see what additional
(31:34):
liquidity relief you can get to get through that period
of time after Christmas where you're going to be paying
off your suppliers. And it's typically a low liquidity period
for retailers. It's a high liquidity period generally for consumer
products companies because then they're getting paid right after the
(31:55):
holidays because typically you're selling into retailers with extended terms,
more extended terms. So if you're you know, if your
typical terms with the retailer thirty forty five sixty days,
retailers will negotiate ninety to one hundred and twenty day
terms for that holiday period and then pay you after
(32:16):
so and then of course you need to put that
right back to work, because then you're trying to finish off,
you know, spring merchandise and get it into the stores.
Speaker 1 (32:24):
And is that something we're saying now longer payment.
Speaker 2 (32:26):
Term, Yes, okay, that is one of the things that
people are negotiating. The problem is is that during COVID,
additional capital for many of these consumer products and apparel
companies really just got destroyed. And so there are a
lot of companies overseas, and again we have to take
(32:50):
into account that the majority of this stuff comes from
outside the US. These are smaller factories, they work on
on less working capital, and they're still recovering from the
hit they took during COVID when they had to shut
their factory completely or they had massive orders canceled when
they already had purchased things and started them into work.
(33:14):
So there are many vendors who today at least have
less capability of negotiating that because they just don't have
the working capital to float for the retailer. Some are
doing better. Some the governments themselves have created private credit
(33:35):
funds that work sort of as a local factoring relationship
for those factories and granting credit to retailers. But if
you don't have that kind of backstop working with you,
then you really are going to find it very difficult
to get some of those longer terms. And less you're
working you're a very very very large business. You're a Target,
(33:57):
you're a Call's, you're a Macy's. You know, then you're
working with very large factories, and then you may have
a little bit more latitude to negotiate some of those things.
Speaker 1 (34:07):
Can you kind of explain what the factory means?
Speaker 2 (34:10):
Oh, factoring is the ability to sell your receivable or
borrow against your receivable under certain terms. When you're larger
as a consumer products company, you can get a traditional
credit line from a regular bank, you know, if you're
a US based company, But if you're small and you're
overseas that the factoring basically helps you manage your credit risk.
(34:33):
It's credit insurance essentially, and it also accelerates your ability
to get that cash. So if I've just shipped something
to Macy's and it's you know, multiple containers, it's a
very large order, it's a multimillion dollar order. Macy's has
sixty day terms with me, then I'm not going to
(34:53):
see that cash for sixty days. Well, I can go
to a factor. The factor will buy the receivable from
the equivalent and I'll get the cash today. Now I'll
get instead of getting the ten million dollars for the order,
maybe I'll only get nine because there'll be a discount
rate associated with it. But that's what factoring is.
Speaker 1 (35:13):
And what's the appetite for credit insurance providers? Given escalation
and tariffs? Do they have a big appetite to provide
insurance to distressed retailers? Are they starting to scale back?
Speaker 2 (35:26):
I think the answer is it depends if it's if
it's a large, well capitalized retailer. I think credit insurance
will continue to be there. The kinds and terms of
the insurance may change, the charge on it may change.
But the more distressed you are, the more difficult your
(35:48):
suppliers are going to find getting credit insurance, and so
that will force them to change their terms, shorten the terms. Basically,
so if I was able to in the past grant
you a sixty day term, I may now need to
get part of the cash up front. I may need
to get a deposit to put the goods into work
in the first place, you know, sort of a production
(36:11):
deposit against the materials. Costs, so I'm not out if
for some reason I don't get paid the balance.
Speaker 1 (36:17):
Do you expect to see a lot of suppliers at
liquidity issues.
Speaker 2 (36:22):
I think it depends on the supplier. The less well
capitalized suppliers are going to have issues, and the people
who are concentrated in China still are going to have
issues less so for places where the tariffs may be
(36:43):
moderated to lower levels. You know, the problem we have
right now is that American business, and particularly in the
consumer sector, which is where I primarily work, thrives on predictability,
at least the ability to believe you can predict what's
going to happen with the consumer. This is so unpredictable
(37:07):
moment by moment that you really can't figure out how
to react. You know, you're trying to predict consumer behavior,
and you're also trying to predict price, ultimate price, and
if both of those are moving on you constantly, what
you're going to do is you're going to default to
(37:30):
the most conservative view of the world and have the
point of view that if things are going well, you
can do what's called chase product, which means I placed
an original order with you for a million units, and
now I'd like to upsize it to a million two
(37:50):
because things are going well and things have moderated. So again,
it makes it really tough upstream on the suppliers because
they don't want to lose the sale. But what they're
going to have to do is they're going to have
to authorize over time and rush things into work and
maybe air freight things because the order has upsized. So again,
(38:14):
it creates additional cost for the supplier, and you know
they're going to have to just decide whether or not
they can even accommodate that if that happens, if there's
a recovery, for example, in the second half of the year,
and what if.
Speaker 1 (38:28):
Your most contrained view on the market.
Speaker 2 (38:31):
I think consumer demand across the board in the fourth
quarter will be down somewhere between five and ten percent.
That's kind of the data that I've seen that would
show that based upon what's going on today, particularly if
price increases hit to the degree that we think they
(38:55):
may if these tariffs stay in place. But we'll see,
I mean, maybe we'll be the chip industry and we'll
get a pass. On a day to day basis, you
just sort of don't know what's happening. And that's given
the lead times in producing product to sell to the customer.
Other than grocery, which is immediate, everything else has about
(39:17):
a four month plus lead time depending on where it's
coming from. So you know, you're trying to predict what
the consumer is going to want. You probably have a
good idea of what they want, but the question is
how much they're going to spend it at what price point?
You're trying to predict that four to six months out.
(39:37):
That's that's pretty hard in this environment.
Speaker 1 (39:40):
And as an advisor, how do you deal with that?
Speaker 2 (39:43):
If your lender is going to work with you, and
you have extra capital and you're willing to potentially take
market share, which some people are looking at. Am I
going to be the person that's going to be in
stock if the demand comes back, and I'll just take
the risk of having to deal with heavier markdowns. That's
one school of thought that people are doing. But a
(40:06):
lot of people who don't have excess capital are being
forced more into the other position, which is basically assuming
that demand is being down and playing very conservatively in
what they do because they can't afford to take the loss.
Speaker 1 (40:20):
And what do you worry about the most given of
this chaos.
Speaker 2 (40:25):
I worry that there are going to be some retail
and consumer boards that are going to be so stuck
in their debate about what to do or whether they
agree with management's recommendation, that the company will miss an
(40:46):
opportunity to do what it needs to do to succeed
through the next couple of years. And you know, once
a retailer in particular is out of cash, there is
very little place to go to generate additional liquidity to
fund a turnaround. And so you know, having seen several
(41:08):
of these, unfortunately over the past few years, where management
doesn't work seriously to do something about the business, or
where the board prevents them from doing it or whatever,
to the point that then when they're out, then, at
least in the sector in which I work in, unfortunately,
your unless you can do a very quick sale of
(41:29):
the business, you know, you're looking at a liquidation. And
so what I fear is that we will lose some
segments of the industry that could have been saved, that
there was a reason for them to continue to be
there because of this, you know, frozen decision making while
the company trails down.
Speaker 1 (41:49):
Holly This has been great stuff. Thank you so much,
Holli Utland, Managing director at Alex Partners. It's been a
real pleasure having you on the Credit Edge.
Speaker 2 (42:00):
Many thanks for joining us my pleasure.
Speaker 3 (42:03):
For more credit analysis, go to BI cred that's BI
space cried on the Bloomberg terminal. Bloomberg Intelligence is part
of our research department, with five hundred analysts and strategists
working across all markets across the globe. Coverage includes over
two thousand equities and credits and outlooks on more than
ninety industries and one hundred market indices, currencies and commodities.
(42:28):
Please do subscribe to the Credit Edge wherever you get
your podcasts. We're on Apple, Spotify and all other good
podcast providers, including the Bloomberg Terminal at B pod Go
that's bpod space go. Give us a review. It helps
us spread the word, and please do tell your friends.
I'm Steve Flynn. It's been a pleasure having you join
(42:48):
us again next week on the Credit Edge.
Host
James Crombie
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