Retail’s Unprecedented Reset Presentation to TMA SE Conference June, 2017
Status of the U.S. Retail Industry
Status of the U.S. Retail Industry Retail sales growth remains stubbornly substandard Retail sales growth remains stubbornly substandard It’s been an uninspiring recovery for U.S. retail sales compared to economic growth cycles of the late ‐ 1990’s and mid ‐ 2000’s with growth in discretionary spending slowing to 3% in 2016 from 4% in 2015. Consumers say they are fairly upbeat on the economy, as well as their personal finances. U. S. DISCRETIONARY RETAIL SALES Retail sales (excl. food services, autos & gas) Adjusted GAFO 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Discretionary spending (we use the GAFO category as our proxy) and of non ‐ store sales since 1993 as reported to the U.S. Bureau of the Census (“BOC”). GAFO represents firms that specialize in merchandise consisting of furniture & home furnishings; electronics & appliances; clothing & accessories; sporting goods; hobby, books and music; general merchandise; office supplies and stationery; and gift stores. 3
Status of the U.S. Retail Industry Many retailers with operational challenges Many retailers with operational challenges Most metrics declining since late 2014 across all sectors. PERFORMANCE OF 120 PUBLIC RETAILERS WITH SALES OVER $100M O A C O 120 U LIC AIL S WI H SAL S OV $100 Total Sales Growth EBITDA Margin (Nominal, YOY % Change) General Merchandise Supermarkets General Merchandise General Merchandise S permarkets Supermarkets Apparel Home-Related Apparel Home-Related 12% 14% 11% 12% 10% 10% 8% 9% 6% 8% 4% 7% 2% 6% 6% 0% 0% 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Return on Invested Capital General Merchandise Supermarkets Apparel Home-Related Miscellaneous Total 28% 28% 23% 18% Source: US Census Bureau and SEC Filings 13% 8% 4 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Status of the U.S. Retail Industry Retail bankruptcies have increased in 2017 Retail bankruptcies have increased in 2017 Doubling in large (>$50M liabilities) retail bankruptcies in 2017 versus this time last year Particular stress in regional department and grocery stores, sporting goods and electronics segments Two thirds of large retail bankruptcies in YTD 2017 were private equity backed RETAIL RESETS Particular stress in sporting goods, regional Major Retail Bankruptcies Filed Chapter 11 Filed Chapter 11 department stores and Filed Chapter 11 Closing approx. 120 YTD 2017 Vs 2016 ($M) 0 s 0 6 ($ ) Liquidating all 126 electronics sub segments Closing 400 stores Closing 400 stores stores stores locations $5,000 15 12 Particular stress in Particular stress in Particular stress in $4,000 sporting goods, regional sporting goods, regional sporting goods, regional 6 Filed Chapter 11 Filed Chapter 11 Filed Chapter 22 10 10 depa t e t sto es a d department stores and department stores and depa t e t sto es a d department stores and depa t e t sto es a d $3,000 $3 000 Selling 50 of 107 locations. Liquidating all 220 Closing approx. 120 electronics sub segments electronics sub segments electronics sub segments Balance to be liquidated. locations locations $4,466 $2,000 5 $2,997 Particular stress in Particular stress in Particular stress in $1,000 $ , sporting goods, regional ti d i l sporting goods, regional ti d i l sporting goods, regional ti d i l Filed Chapter 11 Filed Chapter 22 department stores and department stores and department stores and Filed Chapter 11 $ ‐ 0 Liquidating all 250 electronics sub segments electronics sub segments Liquidating all 142 electronics sub segments Pursuing a sale locations 2016 2017 locations Closing 9+ locations Particular stress in P ti l t i P Particular stress in ti l t i P Particular stress in ti l t i Liabilities Cases Filed of 440 total in 2017 sporting goods, regional sporting goods, regional sporting goods, regional Reset plan to Closing 150+ locations 2017 Liquidating all 180 locations department stores and department stores and department stores and expand to 1,200 CEO reports turnaround To exclusively focus on electronics sub segments electronics sub segments electronics sub segments Source: The Deal, retail bankruptcy filings > $50M liabilities through May 19, 2017 5 locations slower than expected online sales
Status of the U.S. Retail Industry Retail bankruptcies commonly end in liquidation Retail bankruptcies commonly end in liquidation U.S. Bankruptcy law is debtor friendly, with a preference for the company to reorganize or sell as a going concern and emerge with a ‘fresh start’. Successful reorganization requires a strategic plan prior to filing bankruptcy, particularly in retail cases. RETAIL BANKRUPTCY CHALLENGES 503(b)(9) Claims Retailer must pay vendors in full for value of goods received in the 20 p y f f f g days immediately preceding bankruptcy filing. Lease Burden 49% 49% Retailers have 210 days post ‐ bankruptcy to accept / reject leases, which becomes even shorter given 90 days inventory liquidation runway. becomes even shorter given 90 days inventory liquidation runway. Senior Lenders Debtor ‐ in ‐ possession or ABL loans typically mandate short going ‐ concern sale timeframes to ensure sufficient time to sell inventory prior Percentage of retail bankruptcies Percentage of retail bankruptcies to lease rejection deadline to lease rejection deadline. that ended in liquidation. This is in Liquidation Value contrast to less than 25% for Liquidation value of retail estate, including easy ‐ to ‐ sell inventory and IP, nonretail bankruptcies. often exceeds going concern value of bids received. Timeline for li liquidations are typically shorter today. id ti t i ll h t t d Source: Article by FTI Consulting staff in American Bankruptcy Institute Journal, October 2016. 6
How Did We Get Here?
How Did We Get Here? Trends We’re Seeing Trends We’re Seeing Ways to Win Risks and Threats Customize in ‐ store experience Saturated store market and increased online competition Work with mall owners to improve Work with mall owners to improve Shift in consumer spending habits overall shopping experience and drive foot traffic from ‘things’ to ‘experiences’ Embrace Artificial Intelligence retail Significant debt post private support (i.e. Macy’s On Call). acquisition and upcoming maturities (Claire’s, Gymboree, Rue 21...) Develop omni ‐ channel connectivity High cost of online investment Data driven Loyalty Programs Onerous operating lease obligations l bl Customer focus on value (TJ Maxx, Changing consumer tastes Dollar Tree) or specialty offerings (Ulta Warby Parker) (Ulta, Warby Parker) Undisciplined discounting 8
How Did We Get Here? Alternate Strategies Alternate Strategies Pure Online Retailer (Wet Seal, Nasty Gal, The Limited, bebe) Close unprofitable stores, maintain brick ‐ and ‐ mortar presence (Gordmans, BCBGMAXAZARIA, rue21, Payless) (Gordmans, BCBGMAXAZARIA, rue21, Payless) Majority online sales with flagship stores Majority online sales, with flagship stores (Warby Parker, Bonobos, Birchbox, Casper) Liquidation (Sports Authority, Sports Chalet, hhgregg, RadioShack 22) 9
How Did We Get Here? Flat Retail Recovery Flat Retail Recovery Retail recovery has been uninspiring with a steady decline in GAFO sales growth since 2011, with 2016 ending flat. The grocery sector has been mostly flat with a few upticks. Department stores and electronics / appliance stores particularly hard hit in past two years U S RETAIL SALES – SUBSECTOR YEAR OVER YEAR CHANGE U.S. RETAIL SALES SUBSECTOR YEAR OVER YEAR CHANGE 10% 8% 6% 4% ange 2% % Cha 0% ‐ 2% ‐ 4% ‐ 6% ‐ 8% 2010 2011 2012 2013 2014 2015 2016 GAFO Electronics / Appliance stores Apparel and Access. Grocery stores Sporting goods stores Department stores (excl.L.D) 10
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