Retails Unprecedented Reset Presentation to TMA SE Conference June, - - PowerPoint PPT Presentation

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

6.0% 8.0% 10.0% 0.0% 2.0% 4.0%

• 4.0%
• 2.0%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

3

Status of the U.S. Retail Industry Many retailers with operational challenges Many retailers with operational challenges

O A C O 120 U LIC AIL S WI H SAL S OV $100

• Most metrics declining since late 2014 across all sectors.

PERFORMANCE OF 120 PUBLIC RETAILERS WITH SALES OVER $100M

Total Sales Growth

(Nominal, YOY % Change)

General Merchandise S permarkets

EBITDA Margin

General Merchandise Supermarkets 10% 12% 14% General Merchandise Supermarkets Apparel Home-Related 10% 11% 12% Apparel Home-Related 0% 2% 4% 6% 8% 6% 7% 8% 9% 28%

Return on Invested Capital

General Merchandise Supermarkets Apparel Home-Related Miscellaneous Total 0%

6%

18% 23% 28%

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8% 13%

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

RETAIL RESETS

• Two thirds of large retail bankruptcies in YTD 2017 were private equity backed

Particular stress in sporting goods, regional department stores and electronics sub segments Filed Chapter 11 Closing 400 stores Filed Chapter 11 Closing approx. 120 stores Filed Chapter 11 Liquidating all 126

Major Retail Bankruptcies YTD 2017 Vs 2016 ($M)

Particular stress in sporting goods, regional department stores and Particular stress in sporting goods, regional department stores and Particular stress in sporting goods, regional department stores and Closing 400 stores stores locations Filed Chapter 11 Filed Chapter 22

Filed Chapter 11

6 12

10 15 $3 000 $4,000 $5,000 s 0 6 ($ )

Particular stress in ti d i l Particular stress in ti d i l Particular stress in ti d i l depa t e t sto es a d electronics sub segments depa t e t sto es a d electronics sub segments depa t e t sto es a d electronics sub segments Liquidating all 220 locations Closing approx. 120 locations

Selling 50 of 107 locations. Balance to be liquidated.

$2,997 $4,466

5 10 $1,000 $2,000 $3,000

P ti l t i P ti l t i P ti l t i sporting goods, regional department stores and electronics sub segments sporting goods, regional department stores and electronics sub segments sporting goods, regional department stores and electronics sub segments

Closing 9+ locations

Filed Chapter 11 Liquidating all 250 locations Filed Chapter 22 Liquidating all 142 locations Filed Chapter 11 Pursuing a sale

$‐ $ , 2016 2017

Particular stress in sporting goods, regional department stores and electronics sub segments Particular stress in sporting goods, regional department stores and electronics sub segments Particular stress in sporting goods, regional department stores and electronics sub segments 5

Liquidating all 180 locations To exclusively focus on

• nline sales

Closing 150+ locations 2017 CEO reports turnaround slower than expected

• f 440 total in 2017

Reset plan to expand to 1,200 locations

Liabilities Cases Filed

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

Retailers have 210 days post‐bankruptcy to accept / reject leases, which becomes even shorter given 90 days inventory liquidation runway.

49%

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 to lease rejection deadline

49%

Percentage of retail bankruptcies

to lease rejection deadline.

Liquidation Value

Liquidation value of retail estate, including easy‐to‐sell inventory and IP,

• ften exceeds going concern value of bids received. Timeline for

li id ti t i ll h t t d

Percentage of retail bankruptcies that ended in liquidation. This is in contrast to less than 25% for nonretail bankruptcies.

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liquidations are typically shorter today.

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
• Work with mall owners to improve
• Saturated store market and increased
• nline competition

Work with mall owners to improve

• verall shopping experience and drive

foot traffic

• Shift in consumer spending habits

from ‘things’ to ‘experiences’

• Embrace Artificial Intelligence retail

support (i.e. Macy’s On Call).

• Significant debt post private

acquisition and upcoming maturities (Claire’s, Gymboree, Rue 21...)

• Develop omni‐channel connectivity
• Data driven Loyalty Programs
• High cost of online investment

l bl

• Customer focus on value (TJ Maxx,

Dollar Tree) or specialty offerings (Ulta Warby Parker)

• Onerous operating lease obligations
• Changing consumer tastes

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(Ulta, Warby Parker)

• Undisciplined discounting

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)

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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.

U S RETAIL SALES – SUBSECTOR YEAR OVER YEAR CHANGE

• 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

8% 10% 2% 4% 6% ange ‐4% ‐2% 0% % Cha ‐8% ‐6% 2010 2011 2012 2013 2014 2015 2016

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GAFO Electronics / Appliance stores Apparel and Access. Grocery stores Sporting goods stores Department stores (excl.L.D)

How Did We Get Here? Online & In store Two Very Different Realities Online & In‐store ‐ Two Very Different Realities

• It is not a pretty picture, with in‐store sales growth (YOY) gradually trending lower

since 2012.

• In contrast, non‐store sales have consistently grown by a mid double‐digit rate
• Many large omni‐channel retail executives are finally focusing attention on their

diminishing need for so many stores now that their online business has scaled up l h b ll d ll d ll k d f d

U.S. DISCRETIONARY SALES GROWTH – ONLINE vs. STORES

• nicely. The ball started rolling in 2016 and will pick up speed going forward.

18% 20%

8% 10% 13% 15% 18% 0% 3% 5% 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20 2Q20 3Q20 4Q20 1Q20

010 010 010 010 011 011 011 011 012 012 012 012 013 013 013 013 014 014 014 014 015 015 015 015 016 016 016 016 017

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How Did We Get Here?

US O li l h b bi i d A ’ tti th bi t li US Online sales has become a big pie… and Amazon’s getting the biggest slice

• Online sales will approach $400B this year, representing about 12% of U.S. retail sales.
• Omni‐channel retailers account for most online sales today with many chains generating at least

10% of their sales on line.

• Amazon’s estimated share of U.S. online sales is 20% and near 40% when including third‐party sales.
• In the US, 50% of online retail sales growth and 24% of total retail sales growth comes from Amazon.

ONLINE SHARE OF SALES BY PRODUCT CATEGORY

• Amazon’s growth, at 26%, is twice the growth of total online sales.

Amazon’s

Amazon s increasing share

• f online sales

2008 2009 2010 2011 2012 2013 2014

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How Did We Get Here? Online poised to growth at 8% CAGR over the next decade Online poised to growth at 8% CAGR over the next decade

• We anticipate a “doubling” of online market share to 25% excluding grocery.
• Surprisingly, consumers have embraced online for many products that seemed to be ill‐suited for it ‐ bulk of

sales come from apparel, accessories, electronics, home, sporting goods, and toy and hobby, which have 15 to 20% share and will grow to 30 to 35%.

• It’s been a hollow and costly victory for most omni‐channel retailers. For each marginal sales dollar that

migrates away from stores to the online channel today, only about 68¢ stays within the traditional retail g y y, y y ecosystem.

• Pure online retailers face high costs of customer acquisition leading a number of them – Sonos, Warby Parker,

Bonobos and even Amazon and Rent‐the‐Runway – to open flagship retail locations throughout the U.S.

• U. S. ONLINE RETAIL SALES FORECAST

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How Did We Get Here? Impact of Changes in Merchandising on The Supply Chain Impact of Changes in Merchandising on The Supply Chain

• Millennials eschewing traditional brands (Polo, Calvin Klein, Jessica Simpson)

g ( , , p )

• Creating excess inventories for traditional department stores
• Inventories shifting away from brick‐and‐mortar
• Inventories shifting away from brick‐and‐mortar
• More centralized/automated fulfillment for online shopping
• Fewer stores as closings accelerate
• Fast fashion creating significant adjustments throughout the supply chain
• Zara, H&M, Primar, Forever21
• 20% of specialty apparel market and growing; very popular with Millennials
• Smaller in‐store inventories (only what’s on racks)
• Manufacturers and related suppliers need to adjust to smaller, faster orders
• Quick replenishment requires nimble production and adequate IT
• Lower working capital requirements allows brands and retailers to invest in online efforts

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How Did We Get Here? Not All Malls are Created Equally Not All Malls are Created Equally

• About 25% of malls are rated as “A‐” or better.
• However, they generate almost 75% of the total sales generated in malls.
• In contrast, the bottom 1/3 of malls (rated C and below) are responsible for only 5% of mall value.
• On a sales per square foot basis, we see A++ malls generating $965 per square foot compared to

C+ malls that average only $305.

SALES VOLUME BY MALL TYPE

• Public REIT values have declined significantly since mid 2016 with the closure of thousands of

brick and mortar retail stores.

SALES VOLUME BY MALL TYPE

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What’s next…?