There’s Good News in Retail. Can it Last?
- Keywords:
- e-commerce
In the middle of a phone call with the CFO of a middle market prospect in the retail sector, my jaw dropped at his casual reference to 25% positive comparative store sales in January. The following week a client that has been drawn into the line of credit for two years told me they’ve paid off the revolver in full. Updates awash in positivity have become somewhat of the norm.
I suppose my surprise began earlier in the year at an industry conference targeted to equity capital and M&A for retail and consumer. Companies large and small, coast to coast, furniture and footwear, hard goods and home goods, specialty retail and, yes, even apparel, presented surprising updates of strong holiday sales and improving liquidity. Is it sustainable? Conversations since then suggest yes, it is.
As I sit here today, my mind wants to conclude that the sector I’ve called home for the better part of the last 20 years was bound for more disruption, significant restructuring activity and an equal, if not higher, number of retailer bankruptcies in the first quarter of 2021. As a lender, I find myself in an odd position where my days are full of activity, while fielding calls from my restructuring community friends wondering why it’s so slow out there.
Don’t get me wrong, there is still ample trepidation in financing retail and consumer products companies. Our memories are short, but not that short. 2020 raised many difficult conversations—from how to underwrite a loan to a company that hasn’t opened its doors in four months, to how to liquidate one that will never open its doors again. However, most of my days over the past three months have been filled with video conference or phone calls different from those through much of 2020. So, I started to piece together the puzzle of what to believe about sustainability and why the positivity may last.
A new balancing act
We’ve all heard the quick reactions and initiatives that took hold at the start of the shutdown last year. In retail, companies seemed to operate with advice from a hotline every CFO had access to, advising them to furlough employees, defer rent, cut purchases and invest in online capabilities. All of them did so with abundant success. Eventually, though, the other shoe will drop, right? That is, rent payments will come due; furloughs will end, and companies will have to staff up. Meanwhile, e-commerce investment and inventory control measures are now well entrenched in how companies operate. Well, yes and no.
According to Forbes, more than 12,000 store closures resulted in 159 million square feet of emptied retail space last year.1 Yet, overall retail industry sales eclipsed $4 trillion in 2020, a staggering 7% increase over 2019, including a 44% increase in e-commerce-related revenue.2
Constant supply chain disruption marked the beginning of COVID-19-related challenges, while out-of-season inventory, particularly in the apparel industry, might have been one of the toughest hurdles of the year. Though margins are hard to quantify for the industry as a whole, by most accounts overall gross margins in 2020 were only down slightly compared with 2019.
A reasonable conclusion is that the amount of discounting that was necessary to achieve revenue growth was balanced by the cost efficiencies of operating a new hybrid business model as the shutdown turned into the new normal. Many believe this new way of operating is sustainable as long as companies maintain the disciplined buying behaviors and cost controls that the past year necessitated.
With respect to personnel, one report I read suggested less than 40% of furloughed workers were expected to regain their positions. I think that figure is impacted by the inclusion of industries that have yet to recover close to the levels as some retail subsectors, such as restaurants.
While over 300,0003 of the nearly 2 million retail industry workers who were furloughed happened in a single day in March 2020, reports emerged throughout the year of others adding to their headcount. The jury remains out on whether retailers can sustain smaller workforces compared to pre-pandemic levels, or if many furloughed workers migrated to other industries or even within retail to companies more diversified than a bricks-and-mortar only offering.4
Moving forward
I don’t know if it’s possible to draw conclusions about the sustainability of this positive information flow. Could revenue increases in 2020 be a direct result of consumers spending discretionary income on things other than travel and entertainment? Could margin enhancement be entirely due to restructuring or deferred payments of leases or reduced personnel costs? Both are possible.
What is certain is that the world since March 2020 taught many companies in the retail industry how to be patient, where to invest dollars that make the most sense, how to balance staffing needs, where the customer prefers to shop and how to market to them, and how to stock the right products on the shelves, either physically or virtually.
Those are all valuable lessons not just for surviving the economic effects of the pandemic, but for operating as a leaner, more agile business as the industry moves toward a new normal.
1 Forbes 
Read more
Michael Ganann
Head of Retail Finance, BMO Financial Group
In the middle of a phone call with the CFO of a middle market prospect in the retail sector, my jaw dropped at his casual reference to 25% positive comparative store sales in January. The following week a client that has been drawn into the line of credit for two years told me they’ve paid off the revolver in full. Updates awash in positivity have become somewhat of the norm.
I suppose my surprise began earlier in the year at an industry conference targeted to equity capital and M&A for retail and consumer. Companies large and small, coast to coast, furniture and footwear, hard goods and home goods, specialty retail and, yes, even apparel, presented surprising updates of strong holiday sales and improving liquidity. Is it sustainable? Conversations since then suggest yes, it is.
As I sit here today, my mind wants to conclude that the sector I’ve called home for the better part of the last 20 years was bound for more disruption, significant restructuring activity and an equal, if not higher, number of retailer bankruptcies in the first quarter of 2021. As a lender, I find myself in an odd position where my days are full of activity, while fielding calls from my restructuring community friends wondering why it’s so slow out there.
Don’t get me wrong, there is still ample trepidation in financing retail and consumer products companies. Our memories are short, but not that short. 2020 raised many difficult conversations—from how to underwrite a loan to a company that hasn’t opened its doors in four months, to how to liquidate one that will never open its doors again. However, most of my days over the past three months have been filled with video conference or phone calls different from those through much of 2020. So, I started to piece together the puzzle of what to believe about sustainability and why the positivity may last.
A new balancing act
We’ve all heard the quick reactions and initiatives that took hold at the start of the shutdown last year. In retail, companies seemed to operate with advice from a hotline every CFO had access to, advising them to furlough employees, defer rent, cut purchases and invest in online capabilities. All of them did so with abundant success. Eventually, though, the other shoe will drop, right? That is, rent payments will come due; furloughs will end, and companies will have to staff up. Meanwhile, e-commerce investment and inventory control measures are now well entrenched in how companies operate. Well, yes and no.
According to Forbes, more than 12,000 store closures resulted in 159 million square feet of emptied retail space last year.1 Yet, overall retail industry sales eclipsed $4 trillion in 2020, a staggering 7% increase over 2019, including a 44% increase in e-commerce-related revenue.2
Constant supply chain disruption marked the beginning of COVID-19-related challenges, while out-of-season inventory, particularly in the apparel industry, might have been one of the toughest hurdles of the year. Though margins are hard to quantify for the industry as a whole, by most accounts overall gross margins in 2020 were only down slightly compared with 2019.
A reasonable conclusion is that the amount of discounting that was necessary to achieve revenue growth was balanced by the cost efficiencies of operating a new hybrid business model as the shutdown turned into the new normal. Many believe this new way of operating is sustainable as long as companies maintain the disciplined buying behaviors and cost controls that the past year necessitated.
With respect to personnel, one report I read suggested less than 40% of furloughed workers were expected to regain their positions. I think that figure is impacted by the inclusion of industries that have yet to recover close to the levels as some retail subsectors, such as restaurants.
While over 300,0003 of the nearly 2 million retail industry workers who were furloughed happened in a single day in March 2020, reports emerged throughout the year of others adding to their headcount. The jury remains out on whether retailers can sustain smaller workforces compared to pre-pandemic levels, or if many furloughed workers migrated to other industries or even within retail to companies more diversified than a bricks-and-mortar only offering.4
Moving forward
I don’t know if it’s possible to draw conclusions about the sustainability of this positive information flow. Could revenue increases in 2020 be a direct result of consumers spending discretionary income on things other than travel and entertainment? Could margin enhancement be entirely due to restructuring or deferred payments of leases or reduced personnel costs? Both are possible.
What is certain is that the world since March 2020 taught many companies in the retail industry how to be patient, where to invest dollars that make the most sense, how to balance staffing needs, where the customer prefers to shop and how to market to them, and how to stock the right products on the shelves, either physically or virtually.
Those are all valuable lessons not just for surviving the economic effects of the pandemic, but for operating as a leaner, more agile business as the industry moves toward a new normal.
1 Forbes
What to Read Next.
Did COVID Actually Save Retail?
Simeon Siegel, CFA | September 22, 2020 Retail And Wholesale Distribution, Addressing Covid 19
As retailers choose which stores to open, rather than close, on the heels of the COVID-19 outbreak, they face a once-in-a-lifetime opportunity to fli…
Continue Reading>
Tell us three simple things to
customize your experience.
