Following the wave of restructurings in the retail industry during 2021, most retail companies have improved liquidity and invested in omnichannel capabilities, among other initiatives, to help them weather 2022 and position them for growth in the future.

The restructuring environment over the next 12 months projects to be a calm one, but that doesn’t mean retailers aren’t struggling with significant challenges.

In a recent interview for the Debtwired podcast, Jon Goulding, Managing Director, North American Corporate Restructuring, Alvarez & Marsal and David Ritter, Managing Director, Consumer Retail Group, Alvarez & Marsal were interviewed by Debtwire Deputy Editor, Reshmi Basu about the financial pressures on the industry and the anticipated restructuring trends in 2022.

You can listen to the podcast here.
 

How Has COVID Fundamentally Changed Retailers?

The pandemic itself affected many aspects of retail and changing consumer behavior will continue to impact the industry. COVID has advanced the omnichannel capabilities of retailers by many years as they were forced to invest in areas like buy online pick up in store (BOPUS), curbside pickup, same day delivery and more.

Retailers are applying increasing importance on becoming a true omnichannel retailer. Consumers expect newfound conveniences to remain, and retailers will try to meet those expectations.

Yet, retailers must also deal with other repercussions of the pandemic, some of them unforeseen in the initial phase of the disease — shifting supply-chain shortages, a tight labor market and increasing inflation. The added pressure will force companies to change operational strategies but shouldn’t create heavy distress situations for most retailers in 2022.

Instead, they’ll most likely focus on optimizing their operations and distribution models to reduce customer wait times and increase order accuracy because the consumer mindset has fundamentally changed.

What’s the Appetite for IPOs in Retail?

It’s a hot market in terms of valuations, especially with direct-to-consumer (DTC) retail companies, which are getting strong valuations on operating models that are struggling to achieve profitability. Many are fundamentally rethinking their channel strategies as they face increasing costs of customer acquisition and changing customer preferences.

Both require significant capital to solve, and so do innovative initiatives to expand omnichannel operations. Some DTC companies, for example, are even building out physical retail footprints and creating wholesale salesforces. The IPO market provides a solution for covering those costs.

These companies are also going the special purpose acquisition company (SPAC) route, which can provide capital in a shorter time span than an IPO, especially if they need to speed up access to capital.

How Are Supply Chain Issues Impacting Retailers’ Bottom Lines?

Across the board, most retailers are experiencing some kind of supply chain disruption, manifesting in several ways:

• First, many are having issues with in-stock positions, especially for in-demand products during the holiday sales season. When retailers report their performance numbers, problems with inventory on hand should show up in top line sales figures.
• Second, given potential product shortages, some retailers are curbing some promotional spending, result in a short-term improvement in margins.
• Finally, retailers experienced significant supply-chain disruptions in the fourth quarter that should show up as a glut in inventory in the first quarter of 2022. By missing the important holiday sales window, they’ll have heavy inventory positions and may be forced to substantially markdown prices to clear inventory this spring, putting further pressure on gross margins.

How Has Inflation Forced Retailers to Change Their Strategies?

Retailers are seeing inflation across the board, whether it’s cost of goods sold, logistics or higher wage rates in stores. Retailers are aggressively monitoring costs and passing them on to customers. A highly visible example is Dollar Tree, the discount retailer with an “everything’s a dollar” mantra. The company announced recently that it was hiking its prices to $1.25.

Another way that retailers are combating inflation is through automation. Expect a wave of further automation in retail across the full value chain. Retailers will continue to invest in technical innovations, such as cashier-less checkout and automated micro fulfillment centers. By automating some core tasks, retailers can address core costs as they fight inflation.

What’s the Outlook on the Brick-and-Mortar Business Model?

The common perception about brick-and-mortar retailers fading away is overblown; however, retailers know they have too many stores in this new environment. Some malls will need to close, based on consumer behavior, but others are finding a way to make the changing landscape work for them.

Malls that have picked up on this shift and stepped up their business strategies adapted to consumer demands by providing curbside pickup or other services.

Retailers, and even malls, are accelerating to an omnichannel world, converting some stores into mini distribution centers to keep up with consumer preferences. Digitally native brands now want a physical presence, popping up in malls and other centers to create another channel.

Landlords of these centers have become more flexible to stay competitive, assisting with omnichannel strategies while trying to maintain their rent structures at the same time. It’s a winning combination for higher performing centers but not underperforming ones. The two will continue to separate themselves in 2022 and beyond.

The smartest landlords are forming innovative partnerships with technology firms to try to bridge the omnichannel gap and provide it as a service to their tenants. Instead of serving as just a rent collector, landlords can provide added value to tenants by offering something new and needed.  

Will Restructurings Pick Up in 2022?

Expect little material increase in restructurings in the next year. What retailers will grapple with is continuous change in the industry that will cause more performance improvement challenges and omnichannel shift, among other issues.

While there were a lot of bankruptcies in 2021, industry watchers shouldn’t expect many defaults since the usual suspects on many watch lists have either filed or sufficiently tapped capital markets.

Retailers now benefit from loans with very few covenants attached and new liquidity that gives them a runway to last at least the next 12 to 18 months.

Retailers Should Focus on Agility.

Inflation, supply-chain disruption and other issues will continue to challenge retailers. They have options to raise capital to invest further to enhance omnichannel capabilities and reduce costs.

The bottom line is that financial planning in retail has fundamentally changed with so much uncertainty. Retailers must take an agile approach by effectively reforecasting in near real time.