Women's Apparel Retailers
Date January 2018
Approximate net recovery on cost
- Women’s apparel retailers comp sales trends were mixed coming out of holiday 2017, with some clear winners (New York & Company) and others that did not fare as well (Ascena Retail Group, Cato, Chico’s)
- The Consumer Price Index for total women’s and girls’ apparel was -2.3% for November 2017 over 2016 driven by declines in women’s apparel (-2.5), suits and separates (-5.1), and girls’ apparel (-1.5); the only positive was in the dress category, which was up 0.2% for the period
- U.S. retail sales rose 0.4% in December, following a 0.9% increase the previous month, marking the biggest year for sales growth since 2014, the Commerce Department reported; Q4 sales were up 5.5% over 2016
Mixed sales results define season: Retail sales increased 0.4 percent in December, after a 0.9 percent increase in November. Commerce Department figures note spending for the two months combined was the best since 2005. Unemployment is at a 17-year low of 4.1 percent. The strong holiday shopping figures have economists ramping up their estimates for economic growth in the October-December quarter. Americans appear to be more confident about the economy and thus more willing to spend. In the aggregate, retail is having a rebound, but the news is not positive for everyone. Overall the 2017 holiday shopping season brought positive trends for some brick and mortar retailers and continued the trend of positive sales for e-commerce. Goldman Sachs Research attributed the improvement to “a healthy economy, cooperative weather, and a more rational approach to Black Friday promotions.”
As millennials (18-34) increase as a percentage of American women, the quality of the shopping experience continues to take on greater importance in terms of where they choose to shop. Where competition exists, the retailer that invests in the better store-level experience, whether through added incentives, improved customer service, updated store design, or a change of location, stands to gain an advantage over competitors that do not. As merchandise and pricing has become standardized in some sectors, the personalization of the shopping and sensory experience is a key driver in terms of which retailer thrives, or even survives. As retailers move away from mall-based real estate and into lifestyle centers and “Main Street” locations, accessibility often becomes easier. This format appeals to shoppers who still want to shop in a store, but do not want the inconvenience of going to a traditional mall. Retailers adding something extra to differentiate their customers’ in-store experience, whether it be a cafe, wine bar, updated décor, click-and-collect services, or same-day delivery, have the advantage. Walter Loeb, President of Loeb Associates, management consultants to the retail industry, notes that “the big trend I see is that retailers are finally realizing that they must change. I predict that most well-funded retailers and department stores will adjust and survive.”
Nevertheless, as select women’s apparel retailers continue to experience negative sales trends, decreasing margins, and eroding liquidity in credit lines, it is especially important for lenders appraising portfolio companies regularly to offset risks associated with declining sales and recovery prospects. Partnering with an appraiser who understands the implications of deteriorating net recoveries associated with a declining customer base, loss of vendor support, or increased normal-course discounting can help mitigate risk if the company ultimately files bankruptcy and faces either partial or total liquidation.
Return to stores drives incentives: For 2018, retailers looking to entice customers back into their stores have to offer incentives for them to come back. For the past few years, consumers have spent a larger percentage of their disposable income online. The benefits of a larger selection, speed and convenience, (often free) door-to-door shipping, and competitive pricing and/or additional online discounts have made it hard for consumers to resist the lure of electronic shopping. Looking forward, retailers with brick and mortar stores will need to up the level of in-store incentives to entice shoppers back into stores. Smart retailers are offering incentives like bounce-back coupons, gifts with purchase, and additional in-store discounts and BOGOs to break the now pervasive online-only shopping preference.
Apparel Disposition, Critical Factors beyond Inventory: A successful disposition in the apparel space depends on several critical factors, not least of which is the quality, quantity, pricing, and discounting of the inventory. However, additional factors including company system capabilities, retention of key staff, and relationships with corporate and store personnel can also be determiners of value.
Essential to the success of a liquidation event is understanding the relationship of key corporate and store-level personnel to the business. Retention of corporate personnel including employees involved in cash management, payroll functions, inventory allocation, and loss prevention in addition to IT and operations directors is absolutely critical to a successful sale. Supplementary to the agent’s supervisory staff, retention of strong store-level management and sales staff is mandatory to the success of a sale. Corporate and store-level staff play a daily role in facilitating the sale and helping to curb shrink levels and staff turnover, which ultimately impact profitability.
A company’s system’s ability to capture sales and inventory data, including the capability to track inter-store transfers, is also critical to maximizing results. Inability to track these key metrics on a daily basis and with a reasonable level of detail means a lack of visibility as to what is selling and what the remaining inventory levels are on a store-by-store basis, which impacts gross recovery rates.
Partnering with an appraisal firm with direct experience managing the complexities of a retail liquidation event gives asset-based lenders the most informed and realistic net orderly liquidation values on which to base advance rates.