Recent News

<< Previous Page

Jeff Bloomberg Participates in the TMA Webinar, "What's in Store for the Retail Industry 2010"

Dated 04, March, 2010

In a panel discussion hosted by the Turnaround Management Association on Thursday, February 25, 2010, Jeffrey Bloomberg, Principal and Office of the Chairman at Gordon Brothers Group, addressed: "What's in store for the retail industry in 2010."

Bloomberg on recovery:

"Signals are mixed. Unemployment is around 10 percent but consumer confidence rose three of the last four months. The fourth quarter of 2009 and the start of 2010 showed modest sales increases. Even if sales were flat, gross margins were higher because retailers reduced inventories, sending the new message to consumers: 'If you wait to buy, it won't be here!' Also consumer attitudes shifted and after Lehman failed, consumers stopped discretionary spending and virtually bought only staples. This explained the large spread (about 5%) between comp- store sales at Walmart vs. Target for most of 2009. In the fourth quarter consumer sentiment changed a bit and Target outperformed Walmart. Now, it's okay to buy, but value is key. 2010 will set the new baseline, barring any major trauma, and there will be better earnings but not great top-line improvement."

On redistribution of spending following retail bankruptcies:

"Probably $40 billion in sales came out of the brick-and-mortar world. After accounting for overspending and migration of shopping to the Web, there's maybe $30 billion being redistributed. But it's sector-specific - there was far more impact in consumer electronics with Circuit City going out and leaving $10 billion in sales than with other retailers that closed. But industry consolidation is not the great panacea. What's really happened is that people are starting to say: 'This is not going to be the Great Depression. It's okay to spend for discretionary items.'"

On distressed credit:

"We're living in an extend, amend and pretend universe. Look at bankruptcies from 2007 through 2009: The recoveries that unsecured creditors realized were disastrous, with zero to 20 cents on each dollar of unsecured claim, and these recoveries impacted over-leveraged retailers. Today credit markets will tolerate about 4-plus EBITDA coverage in terms of total leverage for retailers. Most transactions in 2005-2007 were done at purchase multiples of 8 -10+x multiples of EBITDA using leverage of 6+x EBITDA that were materially higher than the EBITDA realized in 2008 or 2009. As a result, the equity is underwater and there is likely little value to any debt, junior to senior-secured. There is no way these companies could refinance debt with new borrowings.  If these over-leveraged companies file [bankruptcy], the private equity firms get zero and the unsecured creditors get essentially zero or tip money. If the company is not doing horrendously and is stable, all classes from junior to the senior-secured tranches would be better off waiting until business and EBITDA improves. Although there are tax advantages to filing, you can accomplish virtually everything you need to do operationally without going to court."

On liquidating to raise cash:

"Liquidating inventory to raise cash assumes the company is experiencing difficulty with liquidity. Instead, consider a company with an ABL (asset-based loan) advance rate of 80 cents on the dollar. If you liquidate that inventory and end with 20 cents on the dollar to reinvest, that's not a great source of capital. This isn't the answer and mezzanine lenders or unsecured lenders aren't coming into this game because they aren't going beyond 4X EBITDA.  Until EBITDA increases, they won't be willing participants. Moreover, the high-yield market is only available to those who can issue $100 million or more. This is a real problem for middle- market companies."

On surviving:

"The way to get out of this quandry is by operating your way out - i.e.' improving operating performance/income. Not a lot of capital is being allocated on the debt side, particularly in the retail sector. Companies with systemic or operational problems will fail because they can't attract capital. There won't be as many large bankruptcies this year, but regional players that have been obviated may fall by the wayside."

On opportunities for investors:

"It's a more selective world in 2010. Classes (equity and debt valuations) won't move in mass the way they did in the last three quarters of 2009. Like the stock market as a whole, it's a more difficult environment to make money in and you'll have to work hard to identify under-valued companies."

On asset-based lending:

"With a glut of retail vacancies, real estate has little value. Inventory is the primary source of capital - but with retailers becoming leaner, there are fewer dollars to spread. Look at the factors: if unsecured creditors buy paper at 97 cents and in bankruptcy get 10 cents, retailers have to turn goods 25 to 35 times before lenders break-even on credit extended. Pressure reverts to vendors to carry the receivables of weaker credits. Secondary secured lending may be the only source of capital available to weaker retailers in today's market."