PJ SOLOMON’s Co-Head of Consumer Retail, Cathy Leonhardt, and Derek Pitts, Head of Debt Advisory & Restructuring, discuss how they are advising Consumer and Retail clients amidst the spread of COVID-19. Derek advises clients to “be the co-authors of their own story” and Cathy questions whether consumer behavior will be forever changed.
Derek Pitts: 0:03
Companies will need to be the co author of their own stories as they figure out how we work through this period of uncertainty and ultimately getting to the place where this ends and people could get back to focusing on growth and thriving again.
Cathy Leonhardt: 0:19
I think we're gonna be surprised by the innovations that comes out of companies through this time of crisis.
Cathy Leonhardt: 0:28
Hi, I'm Cathy Leonhardt, co-Head of the global Consumer Retail practice at PJ SOLOMON. Thank you for joining us today. I know many of you are listening from home. We too are at home as we work through this crisis. I'm in my living room and apologies if you hear my daughter doing cartwheels outside my office. I'm joined by my partner, Derek Pitts, who leads our Debt Advisory & Restructuring team. We're here today to talk about the state of the consumer and retail market in this unprecedented period of the coronavirus. We'll also talk about expectations, consumer behavior and how we're advising clients at this time. Derek, Hi. I know your team has been extraordinarily busy working with clients across the PJS retail sectors. Why don't we start with that? Can you comment on what you're seeing out there?
Derek Pitts: 1:30
Sure thing, Cathy. We spend a lot of time working with companies across all sectors in special situations, challenging times as such as this. Cathy I have this quote that I like to say that you know, if you think you have enough liquidity, double it and then you might have enough, right? That's sort of the sentiment that really is pervasive in the market today. And there's a lot of people that are spending these early moments figuring out just how to survive, how to triage, and when they do that with operations, which we'll talk about, there's some meaningful capital markets, financing, balance sheet and leverage implications that go into that. So before we talk about that, what are you seeing from the retail operational side as we go into this?
Cathy Leonhardt: 2:14
Not surprisingly, very challenging. I think you use a very good word called triage. With stores closed indefinitely for non essential products, both the retailers and the discretionary brands who sell to these retailers are practicing a range of self help options. I know you're hearing that. We're hearing that from across our client base. Call it hibernating or simply survival, you know companies are doing, you know, going back to liquidity, they're doing everything they can to preserve cash and survive during this. And you know what? I think the playbook is already playing out. It includes initiative, different payables to vendors, really extending those days, landlords and suppliers, extending those payments and then, you know, very prominent now is furloughing store field employees and even into the corporate employee base. Lots of examples. We saw Macy's furloughing over 100,000 employees, Gap 80,000 and even, you know, the real estate guys they are furloughing employees. And you know, I think there is some positivity in this time. You are seeing the executives stand up and cut and eliminate their own salaries and their team salaries. We're seeing a lot of corporate philanthropy. We're seeing some good things come out of this. But make no mistake, this is definitely a period of survival. And I think you know, when you get back to that, if we call that triage, I don't know Derek if that's how you characterize it. What about the balance sheet? What are you seeing there?
Derek Pitts: 3:57
Triage is the perfect word on the balance sheet side given all of the things that you mentioned. Obviously it creates a whole landslide of issues with any kind of debt document that you have whether it be a credit agreement, secured notes, unsecured notes. These are all contracts, and it creates a landslide of problems with the contract, but also at the same time those issues or default or problem, they've been created are not top of mind for companies as they try and survive. All the things you mentioned are important. And so what happens is a lot of the balance sheet issues they are creating will definitely have to be addressed in a future phase, right? And if you think about this in the now, next and later type of process, that yet is to be defined by the calendar in the now phase, people are taking the steps that you're thinking about and as a part of that, even though they're creating a lot of issues on the balance sheet, relative to liquidity you're seeing sort of two general areas, open up. One, if you're a larger company, typically larger cap, historically positive cash flow. You are actually accessing additional liquidity as best you can to the extent you can, and a lot of these bigger companies were able to get it. Whether in addition to drawing revolvers, they may be tapping accordion features they might have inserted in their loan agreements to get additional capital. People who actually can tap the revolver in some cases have chosen not to, but actually have raised different capital. So they have more money on the balance sheet and still can show a lot of liquidity. So if you're able to do that, it's just all about liquidity, liquidity, liquidity. At the other end of the spectrum, you've got the traditionally middle market or smaller companies, maybe historically challenged, not as much access to liquidity. And that's where the operational issues get magnified. Because then the landslide of issues you're creating on the balance sheet side, almost starting now have to be a focus, have to be focused on and have to be worked out. And some of the things you mentioned, just to re-highlight. You know, if you're not paying rent, you got to deal with that in a month. If you're not paying interest, you gotta deal with that in a month. If you're not paying your trade vendors, you probably don't have to deal with that in a month but you got to deal with it in 2, 3 or 4 months, right? So it's that we're seeing. That dichotomy has expanded. So if you think about the next phase, once this triage moment is there and you've done what you can do, what do you think happens next?
Cathy Leonhardt: 6:23
I think the uncertainty is staggering to most companies, brands and retailers. You know, let's just talk about the US market because if you are a multinational or truly global company the considerations are different. Lets talk about North America or a US domestic, we're seeing companies are modeling, there's a reopening. Let's talk about what that means. And you know, it's May, June, July. But what does that mean? Is it rolling opens? Its not gonna be a hard and fast open. So, you know, I think folks, as soon as they get through this initial phase of what I have to do now and make sure I'm cutting off any electronic payments out of my payables is really challenging. Then they're gonna turn to what next and I think most folks and maybe that's being optimistic, are sort of modeling in a return and that sort of early summer time frame. But the planning is gonna get very complicated. You know, in a lot of cases, they, you know, shut off their supply chains, you know, the distribution and the shipping has been open, but as folks hibernate their supply chains the complexity of modeling through the fall and predicting what's gonna happen is really challenging. And I think as we talk to clients, that's going to be the next phase of planning. How do we come back in this environment?
Derek Pitts: 7:55
A key aspect of that next phase and we get this question a lot and we're working with people on how to think through this: if I don't have a liquidity now and can't get it, but I know I'm going to need it in this next phase, where do I go? Who does it come from? And most importantly, how do people even make the decision whether to invest, giving, as you put it, the staggering uncertainty. But part of that answer is, as is anything in a workout or restructuring, special situation, type of environment, you have to find a way to structure around the uncertainty. This happens to be an unprecedented and almost incalculable level of uncertainty, but companies will have to figure it out. We'll have to move forward. There will be a restart. There will be an opportunity at some point to start getting back to runway, but you don't know when that's gonna happen. I agree. People are modeling different scenarios and having different views because you just have to have an understanding of what impacts it could mean to the business and your liquidity position. We've also heard from a lot of capital providers who say they're open for business. They're willing to provide support. And so part of what we do in the next phase will be trying to help companies story around the uncertainty, structure around it, help companies figure out how to make a little more permanent a lot of the steps, the temporary steps, they've had to take and endure in the triage moment and all that has to get wrapped up into a story that gives you some stability of some breathing room until the uncertainty starts to get reduced, which means that you have better visibility into when and how you might be able to reopen. So then you can start to make those kind of decisions. One of things I also like to say is, you know, when you think about capital providers, why is story so important is why is the telling the story so important. Generally, capital providers say, for some rare exceptions are in the business of funding rising tides, right? They're not in the business of catching falling knives, right? And so this market environment is a lot of falling knives, and so we have the figure out a way to position it and structure for people, a solution that people could be attracted to. That sets you up for the next set of decisions. And so when we think about that, the longer term or the later term, I think you touched upon in terms of how to even think about what happens when the clouds clear and reopen. What do you think happens then, operationally?
Cathy Leonhardt: 10:25
I think what we're advising our client is get a liquidity you need now and get more than you think you need right, to weather through that uncertainty. But you mentioned something really important. You know, those who are surviving, thriving and then those who are not. We've always talked about the retail and consumer sectors in terms of have and have not. And I think you're seeing a lot of definitional changes in consumer behavior in this environment, where consumers they're frightened, they're frightened about their jobs. They're frightened about their outlook. Consumer discretionary goods have been particularly impacted. We've seen apparel retailers down 40-50%. The question is, how much can direct to consumer e-commerce, you know, hold a critical mass of business? And you know, those sectors have lagged only apparel, which are down much more in sales growth versus the pre crisis numbers. But in consumables, it's a very different story. Essentials, food, household products are strong. Personal care, health and wellness, supplements are growing rapidly. This consumer is really focused on well-being during what I would call a global health crisis and Derek, you work in food, retail and grocery and do a lot of work there, you know, that's a different story, right? So the financing alternatives and capital available is different for different segments of this retail economy. Any comments there?
Derek Pitts: 12:01
It's, ah, very true when you look at the even the whole spectrum of different industries that that could be affected, right? And if you mentioned food retail, apparel and even when you think about just even try and imagine airlines or hotels relative to the vacation market, when people will start to travel and spend money and spend money on that when you think about restaurants, theme parks, sports, movie theaters, which a lot of people like to talk about, each one of those sectors is gonna have a different cadence and a different sort of set of things they have to solve for relative to how they try to get back the run rate, which will implicate how they survive through this period. So food retail is having a moment, right? There's a couple of things happening there. There's obviously the surge, right, where people are stocking up on stuff, getting things they need for the household. Given that there's a lot of uncertainty relative that how long these these social mitigation efforts will be in play. But then there's also the other element, which could lead to some stickiness and could lead to long term, is with fewer dining options, with fewer delivery options, people are now back to buying grocery products, bringing it home, cooking it, making it. Grocery products at the grocery store have also expanded into prepared foods. The question is, you know, so that is that just the moment, or is there some of that that's gonna be sticking around? So a lot of those companies today are exceeding plan, generating cash and while they're doing a lot of good things with it to support their communities, to make sure employees are supported and help with charitable giving-doing their part right to support the communities relative to to the effects of the pandemic, they also have the opportunity to get so much stronger because they're generating cash flows, they can reduce some of their leverage. They could do some other things that help shore them up as the part of what's happening so their dynamics are different. But then, along with everyone else, while they're not in triage, they too, need to reevaluate what's happening for the longer term to make sure they're set up appropriately on the balance sheet of some of this bump that there have now may abate. But then the question is, where does it go and for how long? And there's always the the thing here that, as you mentioned the haves versus the have nots, even no matter how you look at it, it's still a situation where the bigger, larger, well more capitalized competitors could you get stronger here and increase the distance or increase the lead. So this is a lot of strategic thinking needed relative around those names in particular,
Cathy Leonhardt: 14:35
I think that's right. I mean, as we as a Consumer Retail group, think about it and you know, we work closely with you and we cover a lot of categories - hardline, softlines, consumables, wholesale, retail, direct to consumer. The one truism that we feel strongly about is that consumer purchasing maybe forever altered and tapping into these changes and optimizing where you can is gonna be critical for brands and for retailers and the strategies they employ. We do a lot of retail, obviously a lot of retail consumer and M&A advisory. Just for a few moments, what are you seeing on M&A as a solution or a solve for liquidity problems? Let's just touch on M&A generally.
Derek Pitts: 15:28
I think the way we look at this is M&A is generally not now, but it is, I think it's gonna have a major role to play when we get through the area of uncertainty and people are recalibrating their restart, figuring out what their story is, what their permanent benefits and disadvantages are relative to what has occurred and figure out what their story is. I think of M&A as a funding mechanism because people may not be able to have enough liquidity or raise enough capital or just might have higher value in the hands of someone else, given everything that's happened from where they have to start. So I think what informs M&A now is well, you may have capitalized companies or investors that will look and look around and be ready to do something. I think you have sellers that are still in this moment of uncertainty aren't thinking about running an M&A process. You might have some super distressed situations where it's the only option. And if you happen to be in a segment where you can find a buyer or something happens then then maybe that's an option. But that's going to be the rarity. Sellers are gonna want to get back on their feet. You're gonna want to get to a place of some level of stability so they can still, in this environment, command something I don't think is a deeply discounted temporary valuation. I don't think you have a large meeting of the minds right now in this window of time. But when the uncertainty clears, I think M&A will have a very large part to play and how all of this gets restructured, fixed and modified. It could really drive that market for a period of time,
Cathy Leonhardt: 17:05
I completely agree with that, I think on the M&A front, the pandemic has largely halted the non distressed M&A market as businesses focus on what's in front of them and the challenges they're facing right now. I would add to the extent they were transactions in the works as we came into this cycle of coronavirus, we did see contracts and purchase agreements getting signed that would generally written expressly to carve out pandemic risk. And we do think these deals get done. We expect them to get done. But we are in extraordinary times and, you know, I think as we talk coming out of 08-09, when founders, companies, leaders have gone through this type of risk and uncertainty, it does change their mind set. And their view is, you know, do I want to go this on my own? Can I consolidate, you know, create a bigger organization with more scale and competitive advantage. We have seen that it does start to trigger more M&A once the volatility and the uncertainty diminishes, I do think we'll see more M&A.
Derek Pitts: 18:23
I agree. We have a number of clients , a couple under contract. It's it's still a wait and see. People are still working towards how to make that happen. You know, the uncertainty is still so high while you see globally, you see and start to hear that there will definitely be certain deals that just don't get done because the pricing is different for the, uh, the ability to get financing is different or some businesses are just so deeply affected by what's happening, maybe disproportionately right that M&A trade just isn't the right valuation proposition anymore. But I think you'll also have others. I mean, putting an M&A trade iinto statis if they're under contract can be can be difficult, but you might have some extension of outside dates. You may have some recalibration of what those businesses can do. We haven't seen people just wholesale jump at this point from that, but there's sort of this period of time where everyone's just kind of absorbing what's happening. Everyone's running their math. Everyone's trying to get as much visibility as they possibly can before they decide to make any major new decisionsor reevaluate any older decisions once the uncertainty clears, whatever that means and whenever that happens and there's a mandate to be able to go ahead and and restart and do some of these other elements, how do you see that playing out beyond M&A?
Cathy Leonhardt: 19:46
You know, I think most businesses, they're not gonna let this crisis go to work. They're examining their cost structures, their agility. Hopefully, you know, there's a lower base of cost structure to come out of this, which can give them operating leverage and the ability to extend margins. The other thing is technology is still a really area of focus. And, you know, this critical channel of distribution in a time where physical retail got shut down is gonna be ever more important, whether, and I think even shipped from store so that that whole supply chain, logistics, distribution and the technology enablement of all of that is gonna be ever more important to retailers and brands. As we come out this, those companies that have reduced costs, increased operating capability, strengthened their agility, you know, we as Americans are optimistic and we know the consumer will come back, and these companies are gonna be better position if they've survived through the then they're gonna be better position to coming out of it. But they have to have the technology and the capabilities to enable that.
Derek Pitts: 21:07
One of the most interesting aspects of what you just covered, I don't think a lot of people think about the opportunity set on this side is this situation breeds innovation, because that's the path forward because you're have to have it. And from my seat, I believe they'll also be driven by the need for, but also the creativity of people. Whether the business people, financing people, advisors, everyone, everyone gets an innovative mindset. There are paths that are created that find ways to structure around problems that you may or may not have seen before. And on the balance sheet side innovations could come in a number of different forms. I mean the level of dislocation for all your counter parties. When you think about what it takes to restart thinking about, it takes to get your consumer back and get back the margins. But there's a whole ecosystem right that is required to do that goes from your trade vendors to your supply chain to your distribution points to the point of sale. And a lot of companies are global or at least their supply chain is global. So it's not only you here, it's what's happening all the way back in the chain. What's the situation from your supplier? Do they need to have some financial support to continue to manufacture key products for you, which will be a key element that people hage to figure out, which is not something companies or clients have historically done because that's been done through the typical, let me borrow my bank debt, let me fund my trade payable, all the timing of cash flows hadcertain cadence to it. Well, that's completely different, but you still have to move goods, and you still have to meet the consumer where they need to be met. And so you're going to need different innovative structures around how to make sure that ecosystem in its pieces gets put back together until at some point in time, it molds together with all the innovation that you're talking about in terms of the way people need to look at their business, really, look at it, become more agile, do things differently. And I think you could you could have some very, very interesting assets in situations come out. There's gonna be a lot of pain, and there's gonna be a lot of stories that aren't successful right. They're gonna be situations where people just that the ecosystem has become too too broken. The way is too much their flexibility is too limited, right? You're just going to have that, and this process, in some ways is going to accelerate. I think a lot of that what, what could have happened over a longer period of time. But then you also have the people that can take advantage of the innovations or have managed the process enough where they've done enough of the right things, have enough liquidity, moved the different things around in a way that didn't totally smash what sort of worked, even though it's hurt in a way that you can start to put everything back together again once it once it comes together. So it's gonna be interesting time. Whatever that ramp up back is that it's gonna be a lot of creative thinking that needs to be brought to the table.
Cathy Leonhardt: 24:00
And the one thing that's going to enable this is there is the mind set of we're all in It together. The retailers, the brands, the supply chain, you know, the financing sources and there's just more of a willingness. It seems to be constructive among all the constituencies than ever before. This is a global crisis, and it's interesting to see how conversations are progressing and how folks are working together now, but also will be interesting to see how they work together as we as we come out of it. We have a 30 year history advising consumer and retail companies across cycles, you know, in providing that independent advice across strategic and financial matters. And we're gonna be here to help our clients through this. And you know, whether it's a unique capital structure or financing situation or just good sound advice, that's what we're here for and that's what we're gonna be doing.
Derek Pitts: 25:06
One of the most important things that companies can and should do, and that we're helping them with is, given the unprecedented nature of this, maybe 30 years as you say, we've been helping people through all kinds of different cycles, and I think a couple of those cycles you'll look back and people were also using the word unprecedented. And so when you look at this unprecedented well, it has a lot of wide reaching ramifications, also has the opportunity for people to relook at what they do and be creative. And since, you're right, everyone is in a similar situation. Everyone has been almost equally is dislocated. What that means is as different parts of the system start to turn back on and some will turn on earlier, some will turn on later. They'll be different places. You know, you as as a centerpiece of that we're advising people is you have to be proactive and educate counterparties, everyone in the system on how you should be treated, how you're willing to work with them, how you should be valued, how you value them. I you should be supported and how you support them. Since we're all in this together, you don't let someone get so far ahead of the rest and they're machine starts the work in, and then they start to make assumptions and draw conclusions about where everyone else on the board should be. And then you get caught up in that and it would make your circumstance much harder if you get caught up in what everyone else is doing and just reacting. So if you think you have enough liquidity, get more as being one of the key mantras. The other mantra we would have is you gotta be the coauthor of your own story and you have to be a self promoter. Put it out there. Ultimately drive the result you want. You don't want to be in a situation where the machine is figuring it out. And then you're trying to learn how to how to react to that. That will not put you in the best position to recover or grow. And someday start using the word thrive again. People are gonna survive through this. They're gonna be different. They're gonna have adjusted what they need to have adjusted. There gonna be more innovative, and people will get back to fthriving, but you've got to be the co author of your own story and you have to be proactive.
Derek Pitts: 27:17
Thank you, Derek.
Derek Pitts: 27:19
Thank you, Cathy. Thanks everyone for listening and please visit us at PJSOLOMON.com