How Fashion Retail Should Prepare for the Stimulus Packages Ending

Article as Appeared in Ragtrader Magazine Jan/Feb 2021 Edition.

The end of the stimulus package on the 28th t March 2021 couldn’t occur at the worst time for fashion retailers coming at the end of the traditionally slow months of January to March, 12 months of Covid disruption, less revenue due to the recession, lockdowns, and changing shopper habits.

Leaving aside trading up to Christmas retailers have 3 months from 1st January 2021 to 28th March 2021 to plan for 28th March stimulus ending.

For retailers not receiving JobKeeper, it's worth reviewing your strategy and options for a post-covid world

In this article I have set out a recommended timetable for action and co-opted the help of Louisa Sijabat a registered Business Restructuring, Safe Harbour and Insolvency expert to answer some critical questions and explain insolvency terms such as “Safe Harbour”, “Voluntary Administration” and the types of Restructuring available that potentially you may want to consider.

The implication for the Fashion Industry

With JobKeeper finishing on the 28th March 2021 there are implications for retailers, specifically

• When JobKeeper finishes will a substantial number of employees lose their job and end up unemployed. For all retailers, this may have a serious impact on consumer confidence and sales.
• To be eligible for JobKeeper actual sales for the September 20 and December 20 quarter need to be 30% less than for the comparable quarter in 2019. Those retailers recording 30% less sales will struggle to be profitable post JobKeeper and should seriously consider their options and their short and long-term viability.
• For retailers that are generating between 0% (break-even) and 5% Net Profit currently a restructure may be the best way to get the business growing again.
• For retailers generating profits exceeding 5% Net Profit, congratulations and think about ways to further improve profit via rationalizing store numbers and digitizing the business to reduce costs.

With a vaccine expected to be rolled out early in February 2021, the good news is that growth and reduction in unemployment will start, the bad news is that there is expected to be a lag effect that retailers will need to navigate through.

The 3 Type of Fashion Retailer Post Stimulus

For each of these Fashion Retail types we have listed below actions and a timetable to allow them to be in a position post stimulus to move forward with confidence

Type 1: Zombie Retailers: These are fashion retailers where the stimulus package and low-interest rates are allowing them to stay in business when the market would normally force them to close. What defines a “Zombie Retailer” includes

• Excess stock/ low stock turns
• Declining sales and gross margin over several years
• Sales have declined 30% + for September and or December 2020 Quarters
•  Net Losses or break even
• Ecommerce sales below 10% of total sales
•  Limited surplus cash flow

 Type 2. Hope & Guess Retailers: These are fashion retailers that believe with some help they can restructure their business however there are risks and uncertainty involved. The executives desire to move beyond hope and a guess to a more certain future. What defines a “Hope & Guess “Retailer include

• Excess stock/ low stock turns
•  Declining sales and gross margin over several years
• Too many stores a proportion of which are making losses or minimal profit
•  Break-even or at best a small profit
• A growing Ecommerce business
• Tight Cash Flow

Type 3. Transitioning to Digital Retailers:

Most Australian Fashion Retailers are somewhere along the journey to becoming a digital/modern retailer that will open up massive cost reduction and revenue growth. Here restructure is the order of the day. For the last 12 months, Covid has delayed much needed updating of processes and systems as survival overtook the digital restructure.

I can name any number of high-profile retailers with turnover in the hundreds of million to billions that have not implemented a world-class ERP System despite talking about it for many years a key ingredient to becoming digital, this has now been delayed a further 12-18 months.

What defines a Transitioning to Digital” Retailer include

• Too many stores
• Overbuying leading to excessive stock and declining margins
• Cashflow tied up in stock and leasehold improvements
•  Need to further invest in technology
• Further investment in Ecommerce and Supply Chain required

Critical Questions for Fashion Retailers 2021:

Quite a few retailers will be in a precarious position in 2021 or are unsure whether they will be able to survive and prosper. In these circumstances, we recommend you seek outside help to lower the risk and potential personal exposure.

If you have questions around reducing the number of stores, cash flow and bank relations, excess stock, cost reduction, and viability after the withdrawal of JobKeeper it is better to seek outside help to complement internal resources to lower the risk of making a misstep.. Many retailers are having difficulty with landlords who are inflexible when it comes to rent reductions its time therefore to explore options.

Retailers typically say when confronted with an uncertain 2021

• I can do it myself; I do not need help or a 2nd opinion
• I can do it myself however I need specific help dealing with the bank, landlords, suppliers, and so on
• I am uncertain if we will survive so I would like to consider “Safe Harbour” ASIC provisions or Voluntary Administration to protect myself and to restructure
• Can I survive beyond JobKeeper do I restructure or liquidate?

Recommendation

Depending on what type of fashion retailer you are will depend on your options. Typically, we would recommend the following course of action

• Zombie Retailers: Safe Harbour & Restructure / Voluntary Administration & Restructure /Liquidation
•  Hope & Guess Retailers: Retail Expert Advice / Safe Harbour & Restructure / Voluntary Administration & Restructure
• Transitioning to Digital Retailers: DIY/ Retail Expert Advice / Safe Harbour & Restructure / Voluntary Administration & Restructure
• Too many stores inflexible landlords: Voluntary Administration & Restructure
•  Bank and Cashflow Issues: Retail Expert Advice / Safe Harbour & Restructure / Voluntary Administration & Restructure
• Stock Issues especially if at a high/critical level: : Retail Expert Advice / Safe Harbour & Restructure / Voluntary Administration & Restructure

Timetable:

Here is our recommended timetable to review and revitalize your fashion business post-stimulus package 

Louisa Sijabat, a Business Restructuring and Insolvency Expert, Answers Your Questions

I would like to introduce you to Louisa Sijabat ( LSijabat@Vincents.com.au, mobile: 0404 813 716) a Business Restructuring, Safe Harbour, and Insolvency expert with Vincents Chartered Accountants to answer some questions and to demystify terms such as Safe Harbour and Voluntary Administration, and explain the types of Restructuring available to fashion retailers.

Thanks, Louisa for joining this Q & A for Ragtrader to help our retailers navigate these difficult times and the end of the stimulus packages.

LS: Thank you for having me.

Questions:

1.     BR: What types of restructuring options are available to fashion retailers?

LS: There are “informal” and “formal” restructuring options available to fashion retailers. Different types of restructuring are used to address different issues in a retail business.

An “informal” restructure is one that isn’t announced to the market or made public. An “informal” restructure can be used to make significant changes in the business to return it to profitability and growth, or further profitability and growth.

This can include things like:

• Strategic planning
• Refinancing existing banking and finance facilities
• Recapitalising the business, including through new investors
• Sale of parts of the business, especially non-core businesses
• Consideration of strategic acquisitions
•  Cashflow planning and negotiations
• Landlord negotiations
• Refreshing and/or repurposing stores
• Management and personnel changes
• Market repositioning
• Operational improvements, including:
• Addressing stock issues, including too much stock / unsold stock, dated stock, a suboptimal stock mix, consistent overbuying issues etc.
• Supply chain issues & strategic decisions
• Product range, including innovation, diversity, and fashion cycle length
• Customer experiences
• Cost analysis and cost reductions
• Marketing
• Digitization and new technologies
• Omnichannel experiences
• Sustainability

A “formal” restructure is one that is publicly known and enables certain actions to be taken that aren’t available in an “informal” restructure or can be approached in a different way, which can be more optimal for the business:

These include:

• Exiting some leases and premises while retaining and continuing to trade from only profitable locations
•  Change of mix of larger and smaller format store location
• Exiting certain businesses of the company or group while retaining others
•  A formal process for employee terminations and redundancies (or redeployment), especially for exited locations and exited businesses within the company or group
• Dealing with all legacy debts that aren’t secured against assets from before the date the formal restructure starts altogether, rather than negotiating payment plans and arrangements separately with each party, saving valuable management time and energy to focus on the future of the company.
• Terminating selected supplier, overhead and operational contracts, and expenses while retaining others to free up cash flow
•  “Right-sizing” the business to optimize it for future profitability, growth, and agility

A “formal” restructure is commonly done through the company or group initiating a Voluntary Administration, typically with the aim of right-sizing the business, coming to an agreement with creditors owed legacy debts, and coming out the other side with a leaner business now positioned for future profitability and growth.

2.     BR: How do I know if I should be considering a restructure option?

LS: If your company is still utilising JobKeeper now and/or you have any temporary landlord concessions in place and would struggle without these, I highly recommend investigating your restructuring options now including Safe Harbour and Voluntary Administration. This is because it usually takes a few weeks to a few months to prepare for one or both of these processes, and the window of opportunity where these remain options available to you does close at some point if things don’t improve.  

3.     BR: Can you explain the term Safe Harbour and how it helps directors of fashion retailers?

LS: Sure. Sometimes a company or group of companies go through a period of tight cash flow. It can sometimes be hard for the company’s or group’s directors to know if any “informal” restructure plans may or may not ultimately be successful, and whether their company or group will return to a better cash flow situation, profitability and growth, or in the worst-case scenario, end up in liquidation.

Simultaneously, company directors have a duty under the Corporations Act 2001 to prevent any company they are a director of from trading while insolvent and if they don’t, they can be required to personally compensate the company for the loss or damage caused to the company as a result of it trading while insolvent. This can be a very large amount and is often accompanied by legal proceedings against directors – which are costly, time-consuming, and stressful. These legal proceedings and insolvent trading claims against directors occur if the worst-case scenario occurs and the company ends up in liquidation, and the liquidator believes that the directors have traded the company while it was insolvent.

This sometimes prevents directors from even attempting to restructure their company as to them, it’s not worth risking their personal assets, including often their own family home, for the sake of trying to get the company into a position where it can repay all of its company debts.

So this is where Safe Harbour comes in. Safe Harbour is a process undertaken by directors of a company, usually, as part of an “informal” restructure, to provide the directors with a defense to any potential future insolvent trading claim should the worst-case scenario occur and the company ultimately end up in liquidation, with the liquidator bringing a legal claim against the directors for insolvent trading.

There are a number of specific steps that need to be undertaken by the board of directors for Safe Harbour to be a valid defense, and if undertaken correctly, usually with the assistance of a Safe Harbour professional advisor, will mean that the directors’ personal assets are not at risk for the Safe Harbour period as they seek to restructure the company and return it to profitability and growth.

4.     BR: How do banks and suppliers typically respond to Safe Harbour arrangements?

LS: This generally depends on how the accompanying restructuring plan for the company or group proposes to deal with each bank’s and each supplier’s debts, whether the existing relationships are supportive or whether they have deteriorated, the amount of the debt owed to each, the alternative scenarios of what would be available to the banks and suppliers in the event of the company’s liquidation, and other factors. As a general principle, banks and key suppliers tend to be more supportive when they consider their interests are being genuinely looked after to the best of the company’s ability, when they have been kept informed from an early stage, and communication with them is open, honest and frank.

5.     BR: Can you explain the term Voluntary Administration and give an example of when you would deploy it?

LS: Sure. A Voluntary Administration is a process a company or group of companies goes through to put a “formal” restructuring plan to its creditors, to see if its creditors may accept it and permit the company to continue operating.

For example, if a retailer has too many stores that are unprofitable, either due to COVID-19, digitisation of the industry or any other reason, and no agreement has been able to be reached with the landlords, a voluntary administration can be used exit from unprofitable locations and to “right-size” your business.

6.     BR: How long will a Voluntary Administration go for?

LS: Typically, a voluntary administration will go for about 4 to 6 weeks, although this can be extended if the retailer is very large or if there are complex issues involved that need more time. If the restructuring plan is accepted by creditors, the payments can be over a period longer than this.

7.     BR: How much will it cost?

LS: This varies depending on how large the retail group is and the level of complexity in the business and/or in the restructuring plan.

8.     BR: What is my exposure if I am a director and I am not sure if the company will survive post the Stimulus Package?

LS: Company directors need to be aware of their exposure from any personal guarantees they may have signed, which guarantee that they personally will pay those debts that the company doesn’t pay. It’s a good idea to start by making a list of all debts that the director has personally guaranteed. Company directors also need to prevent their companies from trading while insolvent, and Safe Harbour is a key part of doing this.

9.     BR: What size retailers should consider your advice and Safe Harbour/Voluntary Administration?

LS: Safe Harbour and Voluntary Administration can be used by retailers of any size. Retailers with over about 5 stores may find it most beneficial as the benefits available to them usually exceed the cost of these processes.

Thanks, Louisa again, for this informative overview and options fashion retailers should consider as they approach the new year.

Bill.

In the next few days, I will post a video discussion between Louisa and myself on this topic look out for it