WWD: Retail Restructuring Seen Ahead

Date: 14-Apr-2011

By David Moin and Vicki M. Young

Retail will be a primary source of restructuring activity for the next 18 months, if not longer.

That’s the conclusion of Durc Savini, managing director and head of the restructuring and recapitalization group at investment bank Peter J. Solomon Co., which held a company presentation Wednesday on “2011 Retail Restructurings: Watch Hemlines, Hardlines and Waistlines” at New York’s Princeton Club.

Other presenters included Kenneth Berliner, president and head of the mergers and acquisitions group, and managing directors Jeffrey Derman and Jeffrey Hornstein.

Savini told attendees that the largest segment of firms with risky credit ratings — 18 percent — are apparel and retail companies. Those limited by lack of financial strength or low pricing power are the ones that will be facing tough headwinds, he said.

Berliner noted that while M&A deals in the past few years have seen lower multiples of seven to eight times earnings before interest, taxes, depreciation and amortization, those multiples are slowly rising again. In a few years, they will likely equal or surpass the 10 or 11 seen between 2006 and 2008 in the days before the Great Recession.

He also said that volatile consumer demand, coupled with shifts in consumer preferences and a rise in e-commerce as a sales channel, add pressure on retailers as they decide which consumers they target, which vendors they use and at what price points they sell.

Still, despite the threat of e-commerce, “traditional retailing is not going to disappear,” Berliner concluded. He explained that for many retailers, the e-commerce channel represents 10 percent or less of overall revenues, and in some cases even less than 2 percent.

Derman pointed out that in the case of hardline retailers, the biggest threat is “absolute price transparency” facilitated by mobile technology that enables consumers to scan product codes to determine which stores are selling the same products at lower prices.

“Price transparency continues to put enormous pressure on margins,” he said.

The hard goods sector is fighting back against the competition with new service offerings, such as product advice, a particularly effective tool at places such as Home Depot or Williams-Sonoma. Derman also advised that in the overstored economy, the sector should adjust to operate fewer stores that are smaller than those in operation. It also has to adapt to changing consumer needs more quickly, he said.

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