The Sports Authority: A View From the Trenches and Lessons for the Next Big Retail Case

Transcription

1 The Sports Authority: A View From the Trenches and Lessons for the Next Big Retail Case

2 Ivan Gold Keith Jelinek Jennifer Bellah Maguire Robert Klyman The views expressed in these materials are those of the speakers and should not be attributed to their respective organizations.

3 Retail Issues & Challenges Headwinds in Retail

4 Current Retail Trends Evolving U.S. Demographics Millennials total population in the U.S. has surpassed Baby Boomers This younger consumer is reaching their prime spending years, while Boomers fade into the sunset of their lives (and spending impact) Millennials are very different from the rest of the consumer population, both in they ways they shop and how they spend their money This shift will dramatically impact the approach retailers take to interact and connect with their customers

5 $ billions Current Retail Trends Online Sales Impact U.S. online sales exceeded $340 billion in 2015 expected to increase 57% to $535 billion in 2019 Key retail segments have been especially hard-hit by online sales, e.g., Department Stores, Consumer Electronics, Specialty Apparel, Books Price transparency online is a gamechanger for consumers and retailers as price comparisons become effortless an big advantage for shoppers at retailers expense $600 $500 $400 $300 $200 $100 $0 US Retail e-commerce Sales $535.0 $481.9 $431.8 $384.9 $340.6 $298.3 $ * 2016* 2017* 2018* 2019* Source: Statista.com. E-Marketer * = forecast

6 Current Retail Trends Sluggish Retail Sales Growth Retail sales growth in the 3-4% range, vs 5% - 7% seen postrecession Holiday sales increase 2015 around 3% - not much improvement expected in 2016 Key retail segments have been especially hard-hit, e.g., Department Stores, Consumer Electronics, Specialty Apparel

7 Meeting the Challenge No Place to Hide! Make it easy for customers Omni channel is NOT just about shopping online; shoppers want the stores and online to work together Focus on retail blocking and tackling Service, in-stock, no hassle, value relentless focus on execution of the basics will be rewarded by customers Supply chain excellence MASTER YOUR INVENTORY and ASSORTMENTS Labor Productivity / optimization Embrace mobile payment options cybersecurity is an issue that must be addressed CRM harness big data, loyalty initiatives to connect with and understand your shoppers BRG Consumer Spending Survey, July 2016

8 Meeting the Challenge No Place to Hide! Consumer Mindset 2016 Consumers are sitting the fence 49% feel good about their financial situation, 51% are neutral or not positive 76% expect to spend the same or less on holiday this year compared to 2015 Those expecting to spend less cite impact to their income as the reason Consumers are likely to continue to be cautious with spending retailers can t expect a spending splurge to save the year BRG Consumer Spending Survey, July 2016

9 Critical Impact on Retailers A Case Study Takeaways from the Sports Authority No proprietary offerings in assortment products can be bought anywhere, including online Lack of organic growth vs. growth by acquisition Lack of continuity across store portfolio Disparate channels of competition like retailers, mass merchants, online, specialty retail Key vendors also major competitors, e.g., Nike, UA, etc. Choking on real estate too many stores as online competition grows Zero wiggle room to be creative both in physical facilities and financial capabilities

10 The Challenges for Restructuring Classic LBO layered capital structure with tiers of senior debt, cascading maturities Closely watched by rating agencies (in turn watched by vendors) Magnitude of Real Estate amplified by big box format

11 Landlord Issues Bankruptcy Code section 365(d)(4), as amended in 2005, generally limits the debtor s time to assume or reject unexpired nonresidential leases to 210 days: Initial statutory period earlier of 120 days after petition date or date of entry of an order confirming a plan ( 365(d)(4)(A)) Additional 90-day extension available under deferential showing of cause ( 365(d)(4)(B)(i)) Subsequent extensions only available with landlord s prior written consent ( 365(d)(4)(B)(ii))

12 Going Forward with or without a Plan Are you going in with a deal vs. no deal: Primary differentiation between success and failure having a transaction on day one When an exit sale is the best option 363 going concern time of year is an issue Seasonality of product vs. seasonality of cash flow 365(d)(4) timing for rejection of leases Buyers wonder if they are better off buying leases when leases are rejected, where the landlords are wounded. Will equity sponsor be playing for an option? Composition of participants in capital structure and who is willing to put in money is critical

13 No pre-negotiated deal How to successfully negotiate with all constituents Does filing foster negotiations or push people apart? Liquidation, but not as bad as it sounds. Takeaway is that if you are behind DIP lenders, explore all options to get to a deal Retail inventory is easy to liquidate predictable.

14 Special Topics and Lessons Learned

15 Special Topics and Lessons Learned Sale of Customer Data Privacy Policies are contractual (click-through), so starting point is whether their terms prohibit sale of the data TSA s website provides: We may transfer your personal information in the event of a corporate sale, merger, acquisition, dissolution or similar event Companies may have multiple customer-facing policies (e.g. loyalty programs) There could always be an argument e.g. is bankruptcy is similar event

16 Special Topics and Lessons Learned Sale of Customer Data (cont d) Consumer Protection Agencies impose additional standards on retailers The FTC contacted the court in RadioShack privacy policy didn t enable FTC has articulated these policies: that consumers information not be sold as a standalone asset, but be bundled with other assets (such as trademarks etc.) that consumer information be sold only to another entity that is in substantially the same line of business that the buyer agree to be bound by the debtor s privacy policies that were in place when the consumers data was collected that the buyer provide consumers with notice and obtain their affirmative consent before using data in a way that is materially different from the promises previously made to consumers Overall, the identity of the buyer may either reassure or worry the FTC The Bankruptcy Court appoint may appoint a privacy Ombudsman (pursuant to Section 332 of the Code)

17 Consignment Issues Consigned Inventory (as of the petition date) Pay-by-Scan Agreements with 160 vendors 10-14% of The Sports Authority s total inventory Approximately $80 million (invoice cost) Wide array of goods across 464 stores Under the agreements, vendors received either a fixed amount or a fixed percentage of the sale proceeds following the sale of consigned goods (on average, days after the end of the month in which the goods were sold). The Sports Authority sought authority to continue selling the consigned inventory in their regular stores and 160 GOB stores, and to escrow the disputed sale proceeds pending resolution of complex consignment issues.

18 Consignment Issues (cont d) Threshold issue: Ownership Who owns the goods? The Sports Authority or vendors? Vendors argument: vendor retained title by operation of vendor agreement and The Sports Authority holds goods under bailment law. The Sports Authority s argument: title passed from vendor to The Sports Authority by operation of UCC 2-401(1), which converts a retention of title into a reservation of a security interest subject to UCC Article 9. UCC 2-401(1): Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.

19 Consignment Issues (cont d) Secondary Issue: Lien Perfection and Priority Applicability of UCC Article 9 to Consignments: UCC 9-102(a)(20) defines consignment for purposes of Article 9 to include goods delivered for sale to a merchant. UCC 9-319(a) provides that a consignee is deemed to have rights and title to consigned goods while such goods are in the consignee s possession, and thereby allows consignee s creditors to obtain liens in consigned goods. UCC provides a consignor with the right to obtain a purchase-money security interest (PMSI) in consigned goods.

20 Consignment Issues (cont d) Secondary Issue: Lien Perfection and Priority (cont d) If title passed to The Sports Authority, do the vendors have perfected, senior liens on the goods? UCC 9-310(a) requires the filing of a financing statement to perfect a security interest. UCC set forth rules of perfection (perfected trumps unperfected). UCC sets forth rules of priority (generally: first in time, first in right). UCC sets forth rules of priority specifically for purchase money security interests; permits a PMSI to trump prior lien (e.g., lender s blanket lien on inventory) if specific conditions are satisfied.

21 Consignment Issues (cont d) Secondary Issue: Lien Perfection and Priority (cont d) How a consignor obtains a perfected, senior lien in consigned inventory: Perfection: file a UCC-1 financing statement that identifies consigned inventory in state where consignee is registered. PMSI Priority: send notice to consignee s prior lien holders to notify them of perfected lien in consigned inventory before consignee receives possession of inventory. Note: without PMSI priority, a consignor s perfected lien would fall in line behind prior, perfected liens (e.g., lenders blanket lien on inventory).

22 Consignment Issues (cont d) The Sports Authority s Adversary Proceedings against Vendors The Sports Authority initiated 160 adversary proceedings to seek declaratory relief on the ownership and liens issues. Only 3 of 160 vendors obtained perfected, senior liens in consigned inventory by filing UCC-1 financing statements and sending notices to The Sports Authority s secured lenders. Vendors that provided no notices to secured lenders hold only junior liens. UCC-1 financing statements that were filed within 90 days of the petition date are subject to avoidance as preferences. Vendors that hold only unperfected liens are junior to both secured lenders and The Sports Authority as debtor-in-possession. Court has not ruled on any of these issues.

23 Consignment Issues (cont d) Sale of Consigned Inventory and Status Update Court permitted The Sports Authority to sell the consigned inventory under the prepetition contracts if The Sports Authority continued to remit the vendors portion of the proceeds to the vendors (subject to clawback pending resolution of the adversary proceedings). Consigned goods remaining at closing stores could be either stored by The Sports Authority pending resolution of the adversary proceedings, or returned to the vendors with no clawback rights. The Sports Authority has now dismissed or settled with the majority of vendors, but approximately 19 adversary proceedings still remain to be adjudicated or settled.