IF AN OUNCE OF PREVENTION is worth a pound of cure, then retailers must work harder to detect early warning signs that can lead to a liquidity crisis. Macro-economics, geopolitics and shifts in consumer spending behaviors certainly have their outsize impacts, but much of a retailer’s success or failure comes from within—how they manage inventory, technology and more, and what that means for the customer experience.

“The Getzler Henrich Retail Industry Team believes that retailers must recognize the warning signals early and implement corrective measures to avoid a liquidity crisis, downgrading of their credit ratings, or worse, formal bankruptcy proceedings,” said Dan O’Brien, managing director of Getzler Henrich & Associates.

Recognizing that each troubled situation has unique challenges and solutions, early warning signs of financial or operational distress are numerous and will be related to net sales, gross margins and store profitability (four wall cash flow).

Managing inventory properly is critical to averting liquidity crises in the first place. “Most retailers have a financing facility that is collateralized by substantially all the assets of the company, and for a retailer, merchandise inventory is the single largest asset in its borrowing base,” said O’Brien. “A retailer’s inventory management practices and the asset-based lender’s (ABL) level of experience with the type of merchandise and appraisal results will influence the specific advance rate set.”

Typically, advance rates on inventory can be 50 percent of the inventory’s appraised value, but a glut of off-season merchandise may cause lenders to reduce advance rates. On the flip side, lenders might offer higher advance rates during peak seasons (e.g. back to school, Christmas or New Year) when inventory turnover is expected to be faster.

A retailer’s ABL lender will look at inventory turnover rate and trends, how the retailer deals with slow-moving inventory, the retailer’s supplier relationships, the physical location of inventory among other factors in its determination of inventory that is ‘eligible’ to be included in the borrowing base and level of advance rate. If advance rates are lowered, the retailer’s borrowing cushion, or credit line or “availability,” may not be sufficient to pay its vendor invoices when they become due.

Maintenance of strong supply chain controls can help retailers manage their inventory. Demand will fluctuate by season and if forecasting accuracy is not what it should be, fragmenting the supplier base can help mitigate capacity constraints at the individual supplier level. Forging on-demand partnerships in warehousing may provide opportunities for retailers to secure additional space needed for short-term spikes. Supply delays and stockouts hurt sales if retailers don’t have the ability to replenish product quickly.

“Retailers must develop a markdown/promotion strategy for excess or slow-moving inventory, which could include communicating with vendors on the possibility of returning slow-moving merchandise for full credit, if practical,” O’Brien said. Retailers should also cancel purchase orders for merchandise already in an overstock position.

Shrink is another retail problem that retailers must take seriously and get ahead of. While many retailers might look at petty theft as a cost-of-doing-business expense, it’s hardly petty (retail shrink cost retailers over $112 billion in 2022, according to the NRF in their National Retail Security Survey conducted last year). Investing in measures to deter theft, be it staffing or technology, can pay off in the long run, especially if locked-up or missing merchandise is sending inconvenienced customers to shop elsewhere.

Management also needs to pay closer attention to other issues that impact liquidity. These include close-proximity store openings by competitors that can lure away existing brick-and-mortar customers, loss of key personnel, incompetent management, poor customer service, changing customer profiles, and inadequate or obsolete information technology. “Information Technology is very important since retail is such a real-time business,” said O’Brien. “If the checkout technology freezes while people are in line, to name one example, customer experience is harmed.”



There is only so much a retailer can control, but that scope is still broad. “We believe that focused control of inventory, focus on costs and focus on cash flow remain the primary mantras to meet the many challenging headwinds directly,” said O’Brien, who recommends the following actions:

· Review each brick-and-mortar location and identify those stores that will continue to have negative four-wall cash flow.

· Consult with professional monetization experts such as Hilco Merchant Resources LLC to consider running store-closing sales. “Additional liquidity will be created if the net realization rate exceeds the inventory advance rate (subject to satisfactory settlements with landlords for potential lease termination claims),” he said.

· Consider retaining a real estate appraiser such as Hilco Real Estate LLC to identify long-term, below-market rate leases. The value of a lease may exceed the present value of the projected four-wall cash flow, plus, the net proceeds from the sale of the lease can be used to reduce the revolving loan balance.

· Ascertain the benefits, if any, of entering a sale and leaseback transaction for owned real estate.

· Review the store staffing model to determine if there is any excess staffing during the slow selling times and inadequate staffing during peak season.

· Challenge each department manager to review their cost structure and identify areas where there are cost saving opportunities.

· Review store renovation plans and determine if any Capex can be deferred.

At a basic level, a liquidity crisis may occur when the retailer’s lender decides that it is necessary to reduce the advance rates applied to the eligible collateral. Merchandise inventory is typically the single largest asset for a retailer in the borrowing base. Working capital management for retailers and non-retailers alike is key to avoiding a liquidity crisis.

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