The retail industry is battling a wave of bankruptcies as many nationwide retailers struggle to survive.
Brands like Red Lobster, Express, Joann, David’s Bridal and 99 Cents Only Stores are just a few of the names that have filed for bankruptcy in the past year. These retailers have faced challenges such as changing consumer behavior and rising operating costs, or have struggled to stay relevant and adapt to changing market dynamics.
For struggling retail companies, restructuring is a viable strategy as it offers the opportunity to optimize the financial and operational aspects of a business, thereby increasing profitability. Real estate is a crucial but often overlooked component of retail restructuring.
Aligning real estate assets with sales performance by right-sizing stores and renegotiating leases can have a significant impact on the company’s bottom line. The key to a successful restructuring is paying close attention to all aspects of the business, including a company’s real estate portfolio, to ensure a streamlined and effective turnaround strategy.
When it comes to valuing a company’s real estate portfolio, there is no one-size-fits-all solution, as the needs and circumstances of each individual asset vary significantly. This approach is
equally important when you begin the process of lease negotiations. Avoid sending a generic form letter to a landlord without first having a conversation to understand the owner’s perspective.
This strategy can seem impersonal and dismissive, potentially damaging to the relationship with the landlord. Instead, seek open dialogue to understand the landlord’s priorities and constraints before negotiating to encourage cooperation and achieve more favorable outcomes. By acknowledging the landlord’s unique situation and showing a willingness to accommodate their needs, the likelihood of achieving favorable lease terms for both the tenant and the landlord increases, which is critical to a successful restructuring.
At the same time, you shouldn’t work with landlords without first being clear about your strategic goals. Without this guidance, negotiations are likely to miss critical factors that could impact your future success. For example, if you want to expand into new markets, downsize or optimize your space and the lease negotiator is unaware of this goal, it could result in missed opportunities or unsuitable leases.
Understanding your business model, including target market, operational requirements and growth plans, will help you set up negotiations for success. Knowing the target market will help identify the locations that will maximize customer reach and revenue potential, while knowing any special operational requirements will ensure the space meets logistical needs such as layout, square footage and amenities. Knowing growth plans allows flexibility in lease terms and allows for future expansion or downsizing.
In addition to real estate strategies, exploring financing options can provide much-needed cash flow to stabilize a struggling retailer. One option is invoice financing, which leverages unpaid invoices to free up funds. The alternative is invoice factoring, which allows you to sell your outstanding invoices to a third party at a discount to receive an advance of around 70-85% of the invoice value. This approach provides immediate cash flow, but involves a contract that could potentially strain customer relationships.
Alternatively, invoice discounting allows a business to borrow against its invoices while maintaining control of its accounts receivable ledger, allowing for regular, quick cash infusions. Both methods significantly improve cash flow, address immediate financial challenges and help the retailer focus on long-term recovery and growth.
Beyond restructuring real estate, companies should take full advantage of the comprehensive support and opportunities offered by Chapter 11 rather than rushing the process. Chapter 11 provides a framework that allows companies to systematically address their financial challenges.
By using the Chapter 11 process, retailers can restructure their debt while continuing operations, renegotiate or terminate onerous contracts, secure more favorable lease terms, pursue new financing options under court supervision, and reduce their overall debt. These strategic steps can help retailers emerge from bankruptcy stronger and better positioned for future success.
