February 12, 2009
Financial Transparency Needed in Challenging Times
By Tom Ryan
With rumors flying daily,
retailers need to be more forthcoming in providing details of their financial
condition to vendors. This is particularly important as these rumors can
push a retailer into bankruptcy court and it’s become virtually impossible
to reorganize in Chapter 11 bankruptcy protection.
That’s the view of veteran
bankruptcy lawyer Larry Gottlieb, who spoke on Wednesday in Newark, N.J.
at “The State of Retailer: A Financial Perspective,” a seminar
sponsored by the Vendor Compliance Federation (VCF) and Trade Promotion
Management Associates (TPMA).
Mr. Gottlieb, of Cooley Godward Kronish LLP,
said that well beyond monthly sales statements, retailers should be providing
monthly P&L statements and frequent details on borrowing rate availability
and loan covenant compliance measures. Conferences with vendors should
be held regularly and secured websites should be set up to provide vendors
with easy access to up-to-date financial info.
The increased access
to information, according to Mr. Gottlieb, should come from both those
retailers with solid as well as questionable credit because the financial
crisis and poor economy has increased retail’s overall exposure to bankruptcy.
“Think about the
number of retailers you have concerns about today that you would have never
believed would have been at risk just six months ago,” suggested Mr.
Gottlieb.
One primary reason retailers
should provide greater financial information is to avoid bankruptcy at
any cost. That’s because amendments to bankruptcy laws enacted in October
2005 over the treatment of leases have made it nearly impossible to reorganize
in bankruptcy proceedings.
Bowing to pressure from
landlords, the new laws gave bankrupt retailers seven months to assume
or reject a lease versus a fairly unlimited time period previously. Since
their primary collateral is the inventory in the stores, banks are increasingly
worried about maximizing going-out-of-business sales in the tight, seven-month
time frame, according to Mr. Gottlieb. Essentially, banks are giving retailers
two months to sell the business. If unsuccessful, the third month is spent
filing the motion to run GOB sales that commence over the next three
months. As a result, banks are no longer offering reorganization as an
option.
“It’s a problem,” said
Mr. Gottlieb. “As long as that amendment exists, we will not reorganize
any retailer in any way.”
The other reason retailers
should open their books for vendors is because speculation is increasingly
likely to push a retailer into bankruptcy proceedings. Given anemic retail
sales and banks slashing borrowing availability, vendors have grown
nervous about the prospect of being left with huge unpaid and essentially
worthless bills in bankruptcy court. Without adequate communication in
today’s climate, Mr. Gottlieb said trade credit can quickly dry up.
“You can’t allow
the rumors to start,” said Mr. Gottlieb. “That rumor mill soon
becomes a runaway freight train that can’t be stopped.”
Discussion Question:
Do you agree that retailers need to be more forthcoming in providing
financial information to their vendors? What more can retailers
do to shore up trade support?
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Gosh, this varies all over the lot, and on an individual basis. Some retailers are liars and hurt people when they suddenly go belly up, and others are real truth tellers who keep vendors in the loop. But unless I had a real problem and a specific reason for doing so, I wouldn’t be at all inclined to routinely share sensitive info on my financial status, to the degree outlined in this article. Electronic files get around where you don’t want them to go, and I just don’t see a need for it any more than I see a reason to give out my social security number every time a doctor’s office asks, for example. Some people play fair, and others don’t. We all know that. How many times have companies kept two sets of books depending on who asks? And who’s going to protect you from that?
Leaving aside for the moment the whole issue of confidential company info, my instinct is that if vendors had access to financials they’d be more likely to shut off a retailer sooner than they otherwise would. That might be a good thing if you believe that once a retailer is under financial strain that they’re unlikely to be able to pull themselves out of it. On the other hand, in the current environment, it would probably lead to a lot fewer retailers.
This discussion should be split between perishables retailers (grocers, mostly) and purveyors of non-perishables. That’s because those who supply grocers depend on daily deliveries for their own cashflow purposes, making them extremely reluctant to push their customers into bankruptcy (if they can help it). Additionally, supermarkets are most often the main traffic generators where they are located, and landlords who also own the adjacent, occupied properties are extremely aware of the domino effect of shutting down a supermarket. They could wind up with a totally empty property.
Retailers of non-perishables, on the other hand, bought all or most of their inventory months ago. There are few suppliers out there depending on the store’s order tomorrow or even next week. So while it’s still uncomfortable, they are better positioned to pressure their customers for payment or returned inventory.
But for all of the erudite reasons proffered by those smarter than me in the previous comments, the premise that “fuller” financial disclosure by retailers will ameliorate their relationships with suppliers and lessors is a leaky boat. Many holes in that hull.
I also don’t want to get too inflammatory, but I have always maintained that when the lawyers and the government start running the show, we’re all in trouble. The unintended consequences both of these groups create when trying to do the “right thing” is, in my opinion, at the center of our current problem. There are inherent risks to running a business that make it rewarding most of the time and challenging, to say the lease, at others. Trying to make sure the former outweighs the latter is enough of a challenge in the face of global competition without added distractions and interventions. Removing risk has the unfortunate effect of limiting or doing away with reward. Do we really want that?
The real question is–why has it become so difficult to reorganize? I am really not happy with the banks these days. The self-same companies that liquidate a retailer are starting to go out and buy the brand when the liquidation is over.
If the brand is viable, why in heaven’s name did the company have to be destroyed in the first place?
The transparency we need right now is in the banking system. I don’t want to get too inflammatory here…but that’s where the problem is. There needs to be some sense of responsibility on their parts beyond “maximizing their shareholder value.”
What’s this guy smoking? Retailers are not going to provide monthly P&Ls to suppliers. That would be a dangerous and invasive path to follow.
I think his arguments apply to smaller retail establishments like independent dollar stores, c-stores, dry cleaners and tattoo parlors. No one whose career and life is wrapped up in retail is going to try and beat vendors out of what’s due.
You’re worried about collecting? That’s why God created C.O.D.
Knowing all the rules of financial disclosure that have been legislated in recent years, primarily due to the inappropriate actions of other industries, I believe it can only help vendor(distributor)/wholesaler/manufacturer and retailer collaboration. A vendor can have greater visibility into the entire supply chain with the availability of key metrics, including days inventory, days purchases/sales outstanding and cash operating cycle. The stakeholders can then take tactical action to build short- and long-term cash flow for the retailer, since vendors need as many outlets for their products as possible.
That’s a new one to me, having to file bankruptcy because of rumors. If rumors are causing a retailer to file for bankruptcy, then they obviously have some serious problems. Disclosing financial statements would probably just confirm the rumors. So I don’t see what could be accomplished.
Most but not all retailers are public companies, with income statements and balance sheets available to those vendors (and the broader community of credit firms, financial advisors, etc.) willing to examine them. It should be apparent from a company’s cash flow and debt/equity metrics whether it is in a position to weather the spending slowdown. But it’s still just as important for public companies to be as transparent with their vendor partners as with their shareholders and other constituents.
Retailers owned by private-equity firms present a different problem. It’s not always apparent–using Mervyns as a recent example–that the “deal” as structured by private investors may strip the store of assets needed to survive today’s downturn. It’s also not clearly visible when a private-equity firm may be putting out bigger fires on other fronts (think Cerberus and Chrysler, for example) and is simply unprepared to rescue its retail operations. In these cases, transparency is even more important to aspire to, but harder to achieve.
With all due respect to the many valuable insights that have been shared above, I believe that the perspective of the article may have been presented somewhat out of context.
I attended the conference and understand that Larry Gottlieb was sharing his belief that in today’s turbulent environment, it is critical for a privately as well as publicly traded retailer to partner with a vendor rather than operate in a vacuum. I don’t know about others, but I have had many instances of a retail trading partner that experienced liquidity problems. Some have been forthcoming and worked with me to either share the reason for late or non-payment or have worked out a deferred payment plan, in an effort to keep the receivable turning and product flowing. Others however, stopped communicating and left to our imagination the reason for non-payment. In these situations, we can only conclude that the worst has occurred or is about to occur. I recently had such an experience, and was prepared for the worst, when after a month of non-responsiveness from the retailer, we suddenly received payment and notice of a cash infusion and new bank agreement. Of course, if we had known about the discussions and negotiations, we would not have sold off the goods that were on order for this customer. We also would have been kept in the loop, which as an unsecured creditor, might be the very least that we should expect. After all, the secured parties such as the banks who have little if any risk, are kept informed every step of the way, and while they are providing the working capital for the business, we as trade creditors are providing another vital commodity, inventory, in which we rarely have any security (yet the bank has as collateral) and which also enables the business to generate working capital.
In instances where the retailer fails to disclose or effectively communicate issues that may be impacting cash flow, there are real concerns that develop, not the least of which could be creditors who overreact and start calling each other about the impending demise of the business. All too often, negative press can be a catalyst for negative reaction. Once merchandise flow is compromised, it may be impossible to reverse the damage. True, there may be little that can be done if a business is in distress, however, in these times, with fewer and more stringent funding alternatives, it might serve the retail trading partner well to work with the body of creditors that have a shared interest in their business and those that have perhaps been most supportive–the unsecured trade creditors.
For many years, Progressive, a major publicly-held insurance company, has published its financial results monthly. Not quarterly. Every retailer of any size, public or private, could do the same if they wanted to, because every retailer already reviews the results monthly, internally. Quarterly reporting is a charade, a delaying tactic, that hurts shareholders and creditors.
Yeah, Chapter 11 is very expensive, and it seems to work less and less often. But the underlying issue isn’t lawyers or judges or banks or the government. It’s just supply and demand: excessive retail space and a million me-too mediocre stores chasing too few customers. The NRF and every local Chamber of Commerce should unite to make America the Land of Zoning Restrictions. Eliminate 1% of all the retail space in the country every year for 20 years and you’ll see how profitable and robust retailing can be. Farmers are paid to conserve the soil and refrain from growing surplus crops. Retailers need to do the same. Shopping center developers should pay a 100% tax on all new construction, with the funds collected going towards training retailers to learn new skills that are actually needed, like nursing, plumbing and welding.
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Gosh, this varies all over the lot, and on an individual basis. Some retailers are liars and hurt people when they suddenly go belly up, and others are real truth tellers who keep vendors in the loop. But unless I had a real problem and a specific reason for doing so, I wouldn’t be at all inclined to routinely share sensitive info on my financial status, to the degree outlined in this article. Electronic files get around where you don’t want them to go, and I just don’t see a need for it any more than I see a reason to give out my social security number every time a doctor’s office asks, for example. Some people play fair, and others don’t. We all know that. How many times have companies kept two sets of books depending on who asks? And who’s going to protect you from that?
Leaving aside for the moment the whole issue of confidential company info, my instinct is that if vendors had access to financials they’d be more likely to shut off a retailer sooner than they otherwise would. That might be a good thing if you believe that once a retailer is under financial strain that they’re unlikely to be able to pull themselves out of it. On the other hand, in the current environment, it would probably lead to a lot fewer retailers.
This discussion should be split between perishables retailers (grocers, mostly) and purveyors of non-perishables. That’s because those who supply grocers depend on daily deliveries for their own cashflow purposes, making them extremely reluctant to push their customers into bankruptcy (if they can help it). Additionally, supermarkets are most often the main traffic generators where they are located, and landlords who also own the adjacent, occupied properties are extremely aware of the domino effect of shutting down a supermarket. They could wind up with a totally empty property.
Retailers of non-perishables, on the other hand, bought all or most of their inventory months ago. There are few suppliers out there depending on the store’s order tomorrow or even next week. So while it’s still uncomfortable, they are better positioned to pressure their customers for payment or returned inventory.
But for all of the erudite reasons proffered by those smarter than me in the previous comments, the premise that “fuller” financial disclosure by retailers will ameliorate their relationships with suppliers and lessors is a leaky boat. Many holes in that hull.
I also don’t want to get too inflammatory, but I have always maintained that when the lawyers and the government start running the show, we’re all in trouble. The unintended consequences both of these groups create when trying to do the “right thing” is, in my opinion, at the center of our current problem. There are inherent risks to running a business that make it rewarding most of the time and challenging, to say the lease, at others. Trying to make sure the former outweighs the latter is enough of a challenge in the face of global competition without added distractions and interventions. Removing risk has the unfortunate effect of limiting or doing away with reward. Do we really want that?
The real question is–why has it become so difficult to reorganize? I am really not happy with the banks these days. The self-same companies that liquidate a retailer are starting to go out and buy the brand when the liquidation is over.
If the brand is viable, why in heaven’s name did the company have to be destroyed in the first place?
The transparency we need right now is in the banking system. I don’t want to get too inflammatory here…but that’s where the problem is. There needs to be some sense of responsibility on their parts beyond “maximizing their shareholder value.”
What’s this guy smoking? Retailers are not going to provide monthly P&Ls to suppliers. That would be a dangerous and invasive path to follow.
I think his arguments apply to smaller retail establishments like independent dollar stores, c-stores, dry cleaners and tattoo parlors. No one whose career and life is wrapped up in retail is going to try and beat vendors out of what’s due.
You’re worried about collecting? That’s why God created C.O.D.
Knowing all the rules of financial disclosure that have been legislated in recent years, primarily due to the inappropriate actions of other industries, I believe it can only help vendor(distributor)/wholesaler/manufacturer and retailer collaboration. A vendor can have greater visibility into the entire supply chain with the availability of key metrics, including days inventory, days purchases/sales outstanding and cash operating cycle. The stakeholders can then take tactical action to build short- and long-term cash flow for the retailer, since vendors need as many outlets for their products as possible.
That’s a new one to me, having to file bankruptcy because of rumors. If rumors are causing a retailer to file for bankruptcy, then they obviously have some serious problems. Disclosing financial statements would probably just confirm the rumors. So I don’t see what could be accomplished.
Most but not all retailers are public companies, with income statements and balance sheets available to those vendors (and the broader community of credit firms, financial advisors, etc.) willing to examine them. It should be apparent from a company’s cash flow and debt/equity metrics whether it is in a position to weather the spending slowdown. But it’s still just as important for public companies to be as transparent with their vendor partners as with their shareholders and other constituents.
Retailers owned by private-equity firms present a different problem. It’s not always apparent–using Mervyns as a recent example–that the “deal” as structured by private investors may strip the store of assets needed to survive today’s downturn. It’s also not clearly visible when a private-equity firm may be putting out bigger fires on other fronts (think Cerberus and Chrysler, for example) and is simply unprepared to rescue its retail operations. In these cases, transparency is even more important to aspire to, but harder to achieve.
With all due respect to the many valuable insights that have been shared above, I believe that the perspective of the article may have been presented somewhat out of context.
I attended the conference and understand that Larry Gottlieb was sharing his belief that in today’s turbulent environment, it is critical for a privately as well as publicly traded retailer to partner with a vendor rather than operate in a vacuum. I don’t know about others, but I have had many instances of a retail trading partner that experienced liquidity problems. Some have been forthcoming and worked with me to either share the reason for late or non-payment or have worked out a deferred payment plan, in an effort to keep the receivable turning and product flowing. Others however, stopped communicating and left to our imagination the reason for non-payment. In these situations, we can only conclude that the worst has occurred or is about to occur. I recently had such an experience, and was prepared for the worst, when after a month of non-responsiveness from the retailer, we suddenly received payment and notice of a cash infusion and new bank agreement. Of course, if we had known about the discussions and negotiations, we would not have sold off the goods that were on order for this customer. We also would have been kept in the loop, which as an unsecured creditor, might be the very least that we should expect. After all, the secured parties such as the banks who have little if any risk, are kept informed every step of the way, and while they are providing the working capital for the business, we as trade creditors are providing another vital commodity, inventory, in which we rarely have any security (yet the bank has as collateral) and which also enables the business to generate working capital.
In instances where the retailer fails to disclose or effectively communicate issues that may be impacting cash flow, there are real concerns that develop, not the least of which could be creditors who overreact and start calling each other about the impending demise of the business. All too often, negative press can be a catalyst for negative reaction. Once merchandise flow is compromised, it may be impossible to reverse the damage. True, there may be little that can be done if a business is in distress, however, in these times, with fewer and more stringent funding alternatives, it might serve the retail trading partner well to work with the body of creditors that have a shared interest in their business and those that have perhaps been most supportive–the unsecured trade creditors.
For many years, Progressive, a major publicly-held insurance company, has published its financial results monthly. Not quarterly. Every retailer of any size, public or private, could do the same if they wanted to, because every retailer already reviews the results monthly, internally. Quarterly reporting is a charade, a delaying tactic, that hurts shareholders and creditors.
Yeah, Chapter 11 is very expensive, and it seems to work less and less often. But the underlying issue isn’t lawyers or judges or banks or the government. It’s just supply and demand: excessive retail space and a million me-too mediocre stores chasing too few customers. The NRF and every local Chamber of Commerce should unite to make America the Land of Zoning Restrictions. Eliminate 1% of all the retail space in the country every year for 20 years and you’ll see how profitable and robust retailing can be. Farmers are paid to conserve the soil and refrain from growing surplus crops. Retailers need to do the same. Shopping center developers should pay a 100% tax on all new construction, with the funds collected going towards training retailers to learn new skills that are actually needed, like nursing, plumbing and welding.