The Sports Authority: A View From the Trenches and Lessons ... Authority.pdf · • Threshold...
Transcript of The Sports Authority: A View From the Trenches and Lessons ... Authority.pdf · • Threshold...
The Sports Authority: A View From the Trenches
and Lessons for the Next Big Retail Case
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.
Retail Issues & Challenges
Headwinds in Retail
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
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 game-changer for consumers and retailers as price comparisons become effortless—an big advantage for shoppers at retailers’ expense
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Current Retail Trends
• Sluggish Retail Sales Growth
– Retail sales growth in the 3-4% range, vs 5% - 7% seen post-recession
– 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
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
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
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
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
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))
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
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 alloptions to get to a deal
– Retail inventory is easy to liquidate – predictable.
Special Topics and Lessons Learned
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”
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)
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, 15-30 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.
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.
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 9-103 provides a consignor with the right to obtain a purchase-money security interest (PMSI) in consigned goods.
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 9-317 set forth rules of perfection (perfected trumps unperfected).
• UCC 9-322 sets forth rules of priority (generally: first in time, first in right).
• UCC 9-324 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.
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).
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.
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.