Restructuring in Today's Retail Environment/media/Files/Insights/Events... April 27, 2017 7 The impact of today’s retail collapse on the commercial real estate cannot be understated

www.dlapiper.com 0 April 27, 2017

April 27, 2017

RETAIL IN DISTRESS

Restructuring in Today's Retail Environment


1 Introduction 2

2 Recent Bankruptcy Filings 4

3 A Snap Shot of Recent Store Closure Announcements 5

4 Why Is Retail In Distress 6

5 Collateral Damage – Commercial Real Estate 7

6 Columbus City Center 8

7 Retail Disruption 9

8 And More Damage – Our Communities 10

9 Is This Just Our Problem? 11

10 Chapter 11 – Retail Style 12

11 Aeropostale Case Study 13

12 Distress Retail Planning 14

13 Retail Disruption 15

14 When All Else Fails 16

15 Q&A 17

Agenda

Richard Chesley

Global Co-Chair, Restructuring

Practice, Partner

DLA Piper

T: +1 312 368 3430

richard.chesley @dlapiper.com

Ann Lawrence

Global Co-Chair, Retail Sector,

Partner

DLA Piper

T: +1 213 330 7755

ann.lawrence @dlapiper.com

Cory Lipoff

Co-Managing Partner

Hilco Global

T: +1 847 849 2915

[email protected]

Presenters

Melanie Cox

Interim CEO

Rue21

T: +1 610 405 1613

[email protected]


While the retail industry has historically gone through “peaks and valleys” of

economic prosperity, the current situation confronting traditional “brick and

mortar” retail is perhaps the most devastating in more than half a century

– Not only impacting the actual retailers, but also on the commercial real

estate market and secondary impacts on myriad aspects of community life

The meteoric rise of Internet shopping and growth of off-price retailing are

certainly mega-trends reshaping the retail industry.

– No doubt, traditional retail has not reacted quickly enough

– Other factors at work as well

During the next hour we want to cover not only the carnage in the industry and

its secondary effects, but also what strategies may be working to begin to

confront this fundamental shift in American, and soon to be global retailing

Introduction



There have been 9 retail bankruptcies in 2017 to-date – as many as all of 2016

and it is only April

Recent Bankruptcy Filings



Why Is Retail In Distress (or in other words, why is this distress different?)

Sooner or later, every industry deals with economic distress. Indeed, every

company has a lifecycle and many face financial distress – due to poor

management, market conditions, industry conditions or global pressures

But GDP has been growing for 8 years straight, gas prices are low,

unemployment is under 5% . . . so why is the Retail Industry being hit so

hard?

Hint – It isn’t just Amazon

– Tight margins mean market fluctuations can cause significant swings

– Over leverage

– Increases in minimum wages can’t instantly drive a profitable store into the red

– Rise of E-commerce – Amazon has grown from $16 billion to $80 billion since 2010

– Over-supply of mall square footage

– Fundamentally changing demographics

– Experiential

– Densification


The impact of today’s retail collapse on the commercial real estate cannot be

understated

Industry experts estimate that there is at least 10% excess retail square

footage – ONE BILLION SQUARE FEET

– Roughly one in four malls will lose an anchor in the next two years

– Loss of a mall creates a death spiral for most mall properties

Impracticability or impossibility of repositioning mall assets

– Historic replacements are simply not available

Likely impact is that more than a few malls will need to go “to dirt” in order to

be repurposed

Collateral Damage – Commercial Real Estate


Columbus City Center – Before and After


Retail Disruption

Retail developers seeking innovation, new uses

for space new business models

What are shopping mall developers going to do?

Make real world shopping more personalized and appealing.

Free WiFi Everywhere

Fashion Shows and Live Music; Comedy

Shows, Lectures & More

Personal services such as nail and beauty

salons

Health and fitness facilities such as yoga,

massage and meditation studios, as well as

traditional gyms

Wine tastings

Dog parks

Bocce courts

Skating rinks

Story telling events


1 out of every 10 Americans works in retail

89,000 American workers laid off since October 2016

Store closures on pace to eclipse Great Recession in 2008

Yet

– Consumer confidence is strong

– Amazon is experimenting with brick and mortar

– In-store experience

And More Damage – Our Communities


UK

– April 2017 minimum wage increase and changes to property taxes

– Devaluation of Sterling following Brexit

– Expected increase in store closure and prepping for a wave of retail insolvencies

Australia

– Strong holiday sales

– 7% growth in 2016 vs 2015

– However international entrants with strong economies of scale are winners while

pushing out local players

– Vast over-supply of retailers struggling to remain competitive

Global Retail Outlook 2017


Chapter 11 – Retail Style

Historically, chapter 11 was used to restructure over-levered or poorly

situated retailers (i.e., Montgomery Ward I, Federated)

In today’s chapter 11 environment, all too often the filing of chapter 11 leads

to liquidation of inventory, sale of real estate assets and potentially

intellectual property, loss of jobs and the end of the chain

Reasons are varied, but most critically because there is no meaningful

future for the retailer, at least in its current form

Recent situation that gives at least a glimmer of hope that chapter 11 can be

used as Congress intended, namely to restructure on-going operations into

future viability

In re Aerpostale, Case No. 16-11275 (Bankr. S.D.N.Y. 2016)

What was done

Why it worked

Can it be replicated


Background – Iconic American retailer Aeropostale, founded in 1973, built a robust business for decades catering to the teen apparel and accessories demographic. At its peak, the retailer had over 800+ mall based stores in all 50 states, Puerto Rico and Canada, and licenses approximately 250 stores in other jurisdictions.

Challenge – Over the last 10 years, Aeropostale, like so many other shopping mall retailers, began to decline significantly as Millennial shoppers rejected overtly branded fashion labels, shifted their spending patterns and focused more on technology and less on apparel with their disposable income. In May of 2016, Aeropostale filed for Chapter 11 Bankruptcy Protection, with the goal of finding a buyer. No strategic buyer emerged and it appeared the chain would close and hold an inventory liquidation process.

In August of 2016, Authentic Brands, the owner of Juicy Couture and other lP, and backed by PE firm Leonard Green, sought to purchase the brand with plans restructure the business using a licensing model. An extensive plan for store closing sales and inventory disposition was being developed and the process.

The Solution - General Growth Properties and Simon Group, two of the largest shopping mall developers in the US each had held hundreds of Aeropostale leases and became deeply concerned about losing the retailer, leaving them with hundreds of vacancies that would impact their business and mall image. In a bold move, unusual for American Shopping Mall developers, General Growth and Simon struck a deal, together with Authentic Brands, Hilco Merchant Resources and Gordon Brothers to buy all of the assets out of bankruptcy.

A new OpCo was formed allowing all 4 entities to operate a reduced number of stores and maintain a solid retail presence in key General Growth and Simon shopping malls. Hilco and Gordon Brothers will liquidate the inventory at all but a minimum of 230 stores (approximately 500 stores with 330 million of cost inventory). Authentic brands will own the intellectual property and trademark for licensing and other expansion opportunities.


Distress Retail Planning

CAN AN OUNCE OF PREVENTION BE A POUND OF CURE?

Early Warning Signs … What can you do to turn the tide?

Acknowledge you are in distress and act early

– Cash management

– Real estate optimization

– Lease negotiation

– Store closures

– Inventory Management

– SG&A optimization

– Stakeholder partnership (vendors, landlords, lenders, contracts)

– Diversification


Retail Disruption

Artificial intelligence/ augmented intelligence

– Amazon Echo will allow guests of the Wynn Hotel to query Alexa for room and hotel information.

– Domino’s Pizza has introduced customers to ‘Dom’ their virtual ordering assistant.

Internet of Things (sensors/tags/trackers/ordering buttons from anywhere/video)

– Inventory visible and accurate

– Interacting digitally with customers in the stores

– Making the store more effective and efficient through digital means

Integration of store/home and mobile

Retail revolution – the next big thing…


Is consolidation the key?

– Synergies of numerous brands under a single umbrella

– Economies of Scale

– Brand Synergies

Recapitalization

Franchise and co-branding opportunities

Online-only retailer

Brand licensing

When All Else Fails


We’re never not shopping.

So, what’s next?

Q&A


Restructuring in Today's Retail Environment/media/Files/Insights/Events... April 27, 2017 7 The impact of today’s retail collapse on the commercial real estate cannot be understated

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