Top Tips for Achieving a Successful Restructuring
The COVID-19 pandemic has driven a new reality for both fashion brands and the consumers they serve, with the changes being sharp and vast, and many of which will be permanent, such as the shift to online. Fashion brands have acutely felt the disruption to supply chains, retail stores, and delivery networks.
We have witnessed numerous well-known brands filing for insolvency or seeking to restructure their businesses, such as Brooks Brothers, Aldo, G-Star, and Lucky Brands. Many of these businesses were the most exposed when COVID-19 hit, due to pre-existing challenges, such as a high debt burden, under-performing store network, and lacklustre brands.
Whilst some retailers have accelerated growth in this new environment, particularly those with a strong online offering, fashion has been hardest hit due to COVID-19. The harsh reality is that the majority of fashion businesses will need to consider restructuring, in some form, to harness the opportunities of the new retail environment. The “post-pandemic” consumer has permanently shifted behaviour to being less brand conscious, less brand loyal, more value savvy, and buying more online.
In this post, restructuring partner Alex Smith teams up with retail restructuring expert Gayle Dickerson of KPMG, to consider the key factors in ensuring that a financial and operational restructuring succeed and that businesses put themselves in the best possible position to withstand the deep economic impacts of the global health crisis. Below are their top tips.
- Early engagement with key stakeholders and funders
The stakeholders in any restructuring are likely to include shareholders, lenders, lessors, suppliers of goods, licensees of brands, logistics providers, manufacturers, key management, designers, employees, government agencies (taxation office) and, of course, customers.
A restructuring will stand a better prospect of success if the management team engage early with key stakeholders to sound out critical pillars of the restructuring, such as the willingness of lenders to continue to support the business (through standstill or forbearance arrangements, as necessary) and the terms on which suppliers are willing to continue to support the business.
- Strategic planning with appropriately skilled advisers
Engaging advisers who have the right sector expertise and the ability to pull together a realistically achievable restructuring plan is vital and can be particularly effective in ensuring the credibility of the restructuring plan and in facilitating effective communications with key stakeholders. Whilst this comes at a cost when cash flow is no doubt tight, there should be an immediate return on investment if you work with the right adviser.
- Operational streamlining and effective cost cutting
A restructuring will invariably require an element of identifying operational improvements and targeting how to use available capital most effectively. External, independent advice with these elements can be critical to ensure that management is appropriately challenged and tested as to which business processes could benefit from refinement. Cost cutting for its own sake without a holistic look at the business can lead to a downward spiral, for example, reckless cuts to marketing could slash sales.
Typically in a fashion business operational restructure, it is the one percent marginal gains that when combined lead to incremental improvements. Identification of assets (such as brands, inventory) that might be capable of being sold or monetised to generate additional funding may be critical in demonstrating to creditor groups how their exposure is to be reduced to an acceptable level.
- Enabling agile reactions to market forces
In this new retail reality, fashion businesses will need to be agile to respond to an environment where there may be ongoing lock-downs for some time. This can be a particular challenge for brands and retailers with a lengthy delay from the planning, design, and manufacturing phase to product delivery. Brands already behind the curve risk being left high and dry during the transition from bricks and mortar to online.
Fashion brands need a laser-like focus on inventory management and merchandise planning, as well as working capital. The disruption and lack of trading in bricks and mortar stores will leave fashion retailers having to clear stock in a tough market or not having the right stock mix for the upcoming peak trading period in November and December.
A restructure or turnaround requires decisive and assertive leadership, sometimes based on imperfect information and a lack of time. At the leadership table, a strong, capable, and assertive financial controller or chief financial officer can make the difference between success and failure.
- Identification of key financial and legal risks in process
Risks such as the loss of key contracts with counterparties will need to be assessed and acted on appropriately. Many global jurisdictions have made automatic contract termination rights unlawful, but this may need legal analysis on a case by case basis for the most critical of arrangements. A further important example may be the flexibility to stand down employees and make use of government sponsored reliefs, such as the JobKeeper allowances available in Australia.
In summary, a pragmatic, planned, and proactive response is required to rise to this business challenge. Many fashion business owners, especially the brand itself, can find it difficult to make the tough decisions needed early to successfully restructure their business. Any restructuring can be a bumpy ride, but early action, with the support of the right advisers to help work through the issues, can provide optionality, challenge old ways of thinking, and share the emotional burden of the journey.
By Alex Smith and Gayle Dickerson (KPMG)