Michael C. Appel is president of Appel Associates LLC, an advisory firm he founded in 1991 that provides performance improvement and turnaround consulting services to retail and consumer goods companies.
Appel’s résumé reveals leadership roles across various functions of retail and in multiple categories and channels — from off-price to luxury. He has served as chief executive officer and/or chief operating officer as well as turnaround adviser for retailers such as Laura Ashley, Barney’s, Wilkes Bashford, Baccarat, Loehmann’s, MacKenzie-Childs and Kasper/Anne Klein, for which Appel won the 2004 Turnaround Management Association’s company turnaround of the year award.
More recently, Appel served as ceo and chairman of Rue21, the 700-unit fast-fashion retailer, from the company’s emergence from Chapter 11 in September 2017 until this past February.
WWD: What is your strategy for a turnaround?
Michael C. Appel: In a turnaround, rapid assessment of the situation is critical. As the leader of a company, once I validate that the business model makes sense, I implement five key elements to gain traction and drive results:
- Customer: Understand the customer.
- Team: Evaluate talent and then bring in the best people to drive a turnaround.
- Product: Fix the product — can’t do that without the talent.
- Technology: Embed technology in business operations to drive results.
- Liquidity: Operate the business to maximize liquidity, which you need to fund the turnaround.
It always takes more money and more time to turn the ship around and you need sufficient liquidity to buy runway to fund the turnaround. In my experience, it always takes more capital and more time to gain traction so you can’t have too much liquidity.
WWD: What are the similarities between a turnaround and this pandemic’s impact on business?
M.A.: In both situations, you need a rapid assessment of the situation; identification of key initiatives that the organization needs to focus on; communication to stakeholders so everyone is aligned, and the ability to pivot based on rapidly changing situations.
WWD: What’s the difference between how you would approach this coronavirus crisis versus a more classic retail turnaround?
M.A.: The number-one priority is liquidity. Liquidity becomes even more important because of the severity of lost business coupled with less confidence in the timeline of when the business will come back. That means playing much more defense in the short run than offense:
- Make assumptions with sensitivity embedded in the financial model on how long this will last and what trajectory of recovery will be
- Attack all sources of liquidity. Nothing should be off the table, but remember that at some point things will recover and there will be pent-up demand.
- You don’t want to burn bridges and harm relationships that you will need going forward.
- Keep communications with stakeholders open and frank. It will pay dividends on the other side.
WWD: What are the sources of liquidity that retailers need to draw upon in this environment?
M.A.: Major sources of liquidity are sales receipts, bank lines and the major expense categories of cost of goods, labor and occupancy, as well as interest expense and debt repayments. How you attack these key drivers can make the difference between survival and liquidation.
WWD: Cost of goods — inventory — for most retailers is the largest single expense line. What is your advice on how to approach managing paying for goods you already received and on-order inventory, some portion of which companies will need when stores reopen?
M.A.: Stretch payables — if the goods are in your inventories, stretching payables to align when receipts flow back in is critical to preserving cash to fund expenses. If you have had a good history of paying timely, this should buy leverage and credibility when negotiating with vendors and factories.
Frank and open discussions with critical vendors will yield the best results. When I was ceo of Wilkes Bashford, and the company had no cash to pay vendors we were able to come up with an innovative formula where we tied payments to sales by sku.
Cancel as many forward orders as possible so as not to end up with too much product when sales recover — but remember that critical vendor relationships need to be preserved. A rigorous analysis of go forward vendors and key categories should be part of this analysis.
The more you preserve liquidity you can negotiate better pricing on the other side when you resume taking in goods. Retailers who are vertical will have a different set of challenges than those retailers who buy from the market.
WWD: Should retailers stop paying rents while stores are closed?
M.A.: Occupancy and labor are always the two largest expense line items and need to be focused on first. Regarding occupancy — negotiate and don’t pay anything you don’t have to. Seek legal advice, but if the landlord closed the center, you should have leverage in your negotiations.
My intelligence has uncovered that most national retailers are not paying April rents. Most paid March and didn’t get the benefit of being open the entire month. Outside consultants can help as they have relationships with large landlords. Avoid deferrals versus getting free rent as you are only mortgaging your future with deferrals. Negotiate win-win scenarios — when business comes back, everyone shares in the upside.
WWD: With stores closed and receipts drastically reduced for most retailers, how do you approach paying personnel both in stores and at headquarters?
M.A.: If stores are closed you need a strategy of whom to furlough, and when and also understand whether the government will pick up some of the slack. At headquarters, you need to determine who you need to run current operations.
Consider temporary salary reductions of all headquarters staff as this goes on and how that impacts liquidity. The c-suite and the board should set an example, especially when asking hourly and lower-paid associates to take a pay reduction or be furloughed.
WWD: How important is active involvement and visibility of the ceo in this process?
M.A.: Leadership is critical in any crisis and the ceo has to be front and forward. The ceo needs to communicate the strategy and how the company intends to navigate through the crisis to gain alignment and support both within the organization and to all outside stakeholders.
There is really no such thing as over-communicating.
It is also important to be realistic in your assessment and communications so that stakeholders can buy into the plan. It can result in a lot of difficult conversations in the short run but will pay huge dividends at the back end as the company begins to gain traction.
WWD: What kind of companies are likely to survive, and what kinds of companies will end up liquidating?
WWD: The strong get stronger. Look at Costco, Target, the major drug and supermarket chains, the dollar stores, Walmart and Amazon. Value wins, and the middle is further squeezed with a lack of differentiation and value. Look for further bifurcation of retail with the high end and value at the low end winning, and retailers in the middle suffering. Companies that were weak before this crisis like Sears, Kmart, J.C. Penney, Ascena, and other poorly performing specialty chains and department stores are the most vulnerable.
Remember that U.S. retail is still vastly overstored, with much more retail square footage per capita than any other country. This crisis will accelerate store closures and liquidations.
WWD: What is your prognosis on the role of private equity in retail going forward?
M.A.: Where private equity has overleveraged the balance sheets of companies that they took private, I believe that again there will be a bifurcation of who survives. Weak players with undifferentiated business models and high debt are likely to liquidate, while retailers with sufficient scale and strong brand equity, despite high debt will most likely restructure with PE sponsors being replaced with bondholders owning the company.
Strong management and leadership will be critical.
WWD: Is there any silver lining to this unprecedented crisis?
M.A.: I believe that since retail represents 70 percent of GDP, recovery is critical to our economy’s survival. Progressive companies will use this crisis to reexamine how they run their businesses and make changes that will position them to survive post-COVID-19.
They will ask the key questions: What should assortments look like? What talent does the company need to drive change and impact results? What functions should companies fund in-house versus outsourcing? What technology is critical to drive efficiencies and reduce working capital needs?
This is a time for action both to protect the business as well as institute needed change in companies’ operating models, so they can survive and prosper long term.