Jon Goulding, managing director and co-head for the West Region with Alvarez & Marsal's North American commercial restructuring practice in Los Angeles.

Apparel retailers, some on the fast track to insolvency because of coronavirus-related store closures, face tough choices in the coming weeks. Those that have recently filed for bankruptcy have shown the process is no easy fix — Modell’s Sporting Goods Inc. wrangled a temporary halt in the proceedings, while True Religion has sought to defer its rent payments for 60 days.

Others reportedly on the precipice include J.C. Penney Co. Inc. and Neiman Marcus Group, both of which missed interest payments due last week. The still unfolding pandemic, which has sickened more than 2.2 million people around the world, may foreshadow a string of collapses and retooling as retail’s lumbering giants navigate an extraordinary moment.

In an interview with WWD, Jon Goulding, managing director at Alvarez & Marsal, and recently the chief restructuring officer in Forever 21’s bankruptcy, described the crisis as a test of viability for many retailers, and their ability to rely on their e-commerce business.

Goulding did not comment on any retailers specifically and spoke only in his capacity as managing director at Alvarez & Marsal.

WWD: At this point in the pandemic, what are the pressure points and ticking-clock issues for retailers that may be nudging them toward bankruptcy? 

Jon Goulding: Very few companies are set up for the ability to have this kind of revenue reduction in their business. Even after furloughing employees, and taking whatever steps they can to minimize the cash burn, to the extent that companies have low amounts of cash, and a capital structure that they can’t pay [interest] on their debt, then they’re being forced to consider things like bankruptcy. 

WWD: One of the benefits to retailers of filing for Chapter 11 is that it imposes an automatic stay, or a pause, of actions by its creditors. But what are the reasons that a retailer in difficulty might choose not to take that route now during this pandemic, or find it difficult to do it? 

J.G.: Under normal circumstances, if you put a retailer into [bankruptcy], one of the great benefits that you have is assumption and rejection of leases, where you can evaluate your store portfolio and close stores. In order to do that, [to] maximize the value of that, you need to be able to run a store-closing sale in those locations, to generate proceeds from merchandise that’s in those locations. 

Obviously, with most of the country, if not all of the country, under some form of lockdown, there’s no way to run a store-closing sale in the current environment. You can’t even pursue that type of strategy today unless you’re willing to abandon the merchandise in the stores that you’d be walking away from. 

I think a lot of folks have been trying to be thoughtful about that, not only from the company’s side, protecting themselves by limiting the cash burn as much as possible, but also from some of the lenders’ side, thinking about allowing people to have incremental time, in whatever means that means, whether that’s deferring interest payments, or other types of actions. Because, quite frankly, there isn’t any way for them to monetize their collateral in this environment. 

WWD: How are retailers’ pre-bankruptcy discussions with lenders, employees, vendors and landlords different now during the pandemic? Is there more of an incentive now for the stakeholders to work out an arrangement outside of court? 

J.G.: It’s hard to say, I think it’s really all over the map. To the extent that folks can delay a bankruptcy filing, I think folks are evaluating that option as much as possible, to the extent that they can delay actually going into a bankruptcy in the current environment with the stores closed. 

Actually getting into bankruptcy right now isn’t going to afford you the types of benefits that you might otherwise look to take advantage of. So it’s probably something that, to the extent people can stave it off, they’re working across the board with all stakeholders to figure out how to do that. 

WWD: Is there more pressure now to pull off a restructuring or a going-concern sale? Or is there a sense it could be more of an inevitable march toward liquidation? 

J.G.: I think it still comes down to the same sort of decision-making about profitability of the business, and whether there’s a real going-concern process, whether that’s a restructuring, reorganization, sale to a buyer. 

I think the liquidation question may actually be less likely in the current environment, depending on whether there’s willing buyers here. [With] a liquidation of assets, even once the stores open, you’re likely to have substantially down traffic in the malls, which is going to necessarily mean that your store closing sales will be less productive, yielding you a lower liquidation value. 

So, as you start to compare the options there, it may very well be that there are some that make more sense to continue in some form or fashion, as long as the business can make money. 

WWD: It seems some retailers are pulling purse strings even tighter now during a bankruptcy. In general, what are some ways we’re likely to see bankrupt retailers handle rent payments and other concessions now during the pandemic, and find ways to save money in the process? 

J.G.: Effectively, everything is on the table at the moment. Vendors shipping in new product to retailers, I think retailers have largely delayed, or suspended, or pushed out many of those orders. I think on the landlord side, there’s a lot of ongoing discussions with landlords about different structures. 

There’s a lot of debate about rent, and whether or not rent is going to be paid. And certainly, from a retailer’s perspective, moving to something that’s more like a percent rent deal — such that if, when stores open, they’re significantly reduced from a revenue standpoint, that they’re paying a proportionate amount of rent as opposed to paying a high fixed charge. 

WWD: What are some things you have observed or learned in the course of this pandemic about the health of retail and what its future might look like?

J.G.: It will be interesting to see how changes in behavior that people are sort of forced into today, how do those impact us in the future? 

If people are obviously buying more online now as a result of stores being closed, does that change people’s behavior such that even when stores reopen, there isn’t a widespread [amount of] people going back to stores? 

I’ve talked to some of my colleagues in China, where they are actually reopening stores currently. And even though they’re reopened, the traffic in many of those shopping malls is down considerably. People are still nervous about congregating in large groups. And so, absent a therapy or a vaccine coming to light, I would expect sales to continue to stay low, and over time, people’s behaviors shift. And that may make it harder for people to then shift back to going in the store.  

The interview has been condensed and edited for length and clarity. 

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