The alts alpha potential in right-sizing bricks and mortars

The second and third quarters of 2020 produced a bumper crop of retail store bankruptcies: the month of May alone saw filings by JCPenney; JCrew; and Neiman Marcus. This bumper crop is a disaster for some, but is an opportunity for others, including private equity firms and those institutional investors, either investing in or alongside those PE firms, with the time horizon necessary to wait out a continuing retrenchment. The pandemic, of course, has sown this crop. It destroyed consumer spending. Such retail establishments as are open at all must abide by social distancing guidelines, which limits foot traffic. Many potential shoppers aren’t even leaving their homes, so even sidewalk window-shopping seldom happens. Yet long before anyone had heard of COVID-19, as far back as the late ‘90s dotcom and eCommerce boom, people had been asking whether the traditional physical mall and the retail ecosystem based there was doomed. It is natural to wonder: has COVID-19 at last pressed the pillow over the head of an industry already on its deathbed? A veteran lawyer, who has represented many retailers and their investors, said in an interview recently that there will likely always be a demand for physical location. How great that demand is, what shape it takes, “depends on the nature of the brand and the nature of the customer.” Some customers, for example, want and will continue to want to have an easy way to return the things they have bought, and bringing it back to the store where you got it is the easiest way of all. But certainly, the veteran lawyer (who didn’t want to be named given his active relations with many clients in the field) acknowledged that there is an ongoing shake-up and that the pandemic has intensified it. Seeking the bottom, facing the risks Neiman-Marcus, which owns Bergdorf Goodman, has only recently emerged from bankruptcy. This was one of the highest-profile retail collapses of the COVID period. Its new owners include Pimco, Davidson Kempner Capital, and Sixth Street, all making the bet that a solid brand is going to survive. For private equity this represents an opportunity to take control of a firm as it is shedding much of its debt, to take advantage of the low valuation and historically low interest rates to create something that can endure and earn alpha in the new environment. In September, Brookfield Asset Management and Simon Property Group agreed to pay $1.7 billion for the retail and operating assets of JC Penney. Back in February, before COVID-19 had its devastating effects, the same two asset managers, along with Authentic Brands Group, acquired Forever 21. In an email exchange, a Brookfield spokeswoman said that the manager “can’t comment specifically on JC Penny given that the process is still working its way through the court other than to say that this is an investment being made through our retail revitalization program that we announced back in June.” Everybody familiar with the corporate bankruptcy process will agree (this is perhaps the only safe generalization) that generalizations are unsafe. The veteran lawyer, for example, invoked the example of Lord & Taylor, which, despite a well-known brand name and being the oldest department store in the United States “is no longer with us.” For a time, in the course of North America’s recovery from the world financial crisis, it appeared that Lord & Taylor, already then quite battered, would receive a new life from a marriage with Hudson’s Bay Company. But it was not to be. HBS sold the 5th Avenue location two years ago, closed much else, and sold the remnants to Le Tote a year ago. But these parent companies have themselves not been immune from the depredations of either the digital economy or of the pandemic. Le Tote filed for bankruptcy two months ago, and L&T will be liquidated. So sometimes a bottom, a base for a comeback, just cannot be found. Liquidation is the bottom. A final thought Still, as the veteran lawyer says, the proper marriage remains for many a promising route to survive, perhaps in due course to thrive. A common plan is the marriage of a famous brand (like Penney) and an owner of the necessary real estate (like Simon). The story of another famous brand, Ann Taylor, is still being written. Its parent, Ascema, filed for bankruptcy in July with a plan to eliminate $1 billion of debt and hand ownership to a group of lenders that includes Bain Capital and Monarch Alternative. In late September, Sycamore Partners entered that picture, offering to buy Ann Taylor and other familiar brand names such Lane Bryant and Loft. Like Ann Taylor, the future of the brick and mortar industry remains in flux. And it is always more in flux than in equilibrium that alpha is to be found.

The alts alpha potential in right-sizing bricks and mortars

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Christopher Faille

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