SMARTER PERSPECTIVE: RETAIL INDUSTRY Finding Certainty in an Uncertain Market By Ian Fredericks, David Peress and Doug Jung

Prior to 2017, the largest number of The variability of COVID-19 lockdowns lenders that forced quick and retail stores to close in any given year and restrictions due to the state-by- fateful decisions. occurred during the financial crisis state approach with which government in 2008. That changed in 2017, the responded to the virus created three At the outset, the variables incident first year of the oft described “retail distinct outcomes. First, lockdowns to these decisions – skyrocketing apocalypse”, and new records have pushed the most distressed retailers unemployment, changes in consumer been set in every subsequent year but into bankruptcy and a wave of filings behavior, store geography, store format, for 2018, which fell just shy of 2008’s occurred beginning in late April. impact to GOLVs and NOLVs, and the number. Indeed, so many stores closed Second, stressed companies such as market reaction to IP values — were all in 2019 that many industry experts JCPenney, without bankruptcy in their unknown. For retailers, lenders, and their didn’t believe 2020 would be able to near-term outlook, were forced onto advisors, the ability to quickly clarify how surpass that high-water mark. But, with an irreversible path towards a filing these variables impacted both business the help of COVID-19, 2020 set another or sale. Third, there was tremendous and asset values became key to informing record with over 11,000 closures. market uncertainty for retailers and transformative decisions.

12,000 11,157 Retail store closures 9,879 in the U.S. 10,000 8,139 8,000 2020 was a record year for retail store closures in the U.S., far 6,163 5,864 exceeding 2019, the previous 6,000 annual record holder.

4,000

2,000

– 2008 2017 2018 2019 2020 Source: Coresight & CoStar Research Finding Certainty prior-period sales in store closing and GOB Valuations & Field Exams settings. Hilco would have expected that As a market leader in operating store number to approach 200% in a normalized These insights and timely data sharing closing sales (Hilco was involved with environment, but team-oriented clothing allow retailers to maximize their liquidity approximately one-third of all 2020 U.S. stock fell out of favor with consumers while and asset valuations by increasing NOLVs closures in addition to stores in Canada sports were shut down, hurting sales and and therefore ABL availability, while and Australia), in acting as a buy and sell driving less overall traffic. providing detailed information to provide side advisor for retail IP, and in restructuring comfort to their secured lenders. These retail leases, Hilco collects robust and Similarly, store closing sale performance data sets augment over 20 years of 1,000+ proprietary real-time market data. This across different store formats varied. annual appraisal and field exam report data supports Hilco’s valuation and field Those that performed the best were data to enable all parties to make better exam professionals, creating a One Hilco anchor stores at malls (often times informed decisions – open to buy, rent, approach to support our retail, lending, Department Stores), which are large, payroll, or any other decision stemming and advisory partners. convenient, and have multiple entrances from the balance sheet and liquidity – faster. and exits. Specialty and in-line mall retail Monitoring over 11 retail segments stores, which require customers to walk Real-time data sharing was particularly during the early pandemic period store through anchor stores or main mall important given market variability in closing sales, Hilco quickly confirmed entrances, struggled. Only in cases where 2020. In Q2, GDP fell 31.4% only to its early thesis that retail segments and a brand enjoyed significant goodwill – rebound by 33.1% in Q3. This reflected store formats were not created equal. loyal customers with a propensity to view government stimulus and changing Certain segments and formats clearly the brand favorably and motivated to act consumer behavior, setting a record performed better or worse than others as on those attributes – did in-line mall stores swing. Owing to that volatility and to well as in comparison to their pre-COVID see an appreciable lift as part of a store ensure they had the most precise values, expectations. Hilco found that closing closing or GOB sale. many lenders doubled the number of Department Stores – boosted by numerous their collateral updates. Those which had value-oriented chains – were particularly These insights and Hilco’s ability to annual updates shifted to bi-annual while resilient. 2020 Sales in a store closing or gauge intangible variables like goodwill, those with bi-annual shifted to quarterly. GOB context averaged almost 300% of the which can materially affect asset values, Because each update requires new 2019 same prior-year period. Alternatively, helped to provide needed certainty to data, management meetings, and store and despite tremendous demand for retailers, lenders, and their advisors as visits, limiting client friction is incredibly outdoor goods, some Sporting Goods they considered their options and made important. This is especially true in a retailers barely achieved 100% of their determinative decisions. rapidly changing environment.

2.50 COVID Average

2.00 Multiplier by Segment 2020

1.50 1.20

1.00 The Multiplier is Gross Sales, represented as a percentage, 0.50 achieved during a sale and measured against the Gross Sales from the same period Year 0.00 Over Year. SHOES PET SUPPLIES PET FAMILY CLOTHING CLOTHING FAMILY SPORTING GOODS SPORTING FURNITURE STORES WOMEN’S CLOTHING WOMEN’S HOME FURNISHUNGS DEPARTMENT STORES DEPARTMENT SEWING & NEEDLEWORK CLOTHING ACCESSORIES CLOTHING Source: Hilco Global OFFICE STATIONARY & GIFT OFFICE STATIONARY

Hilco Global is the Retail Industry Smarter partner for your business. Client friction can be eased through In a highly volatile market, the assumptions disposition experience. In the second streamlined data requests and store that drive valuations can be tested in half of 2020, the IP disposition market visits. This is relevant when conducting unprecedented ways. In 2020, Hilco was benefited from an influx of buyers an appraisal and field exam or multiple approached more times than in any other seeking to capitalize on the growth in appraisals (inventory, IP, FF&E, real estate) year for “second look” appraisals – instances e-commerce adoption. simultaneously by bundling data requests, where retailers or their lenders questioned visits, and store diligence into one assumptions and results from an initial Traditional brand management platforms – streamlined event. Where physical visits appraising source. In many of these (ABG), Marquee, are not possible, digital solutions can be instances Hilco was comfortable providing Bluestar, and others continued to disrupt utilized for interviews and DC test counts appreciably higher NOLV’s due to its robust the market in 2020, but were also met with for field exam and borrowing base reports. in-market and real-time analytics driven new market entrants. These new entrants from events it was concurrently operating. included digital marketing platforms When separate providers are engaged This capability provided retailers with looking to aggregate brands and operate to appraise separate asset classes and much needed additional availability and them through a single consolidated central to conduct field exams, friction and lenders with comfort that their clients could service infrastructure, landlords, strategic delays can result from the need to withstand the current environment and acquirers, and other licensing platforms. reconcile report inputs like definitions should be supported. Overall, new and more diverse buyers fed and data points. When definitions for IP recoveries and will likely continue to do items like slow moving inventory, turn, Intellectual Property & Real Estate so at least in the near term – a welcome and gross margin calculations do not development for lenders and retailers in match between workflows, it creates a Early on, the largest open-ended valuation search of increased availability. considerable amount of work for the questions of 2020 were with respect lender and the client in order to reconcile to Intellectual Property values, one of Notably, after Hilco successfully partnered such issues in the final reports. the fastest maturing sources of lending with Authentic Brands Group, Simon availability. Physical restrictions drastically Property Group, and Brookfield (then Leveraging one firm with collective market accelerated e-commerce adoption and GGP) in 2016 for the acquisition and leading expertise alleviates these concerns, quickly shifted both consumer behavior subsequent operation of Aeropostale, as Hilco did for its clients throughout 2020. and expectations. Indeed, Hilco estimates landlords also reemerged as prominent Providing borrowers more time to run that online adoption advanced five years in market participants. Motivated by their businesses while delivering a better 2020 alone. However, increased adoption Aeropostale’s successful model, landlords and more precise work product delivers also cannibalized brick and mortar sales became acquisitive to posture both much needed certainty in an uncertain while being less profitable. offensively and defensively. No group market. That certainty is created with better exemplifies this than ABG and custom tailored reports that guarantee the Increasingly, borrowers and lenders looked Simon which, through their SPARC appraised values for defined periods of to intangible assets to support additional operating entity, purchased , time should the business liquidate, which or higher advances. Hilco’s IP valuation , JCPenney, and Lucky was anywhere from 3-6 months in 2020 product continued to lead the market in Brand during the pandemic to become versus 12 months in normal times due to providing conservative intangible asset the market leading landlord acquirer. COVID uncertainty. valuations based on over a decade of IP Posturing defensively, Simon and Brookfield acquired JCPenney to protect against losing an incredibly valuable anchor tenant. Understanding that losing JCPenney might result in previously unimaginable losses through direct closures and the domino co-tenancy clause effect, the group paid $800MM to keep the retailer alive. Separately, and for different reasons, SPARC looked to play offense in its Lucky Brand acquisition. In this instance, SPARC planned to readjust all leases, not just its own, to keep as many stores open as possible while ABG provided a mutually beneficial licensing structure. This structure allowed ABG to grow licensing revenue internationally while SPARC maintained the integrity of the store fleet. Having spoken to and partnered with negotiating room in 2021. Regardless e-commerce fulfillment needs. Indeed, a number of acquirers, Hilco expects of outcome, landlords are likely to Tuesday Morning leveraged its industrial landlords and mall operators to remain commit to structures that keep as many real estate assets and sold them above acquisitive in 2021, potentially even stores in place as possible. appraised value to help support its purchasing brands and portfolios void of bankruptcy expenses and pay down an operational retail or brick and mortar Year End & What’s Next creditors without wiping out equity. component. Landlords may continue to This trend is expected to continue as use the SPARC (ABG + Simon operating What’s next for retailers in 2021 remains e-commerce sales approach $1.5 trillion entity) model, leveraging liquidity to to be seen. U.S. consumers showed in 2025, and Hilco expects other retailers minimize vacancies, or create their own considerable resilience as holiday sales will follow Tuesday Morning’s example. anchor tenants by combining multiple increased approximately 2.4% YoY, while brands. It is also possible that landlords e-commerce sales increased almost 50%. Ultimately, lenders are scrutinizing their will license brands to operators within But despite strong sales, many retailers portfolios’ Q4 results knowing that the their malls, leveraging their ownership are finding themselves in a worse cash cash reserves usually built up at this time to maximize occupancy efficiency. position. Shipping, handling, and returns of year are not at historical levels. The expenses make e-commerce sales less pervasiveness of store closures will be In addition to acquisitions, landlords profitable than brick and mortar and many largely dependent upon the profitability also spent time restructuring leases retailers are facing the ramification of being of e-commerce sales, the level of wealthy with tenants. Nearly all retail market under-inventoried going into the holidays. consumer consumption, and the extent to participants attempted to renegotiate Additionally, the promotional calendar which lenders take enforcement action. leases in 2020 with varying degrees of shifted in 2020 from focusing on Black success. Professionals like Hilco have Friday to much longer sale periods that With vaccines here and the country eager the advantage of working with the same began around Prime Day in mid-October. to fully reopen and get back to some level landlords across multiple retailers, Ultimately, less profitable e-commerce of “normalcy,” many retailers and lenders providing robust market data that sales, longer promotional periods, and lack will try to take a “wait and see” approach enables the best deals to be reached. of inventory have left retailers in worse cash for Q1 and hope for greener pastures in In 2020 alone, Hilco negotiated over positions with higher loan balances than Q2 and beyond. In the meantime, retailers 7,000 leases providing $1.5B in savings would be historically expected. continue to adapt by increasing buy through new rent structures and online, pick up in-store (BOPIS), curbside lease terminations. Those that did not Retailers may be able to blunt that pickup, fulfill from stores, and other leverage professional restructuring impact through their industrial real consumer-friendly changes that enable services did not have this benefit, estate assets like warehouses and DCs, consumers to stay safe while continuing creating the possibility for additional which have increased in value based on to support their favorite retailers.

Distribution Center Expansion Plans Planning to expand over next 12 months Area for expansion

43% Number of SKUs 79% 80% 76% 71% 41% Number of employees

26% Annual Inventory Turns

24% Overall square ootage

17% Number of buildings

13% Area of services

4% Height of buildings

4% Other

2017 2018 2019 2020 Source: Peerless Research Group (PRG) To avoid another record number of Hilco Global is the world’s preeminent management team within a retail store closures in 2021, Hilco strongly authority on maximizing the value of business itself, we encourage you encourages consumers to stay safe, assets for both healthy and distressed to reach out to us for a conversation but also to support their favorite local, companies. Our platform of over twenty about the challenges you are facing regional and national retailers so specialized business units works to help in the current environment. The they, in turn, can be there to support retail companies understand the value of expertise of our Inventory Solutions, consumers with their favorite products their assets and monetize that value. With Valuation, Field Exam, Intellectual when things ultimately normalize. a 30-year track record of acting as advisor, Property, Real Estate and Business agent, investor and/or principal across Improvement teams is just a phone call The course of events over the coming thousands of retail transactions, we strive or video conference away. Our proven 12 months and beyond will demand every day to deliver the best possible ability to develop a fully-integrated, that retail operators work closely with outcomes by aligning interests with clients collaborative solution custom tailored both their lenders and select, trusted and providing them strategic insight, to the needs of your retail business, partners to ensure they access the advice, and, in many instances, the capital could make a big difference in the best resources possible to optimize required to complete their deals. outcomes you achieve. These are outcomes for their businesses. difficult times and finding certainty Whether you’re a lender with retail portfolio in an uncertain market is the key exposure or a member of the senior to success.

IAN S. FREDERICKS IS PRESIDENT DAVID PERESS IS EXECUTIVE VICE DOUG JUNG IS MANAGING DIRECTOR OF HILCO MERCHANT RESOURCES PRESIDENT OF HILCO RETAIL SERVICES OF HILCO DILIGENCE SERVICES

After a successful career as a stressed David provides critical oversight and Doug has over 25 years of experience and distressed Mergers and Acquisitions vision for all Hilco retail valuation in diligence, ABL field exam, work-out, and Corporate Restructuring attorney, and monetization client teams. In credit, management, advisory and Ian joined Hilco in 2011 and has been 2017, Peress added this new role investigation background. He is an an instrumental part of the growth of to his existing responsibilities as a experienced leader, having headed and Hilco’s retail offerings. Since joining principal at Hilco Streambank, where performed hundreds of field exams and Hilco, Ian has focused on the overall he has successfully built one of the specialized diligence engagements growth of the organization, including top intangible asset valuation and and investigations on behalf of bankers/ co-founding ReStore Capital with Ben monetization practices in the nation, lenders and investors in connection Nortman in 2019. Over the course of his focusing on brands, trademarks, with potential and existing financings, career, Ian has negotiated and closed patents, and domain names. He has healthy companies as well as companies transactions involving tens of billions of 25 years of experience working in the undergoing financial and liquidity dollars of assets. Among an expansive list corporate restructuring and distressed stress or accounting and financial of other work, Ian is credited as one of investing industry as both an advisor reporting irregularities. In addition the principal architects of the transaction and investment professional. Contact to serving as chief operating officer to save Aeropostale. Contact Ian at: David at: [email protected] responsible for integrating three legacy [email protected] or or 781.471.1239. businesses at Chase Business Credit, 847.418.2075. Doug’s tenure includes other senior positions at JPMorgan, the Commercial Bank, AlixPartners, FTI/Compass and Hilco Global is the world’s preeminent authority on maximizing the Jupiter Advisory Group, which he launched and managed prior to joining the value of assets for both healthy and distressed companies. Hilco in 2013. Contact Doug at: [email protected] or 646.321.6616.

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