Lessons in Bankruptcy and Recovery from PJ Solomon, Go-to Financial Advisor for Retailers

David Shiffman and Cathy Leonhardt share their insights on the state of retail

Cathy Leonhardt and David Shiffman
Cathy Leonhardt and David Shiffman are co-heads of investment bank PJ Solomon's global retail practice. PJ Solomon
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Veteran retail investment bankers David Shiffman and Cathy Leonhardt, co-heads of financial advisory firm PJ Solomon’s global retail practice, have had their fingers on the pulse of what is happening in retail for more than two decades.

Prior to joining the investment bank, Shiffman spent time at Miller Buckfire & Co. and Goldman Sachs as head of retail investment banking, while Leonhardt was a vice president at Morgan Stanley for seven years. Between the two, they’ve advised a who’s who of retail, including Timberland parent VF, Calvin Klein parent PVH and TJ Maxx parent TJX.

During the pandemic, Shiffman and Leonhardt have been more in demand than ever, as a growing number of retailers navigate the myriad challenges of store closures and recessionary conditions.

Most recently, PJ Solomon is serving as the financial advisor to Brooks Brothers, which filed for Chapter 11 bankruptcy last week. As part of that process, Shiffman and Leonhardt are aiding the clothier’s efforts in securing a buyer in what is reportedly likely to be a competitive auction process.

Brooks Brothers, of course, is not alone either in its travails or its future potential under new ownership, joining many other brands in Chapter 11 seeking a sale. In that vein, Shiffman and Leonhardt shared their insights with Adweek on the current state of retail.

Buyers are lining up to invest in iconic brands

Right now, there is a significant pool of interested buyers worldwide who are eager to bid on retail assets, a bit of a silver lining in an otherwise bleak landscape.

It helps that, since the initial coronavirus panic back in March, companies now broadly have a better grasp of what it will take to emerge on the other side of this pandemic, bankruptcy or not. In particular, U.S. businesses with overseas operations are leaning on what they have learned in responding to the pandemic in places such as China to map out a blueprint for how they do business in the U.S., Shiffman said.

If businesses are forced to shut down again due to a spike in Covid-19 cases in certain regions, both Shiffman and Leonhardt said that retailers are better informed this time and understand the “playbook.” As a result, brands are testing group openings of stores in different markets based on the level of outbreak.

Retailers nimbly adapted to slashed ad budgets

As it pertains to marketing, when Covid hit, the most difficult challenge for retailers was figuring out which expenses to cut to survive, Leonhardt said. Advertising budgets were frequently one of the areas sacrificed.

Retailers with agile marketing departments and digital outreach, however, were able to take advantage of lower customer acquisition costs. Brands such as Serena & Lily and Vuori, for example, were able to generate more impressions even as they relied on lower cost paid advertising, Leonhardt said. She cited direct marketing via email and partnering with social media influencers as ways brands were able to reach their customers.

With more people at home and glued to their screens, it meant that in addition to a lower cost, digital was also more likely to quickly pay the retailer back with an uptick in sales, Leonhardt said.

“When you are cash-strapped, the only marketing dollars you spend are where you can get a return,” she said.

Marketing is something the investment bank itself has zeroed in on by hiring a new four-person marketing team last year and producing more videos and newsletters in 2020, along with a digital campaign on social media platforms such as LinkedIn.

Brands tapped the markets for much-need cash

In tandem, brands faced the unprecedented challenge of shutting down their stores, Shiffman noted, and had to first ensure they had the capital to survive.

Not knowing what the full impact of Covid-19 would be, a number of companies immediately went to the capital markets, with their resiliency on full display.

“Even the IPO market is now open,” Shiffman noted.

Brands were able to “bulletproof” their balance sheets and borrow at low interest rates, hopefully giving them enough capital to withstand however long the pandemic lasts, or in a best case scenario, provide a war chest for future M&A.

Underlying the resiliency of the capital markets was a healthy banking system, he said. That, in part, was due to financial regulations put in place during the previous administration following the financial crisis more than a decade ago.

“The banks were in fantastic shape going into this,” Shiffman said.

CEOs are hopeful, but lost sales will be difficult to recover

Meanwhile, CEOs are finding green shoots as they continue to evolve their business models by tying them not only to lifting sales but also doing good for society and the environment, Shiffman explained.

So far, store reopening is largely beating retail executives’ rather low expectations. And categories such as grocery, which were challenged prior to the pandemic because of changing consumer habits, not only salvaged sales but saw a complete resurgence.

Shiffman is in the camp of those who believe the return of consumers is a way of people trying to get back to a new normal, versus pent-up demand. But while shoppers are buying more per visit, the bad news for retailers is it will be difficult for many stores to make up for lost sales.

As Shiffman put it: “No one’s coming in midsummer to buy an Easter dress.”

Lease obligations, not just debt, are causing retailers to file

For now, the most troubled retailers continue to be those that had been under pressure for months, if not years, prior to the outbreak due to their capital structures—meaning their debt was increasingly difficult to service.

The pandemic acted as a catalyst for a growing list of retailers to file for bankruptcy, Shiffman said. While some retailers will be liquidated, there are those that will reorganize.

“We can debate whether it was inevitable,” he added, referring to retailers that may have been able to avoid bankruptcy if Covid-19 had not reached U.S. shores.

J.Crew, for example, was planning an IPO that would have helped it refinance, but the public offering was canceled due to the pandemic. The clothier has since declared bankruptcy.

Shiffman pointed to Centric Brands, which owns apparel labels such as Hudson Jeans and Robert Graham. The company swapped its debt for equity, with its lenders not only becoming the owners but also providing the financing.

“None of those lenders are natural long-term owners,” Shiffman said. Direct lenders are now the new equity owners because there are not natural strategic buyers. But they are converting the debt to ownership to give these business enough time to convert to free cash flow and eventually get paid back on the original loans.

“Those who have size and scale have a natural advantage,” he added. They enjoy a lower cost of capital, have enough leverage to strike deals with landlords, and can attract a talented employee base.

Not all retailers filing for bankruptcy have a large amount of debt. Instead, some companies have massive liabilities due to their fixed overhead, namely store leases in malls, he said. Such retailers likely did not pay April or May rent, and some didn’t pay June as well.

“Landlords are owed enormous amount of money,” Shiffman added.

As a result, bankruptcies will continue throughout the summer, which will only get worse if there is a second wave of store closings. “That will decimate retailers,” Shiffman said, leaving only those with fortified balance sheets standing.

Consolidation is likely once economy recovers

Longer term, retail may see consolidation when the industry emerges from this period of great uncertainty and as the economy stabilizes, Leonhardt said. It would be a way for companies to take advantage of lower valuations, and therefore buy at more reasonable prices. That’s not likely to happen, however, by the end of 2020.

In Leonhardt’s words, the immediate future is a matter of the “strongest retailers getting stronger.” It’s a recurring theme, with retail giants such as Amazon, Walmart and Target currently taking market share.

@RichCollings richard.collings@adweek.com Richard Collings is a retail reporter at Adweek.