With rumors flying daily, retailers need to be more forthcoming in providing details of their financial condition to vendors. This is particularly important as these rumors can push a retailer into bankruptcy court and it's become virtually impossible to reorganize in Chapter 11 bankruptcy protection.
That's the view of veteran bankruptcy lawyer Larry Gottlieb, who spoke on Wednesday in Newark, N.J. at "The State of Retailer: A Financial Perspective," a seminar sponsored by the Vendor Compliance Federation (VCF) and Trade Promotion Management Associates (TPMA).
Mr. Gottlieb, of Cooley Godward Kronish LLP, said that well beyond monthly sales statements, retailers should be providing monthly P&L statements and frequent details on borrowing rate availability and loan covenant compliance measures. Conferences with vendors should be held regularly and secured websites should be set up to provide vendors with easy access to up-to-date financial info.
The increased access to information, according to Mr. Gottlieb, should come from both those retailers with solid as well as questionable credit because the financial crisis and poor economy has increased retail's overall exposure to bankruptcy.
"Think about the number of retailers you have concerns about today that you would have never believed would have been at risk just six months ago," suggested Mr. Gottlieb.
One primary reason retailers should provide greater financial information is to avoid bankruptcy at any cost. That's because amendments to bankruptcy laws enacted in October 2005 over the treatment of leases have made it nearly impossible to reorganize in bankruptcy proceedings.
Bowing to pressure from landlords, the new laws gave bankrupt retailers seven months to assume or reject a lease versus a fairly unlimited time period previously. Since their primary collateral is the inventory in the stores, banks are increasingly worried about maximizing going-out-of-business sales in the tight, seven-month time frame, according to Mr. Gottlieb. Essentially, banks are giving retailers two months to sell the business. If unsuccessful, the third month is spent filing the motion to run GOB sales that commence over the next three months. As a result, banks are no longer offering reorganization as an option.
"It's a problem," said Mr. Gottlieb. "As long as that amendment exists, we will not reorganize any retailer in any way."
The other reason retailers should open their books for vendors is because speculation is increasingly likely to push a retailer into bankruptcy proceedings. Given anemic retail sales and banks slashing borrowing availability, vendors have grown nervous about the prospect of being left with huge unpaid and essentially worthless bills in bankruptcy court. Without adequate communication in today's climate, Mr. Gottlieb said trade credit can quickly dry up.
"You can't allow the rumors to start," said Mr. Gottlieb. "That rumor mill soon becomes a runaway freight train that can't be stopped."
Discussion Question: Do you agree that retailers need to be more forthcoming in providing financial information to their vendors? What more can retailers do to shore up trade support?