Javier Lopez
Partner at KozyakTropin& Throckmorton
EDUCATION: Harvard University (Cambridge, MA)
Javier A. Lopez has been named a recipient of the Hispanic National Bar Association’s Top Lawyers Under 40 award. At the firm, he focuses his practice on complex commercial litigation.
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Problems facing retailers include too many stores, declining mall traffic and the cost of keeping up with the competition
By: Tonya Garcia
Move over oil and gas.
The retail sector is set to replace the troubled energy sector as the most distressed of 2017, according to ratings agencies, lawyers and analysts, beaten down by the strain of competition from juggernaut Amazon.com Inc. AMZN, -0.03% and a range of other issues.
The sector’s future is looking increasingly gloomy, with the cost of digital investments, trimming excessive store locations and lagging revenue amid declining traffic setting the stage for a spate of bankruptcies and restructurings in 2017 and 2018, experts say. The sector is grappling with changing consumer behavior and shrinking discretionary spending as consumers are faced with higher prices for everything from rent to prescriptions to gasoline.
Fitch Ratings’ “Bonds of Concern” list is filled with retailers, and the agency is expecting the default rate for the sector to jump to 9% in 2017 from 1% over the last 12 months. The retail sector had $38.9 billion in outstanding debt as of December. Research firm CreditSights has an underperform rating on the sector’s bonds.
Charlie O’Shea, Moody’s lead retail analyst, said his firm has 19 retail and apparel companies with a Caa credit rating or below, “the highest amount of highly distressed retail and apparel names since the recession.” That places them at least seven notches into speculative, or “junk” status, making them a high credit risk.
S&P Global Ratings, meanwhile, said the majority of outlooks across retail and restaurants are stable, but the ratings trends are negative.
“Shifting consumer preferences, and patches of global economic and policy uncertainty are contributing to the increasingly negative outlook bias,” the agency said this week.
In 2016, the energy sector was hammered by defaults, distressed exchanges and bankruptcies, although the recent recovery in the oil price to back above $50 a barrel has raised hopes the worst is over.
But the issues facing the retail industry threaten to overwhelm companies that don’t have the liquidity to adjust to the changing landscape. Despite positive January results, the hurdles facing the sector are adding up, but sales are not and it’s already taking a toll.
Eastern Outfitters, whose chains include Eastern Mountain Sports and Bob’s Stores, filed for chapter 11 protection last week, and The Limited filed last month, causing the company to close all its stores.
Other companies that have filed for chapter 11 or completely liquidated in the past year include Wet Seal, American Apparel, Aeropostale Inc. AROPQ, +3.18% and Sports Authority.
Macy’s Inc. M, +0.03% Gap Inc. GPS, +0.79% Sears Holding Corp. SHLD, +6.76% and Guess Inc. GES, -0.88% are among the retailers that have announced store closures in recent months. Macy’s and Sears are often anchor stores that are meant to drive traffic to malls, and specialty stores like Gap depend on the boost. Traffic declines are bad for them, mall operators, the restaurants and food courts housed in those malls, and other groups that depend on the mall ecosystem.
“What’s different about 2017 is we’re clearly seeing significant disruption from the rapid movement to online,” said Steve Barr, PwC’s consumer markets leader. He believes 2017 will be a “tipping point” and expects more bankruptcies heading into 2018.
“So at a time when they have significant debt loads, declines in traffic, they’re over-stored and e-commerce is still in investment mode, it presents a challenging profile,” said Barr.
Many of the companies facing trouble are apparel retailers, raising an issue unique to this area: relevance.
“Putting aside metrics like debts and cash, it seems harder to put your arms around it,” said Corali Lopez-Castro, partner at KozyakTropin& Throckmorton. “Trying to keep up with what’s next, then how do you get it into stores, then consumers don’t think you’re cool. How do you give your brand the cool factor?”
The question of how to get merchandise into stores only has one answer: quickly. Fast-fashion, like e-commerce, has changed the way retailers sell and present merchandise. Lopez-Castro highlighted the swift inventory turnover at Zara, an Inditex ITX, +0.19% company.
“That’s why the consumer comes back,” she said. “They go back to the store knowing that they’ll see something new.”
Prolonged challenges can weigh on liquidity.
“A lot of retailers can survive one bad year,” said Philip Emma, senior analyst at Debtwire, a news and research firm focused on fixed-income markets. “But it becomes a problem when you string together a number of bad years.”
The 2015 holiday season, with its unusually warm weather and heavy promotions, hurt many retailers as shoppers were reluctant to buy warm winter clothing during a warm spell. The weather was more seasonal for the 2016 holidays, but the discounting persisted. Add competition and, in apparel, a lack of fresh trends, and there’s another holiday season that falls short.
“For certain retailers, if the business model isn’t sustainable, an initial debt cut might not be enough to get them through,” said Joshua Friedman, legal analyst at Debtwire. While he was reluctant to say that retail would follow in the energy sector’s path to bankruptcies, it’s “not hard to see distressed retail going into the restructuring field.”
The calendar isn’t helping either with Easter, an important holiday after the lull of the first quarter, pushed back this year. “Retailers have to get the goods in and pay for them and then there will be a lag time that will hurt their cash flow and further exacerbate the issues,” said Chuck Tatelbaum, senior attorney in the bankruptcy and creditors’ rights department at the Tripp Scott law firm.
As if that weren’t enough, there’s also political uncertainty, the specter of rising interest rates, and the task of trying to keep up, which all requires cash.
“Do you have the runway to make this change?” asks Moody’s O’Shea, who looks to Wal-Mart Stores Inc. WMT, -0.03% and all of the money it has spent to transform its business, from the multibillion-dollar purchase of Jet.com to price investments.
“It’s expensive,” he said. “The problem for many of these retailers is do they have the financial flexibility to cross the river and get to the other side?”
On Tuesday, Warren Buffett’s Berkshire Hathaway Inc. BRK.B, -0.05% disclosed that it had slashed its stake in Wal-Mart in the fourth quarter to 1.39 million shares from 12.97 million.
The latest challenge facing the sector is a doozy: President Donald Trump and his administration are proposing introducing a border-adjusted tax, which would tax imported goods, possibly at a rate of 20%, and subsidize exports through rebates. Trump has called out many companies, particularly car makers, for producing in countries including Mexico and then shipping their products back into the U.S., arguing they should be taxed for behavior that is keeping well-paid jobs out of the country.
Retailers are major importers and apparel retailers import about 98% of their products. No surprise then, that a group of retail CEOs, including from Target Corp.TGT, +0.08% Best Buy Inc. BBY, +1.39% Gap Inc. and AutoZone Inc. AZO, +0.50% are in Washington, D.C.today, to meet with congressional leaders and President Trump to make their case against a border tax.
“Given that retail is the largest private sector American employer, retailers support sound policies that spur economic growth and job creation,” said Brian Dodge, senior executive vice president of public affairs at the Retail Industry Leaders Association.
The SPDR S&P Retail exchange-traded fund XRT, -0.05% has gained 12% in the last 12 months, underperforming the S&P 500 SPX, +0.50% , which has gained 25%.
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A Miami attorney destroyed evidence and then spent two years derailing a former client’s efforts to recover those documents, according to a ruling by Circuit Court Judge Bronwyn Miller.
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By: Carolina Bolado
A Florida judge last week sanctioned a real estatefund’s former attorney for destroying email servers after being sued, a decision that shifts the burdenat trial to the attorney accused of scamming the fund out of $1 million in commissions.
In a Dec. 29 decision, Judge Bronwyn Miller granted Progress Residential LP’s motion for spoliationagainst Erik Wesoloski and his company Title Capital Management LLC for destroying 1.4 terabytesof data in September 2013, shortly after Progress filed suit accusing Wesoloski, who had been hired tohandle due diligence of foreclosure sales, of manipulating data in order to inflate his commission.
“TCM and Wesoloski had a duty to preserve the electronically stored information, yet directed itsdestruction, and then failed to disclose to opposing counsel and the court the fact that it no longerexisted,” Judge Miller said. “Only one conclusion may be gleaned: the evidence was critical toestablishing plaintiff’s claim and equally compelling evidence may not be garnered.”
The judge said that at trial, she will give the jury an instruction that the plaintiff has proved its liabilitycase and that the defendant now bears the burden of proving its case.
“To get an order granting spoliation isn’t too common, especially when the severity of the sanction isliterally slipping the burden of proof from the plaintiff to the defendant,”Kozyak Tropin &Throckmorton LLP’s Javier Lopez, who represents Progress, said.
Lopez’s client is a real estate fund that purchases properties to then rent out. In early 2013, thecompany hired Wesoloski and his company to conduct due diligence on potential purchases,according to the order. He made a 4 percent commission on these deals.
But by May 2013, the real estate fund terminated its contract with Wesoloski after finding that datahad been manipulated to inflate Wesoloski’s commission, which in the five months the contract was ineffect had totaled $2 million.
At that point, the parties engaged in extensive settlement negotiations that eventually failed. Progresssued in September 2013 and then spent the next two years trying to get access to emails fromWesoloski and his employees. In late 2015, Wesoloski revealed that the servers hosting the emailshad been deleted two years prior.
“Under these circumstances, Wesoloski, a licensed Florida attorney, was certainly aware that analystemails generated in conjunction with bid sheets and the computation of carrying costs were relevantto the dispute,” Judge Miller said.Lopez said a date has not been set for trial, but the parties will head to court-ordered mediation thismonth.
“With this order, the price of poker has gone up,” he said. “We tried to mediate in February, but it wasunsuccessful. But the landscape has changed dramatically.”
Progress is asking for the extra $1 million in commission that it claims Wesoloski made bymanipulating data, as well as punitive damages and attorneys’ fees and costs.
An attorney for the defendants could not immediately be reached for comment.
Progress Residential is represented by Monica M. McNulty, Gail A. McQuilkin, Javier Lopez and
Douglas A. Wolfe of Kozyak Tropin & Throckmorton LLP.
The defendants are represented by Raul E. Espinoza and Giancarlo Foschini of Raul E. Espinoza PL.
The case is Progress Residential LP v. Title Capital Management LLC, case number 2013-030433-CA, in the Eleventh Judicial Circuit Court of Florida.
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