Asset-Based Lenders Should Rethink Longstanding Methods for Aging Retail Inventory, Advises Tiger Group COO

Citing consumer whiplash and retailers' stark reversal of fortune, Michael McGrail urges lenders to adopt a data-driven, demand-based approach

BOSTON, Dec. 20, 2022 /PRNewswire/ -- Asset-based lenders should push for more accurate approaches to aging retail inventories in the year ahead, advises Tiger Group COO Michael McGrail in an opinion piece for ABF Journal.

In the December 8 column ("Taking stock of retail's reversal of fortune"), the 23-year ABL veteran notes that retailers' rent concessions have subsided, their stimulus money is gone, and their shelves and stockrooms are over-inventoried.

Meanwhile, retailers are also facing a raft of escalating pressures—including consumer pullbacks, higher logistics costs, and rising interest rates. Amid this backdrop, advises McGrail, "the United States may well see an acceleration of retail bankruptcy filings and liquidations," and lenders should more closely scrutinize retail borrowers' inventories and inventory practices. Tiger, for one, increasingly relies on a more granular, SKU-based approach to inventory analytics for insights into collateral value and borrower health.

McGrail adds in the piece that lenders should reconsider the inconsistent and arbitrary approaches to retail inventory aging that have prevailed for decades.

For example, some retailers, having bought a particular product 90 days ago, opt to put all instances of that SKU in a "90-day bucket." They will hold to this approach even if a big new shipment of the item has just arrived. Others will respond to that new shipment by reclassifying all instances of the SKU as "brand new."

Many asset appraisal firms report aging the same way, following the retail client's lead. But McGrail, who oversees Tiger Group's appraisal and disposition practices, writes that a more accurate and actionable picture comes from aging retail inventory based on trends in demand.

The process involves three steps:

• reviewing recent transactions involving the inventory in question;
• running SKU-based analytics to gauge likely consumer demand moving forward;
• and aging the goods based on the picture emerging from the data.

"It's a flexible approach that befits today's fast-changing marketplace," writes McGrail.

He cites a scenario in which a particular SKU of seasonal lawn furniture is breaking sales records, and a new shipment has just arrived.

"Putting that inventory in a bucket like '30-day, fresh receipts' could be appropriate," McGrail writes. "However, the picture is quite different if a review of the past 60 days of lawn furniture sales reveals a gradual slumping of demand. In this case, the rate of sale could merit a '180-day' designation—it could be next year before that product sells again."

Retail decision-makers need to avoid situations in which today's "30-day" inventory in reality takes 180 days to sell. This is important for lenders as well, the COO observes.

"Hold the going out of business sale in May and that 30-day lawn furniture might fly off the shelves; run it at the end of August when the item is 90 or 120 days old, and the recovery will be lower."

The fundamentals of assessing net orderly liquidation value (NOLV) and borrower health have not changed, McGrail asserts. "If inventory is up and comp-store sales and gross margin are down—an increasingly plausible situation for many chains today—it's a red flag."

But in many retail asset-based loans, he concludes, lenders have allowed a high borrowing base and need to be vigilant about understanding true collateral value. "By doing a deep dive into the inventory side of the equation—online sales, merchandise categories and overall levels included—lenders can keep retail borrowers out of the danger zone."

The full column is available at:
https://www.abfjournal.com/articles/taking-stock-of-retails-reversal-of-fortune/ 

Media Contacts: Jaffe Communications, Elisa Krantz, (908) 789-0700, [email protected].

SOURCE Tiger Group