Condensing The Store Base In Retail Liquidations May Not Enhance Inventory Sale Values, Veteran Tiger Group Exec. Cautions

Dec 11, 2013, 09:30 ET from Tiger Group

BOSTON, Dec. 11, 2013 /PRNewswire/ -- Shuttering poor-performing sites and moving assets to stronger locations early on in a retail liquidation sounds like a good way to quickly enhance the overall net recovery value (NOLV) of the sale, but that's not always the case, writes John Cronin, Tiger Group's director of planning and analysis, in a December 3 blog post for online publication ABL Advisor.

In the piece ("Collapsing the Store Base in Retail Liquidations: Myths vs. Realities"), Cronin looks at the pros and cons of condensing a retail chain's store base early on, or even before the beginning of a liquidation sale. "The sale saves operating costs while positioning the goods in areas where they should sell best," he observes. "In practice, however, closing stores early in a liquidation is not always the best way to maximize value."

One significant issue is the makeup of the inventory. Fragile or bulky items can be too risky and/or cost prohibitive to move, Cronin notes. "Items damaged in transit, rendering them unsalable, incur the double-whammy of lost revenue and sunk freight costs," he says. "Likewise, if the items are part of a set and need to be sold as such, shipping them together adds additional layers of complexity to transfers that may make such moves unrealistic in the compressed timeframe of a liquidation sale."

Technological challenges may include determining whether point-of-sale systems at the destination locations will recognize goods from a different banner or concept, he adds, noting that the physical layout of the stores should also be examined. "Many retail spaces are tightly plan-o-grammed with little to no backroom storage," notes Cronin. "Attempting to stuff these sites with an influx of transfers might only cause problems and necessitate renting additional storage space—thus, defeating the purpose of the transfer in the first place."

Also, if inventory is overstocked in a location, customers may recognize this and decide to wait out the discounts, making their purchases deeper into the sale term when the prices are lower—resulting in diminished returns for the liquidator and the estate.

The myriad factors that can affect successful transfers of merchandise need to be evaluated closely, often on a case-by-case basis, adds Cronin. "If the circumstances appear to favor a liquidation analysis that assumes store consolidations, lenders may want to choose an appraisal firm backed with real-world liquidation experience that fully understands the risks and rewards involved in this approach," he concludes.

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