FREE ELECTRONIC LIBRARY - Thesis, documentation, books

Pages:   || 2 | 3 | 4 | 5 |

«Working Paper 13-096 May 3, 2013 Copyright © 2013 by Nathan Craig and Ananth Raman Working papers are in draft form. This working paper is ...»

-- [ Page 1 ] --

Improving Store Liquidation

Nathan Craig

Ananth Raman

Working Paper


May 3, 2013

Copyright © 2013 by Nathan Craig and Ananth Raman

Working papers are in draft form. This working paper is distributed for purposes of comment and

discussion only. It may not be reproduced without permission of the copyright holder. Copies of working

papers are available from the author.

Improving Store Liquidation

Nathan Craig and Ananth Raman

Harvard Business School

May 3, 2013

Abstract Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, not only as a means for investors to recover capital from failed ventures, but also to allow managers of going concerns to divest stores in efforts to enhance performance and to change strategy. Recent examples of entire chains being liquidated include Borders Group in 2012, Circuit City in 2009, and Linens ‘n Things in 2008; the value of inventory sold during these liquidations alone is $3B.

The store liquidation problem is related to but also differs substantially from the markdown optimization problem that has been studied extensively in the literature. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key decision variables, such as markdown, inventory, and store closing decisions during liquidations.

We show that our approach could improve net recovery on cost (i.e., the profit obtained during liquidations stated as a percentage of the cost value of liquidated assets) by 2 to 7 percentage points in the cases we examined. The paper also identifies ways in which current practice in store liquidation differs from the optimal decisions identified in the paper and traces the consequences of these differences.

1 Introduction Store liquidation, defined as the as the time-constrained divestment of retail stores through an in-store sale of inventory, is a critical aspect of the retail industry for both defunct and going concerns. Going concerns use store liquidation to divest sets of stores or even entire concepts.

Struggling and failed retailers liquidate thousands of stores and billions of dollars of inventory each year. For example, as Borders Group entered bankruptcy in early 2011, it held $638.5M dollars of inventory.1 Circuit City and Linens ‘n Things held $1.5B and $795.4M, respectively, of inventory prior to entering bankruptcy. Given the size of these liquidations, even a small improvement in net recovery on cost—i.e., the profit obtained during a liquidation stated as a percentage of the cost value of inventories liquidated—can be substantial. For example, a 1% improvement in Circuit City’s net recovery on cost would have amounted to $15M.

Store liquidation has important implications for firms and investors. Bankruptcy and, thus, liquidation are common in retailing: for the United States alone, Capital IQ records 2,013 retailer bankruptcy announcements over the decade beginning in 2000. Further, Gaur et al. (2013) find that 3.4% of all public retailers during the past 20 years were liquidated in bankruptcy. Store liquidations operated by asset disposition firms like Gordon Brothers Group (GBG) and Hilco Merchant Resources, such as those conducted for Montgomery Ward (Ordonez et al., 2001) and Syms Corporation, the owner of Filene’s Basement (Mattioli, 2011), help stakeholders recoup funds from failed firms and allow investors to shunt capital to other ventures. According to managers at GBG, that firm alone liquidated over $2B of inventory measured at retail value during 2011.

Improving store liquidation in bankruptcy can also directly increase liquidity within the retail industry, since the funds and terms available to retailers using inventory-based lending, a type of asset-based lending in which the collateral is a retailer’s inventory, depend on the estimated NOLV of the inventory (Foley et al., 2012). Inventory-based lending is an important source of capital in the retail sector (Alan and Gaur, 2012). Example inventory-based loans include a $3.28B revolver held by Sears Holdings Corporation and a $1B revolver used by Barnes & Noble.2 Of course, the liquidation value of a retailer can also affect its ability to obtain trade credit as well as the terms of the credit it receives; see, for example, Yang and Birge (2011).

Store liquidation is a valuable tool for going concerns: the ability to redeploy resources by effectively liquidating subsets of stores is key for managers. Store liquidations allow firms to generate The inventory figures reported in this paragraph are recorded by Capital IQ.

These figures are reported in firm quarterly filings and are current as of January 1, 2013.

cash from poorly performing stores and chains, as in the cases of Barnes & Noble’s decision to close roughly 200 stores over the coming decade (Trachtenberg, 2013), of Sears Holdings’ liquidation of over 100 Sears and Kmart stores (Lahart, 2011), and of Home Depot’s closing of its EXPO stores (Zimmerman, 2009). Store liquidation also allows managers to free resources to abet a change in strategy, as in Best Buy’s closing of 50 big box stores to fund a new focus on mobile device stores (Bustillo, 2012). Store liquidation is useful in other situations as well: when Pamida, a department store chain, merged with Shopko (LBO Wire, 2012), a similar firm, managers conducted store liquidations to empty Pamida stores and prepare them for conversion to Shopko stores. Other going concerns that rely on asset disposition firms to close stores include Dick’s Sporting Goods, Forever 21, J.C. Penney, Rite Aid, and Saks Fifth Avenue.3 The store liquidation problem differs from the markdown optimization problem that has been studied extensively in the literature. First, unlike in the markdown optimization problem, retailers have to close (i.e., stop operating their stores) in the store liquidation problem. The decision of when to close a store and, if needed, move the merchandise to another store is an integral part of the liquidation problem. The decision of which stores to open on a particular day adds a number of binary decision variables to the optimization problem and is a function of demand levels, store operating costs, and inter-store transfer times and costs.

Second, consumers behave differently during a store liquidation than at a store under normal operation. Hence, there is considerably more demand uncertainty during store liquidation than during normal store operations or even in markdown optimization. It is hard to predict ex-ante how consumers will react to a liquidation event, and the reaction can differ substantially from one store in a liquidation event to another. As the liquidation progresses, the level of demand uncertainty goes down. Consequently, in identifying optimal liquidation approaches, one needs to explicitly incorporate these phenomena—demand uncertainty and forecast updating.

Third, liquidations involve “quirks”—special features and constraints that characterize each event and often individual stores within the same liquidation event. For example, there might be greater flexibility on when some stores in a chain can be shut down because of the lease agreement For more examples, see the client list posted by Hilco Merchant Resources at http://www.


with the store’s landlord. Similarly, as we illustrate in examples later in the paper, there might be limitations on changing markdown levels, inventory transfers, or store closings by deal. Any method to optimize store liquidation should be flexible enough to accommodate these unique features associated with each liquidation.

In this paper, we introduce a method for improving the efficiency of store liquidations, i.e., for increasing the net orderly liquidation value (NOLV) of retail stores, with a focus on liquidations conducted by asset disposition firms. The method comprises a dynamic program that informs markdown, inventory, and store closing decisions as well as a demand forecasting model. We provide techniques for estimating the parameters in our model and a heuristic approach to solve the dynamic program. We compare the performance of our method to practice in selected case studies and show that the net recovery on cost improved by 2 to 7 percentage points. Through these applications, we provide novel insights gleaned from the use of our technique. GBG served as the test site and our collaborator for the research in this paper; we partnered with GBG on liquidating over $3B of inventory.

This paper is organized as follows. The next section provides background on the process of store liquidation. §3 discusses how our work relates to prior literature. §4 presents the full dynamic program. §5 introduces our solution methodology, including the modified program and the forecasting model. In §6, we discuss the performance of our methods in practice as well as insights garnered while applying the methods. Our concluding remarks are in §7.

2 The Process of Store Liquidation From the retail asset disposition firm’s perspective, the first step of any liquidation is “getting the deal.” In the case of a bankruptcy liquidation, the liquidator receives information on store characteristics, inventory, and historical performance from the bankrupt retailer. Typical data include store location and square footage, store-level or category-level inventory in terms of cost and retail value, count, and age, as well as current- and last-year store revenues. The liquidator must then file a bid with the bankruptcy court for the right to liquidate the bankrupt firm’s inventory within the retailer’s extant retail outlets. The bidding process transpires quickly and is often limited to less than a week. In the case of a going concern liquidation, the asset disposition firm receives similar information and must engage in a sales process—i.e., earning the right to liquidate from the retailer, often through the estimation of net liquidation proceeds and the negotiation of fees.

During a store liquidation, inventory is sold at an increasing discount in a set of retail stores over a finite time period. The length of a liquidation is limited by law for both bankrupt firms and going concerns The majority of U.S. states constrain the length of all liquidation, distressed inventory, and going-out-of-business sales to protect consumers from firms that might perpetually use liquidation as a marketing tool. See, for example, Ohio Administrative Code Chapter 109:4-3which constrains liquidations to 90 days, and Massachusetts General Laws Part 1, Chapter 93, §28A, which limits going-out-of-business sales to 60 days. Many other jurisdictions impose similar restrictions.

Liquidators may execute a sale for a fixed fee or on an equity basis. In the latter case, the asset disposition firm pays up front for the right to liquidate the inventory. In the equity case, the liquidator may share some portion of the proceeds with the retailer or the retailer’s estate. For instance, in advance of the final liquidation of Borders Group during 2011, liquidators agreed to pay Borders’ estate 72% of the audited cost value of inventory present at the outset of liquidation plus 50% of the net proceeds of the liquidation (Checkler, 2011). Given the speed of store liquidation, even a small improvement in net recovery on cost can translate into a substantial increase in annualized return on investment in the case of an equity liquidation. For instance, suppose an asset disposition firm improves net recovery from 3%, which is fairly typical, to 5%. If the firm acquires $100M of inventory at cost and liquidates the inventory over the course of 12 weeks, then the annualized return on investment improves from 13% to 22%.

After securing a deal, the asset disposition firm quickly begins to execute the sale, often within a few days. Once the liquidation commences, each store is assigned a supervisor. At the store level, the supervisors work to increase the profitability of the liquidation through inventory placement (to provide a pleasant shopping environment throughout a sale, asset disposition firms collapse a store by moving inventory toward the front of the store and cordoning off the back of the store) and expense management, including inventory shrinkage and payroll. These supervisors are often recruited from firms subject to a prior going-out-of-business sale and thus tend to have liquidation experience.

Prior exposure to liquidation is important to managers because stores in liquidation behave very differently than stores in normal operation. One way to illustrate this is to compare revenues during liquidation to revenues during normal operation. To do this, we construct liquidation multipliers, i.e., the ratio of revenue earned during the liquidation of a store to the revenue generated by that store over the same period during the prior year. Figure 1 presents box plots of store liquidation multipliers from four liquidations in the apparel, book, household furniture, and jewelry segments. As this plot shows, most stores see a significant increase in revenue due to liquidation.

The median store in both the book and household furniture liquidations more than doubled its revenue. Moreover, this revenue perspective understates the physical volume of product sold, since liquidation discounts exceed normal operating discounts.

In current practice, asset disposition firms use central managers to plan a common markdown cadence across all stores. This markdown cadence is chosen based on the managers’ prior experience with a given retail segment. Broadly, the markdowns start relatively low—usually around 25%— and increase to approximately 85% over the course of the sale. Figure 2 plots the realized markdown levels over time across six retail chains in different segments. Each store continues to operate until its inventory is sold through or until it turns unprofitable, i.e., when revenues exceed operating costs. Remaining inventory is either sold at a large discount to a jobber or, rarely, is transferred to a nearby store in the same chain. As will be discussed in §6, our method represents a substantial departure from this practice.

Pages:   || 2 | 3 | 4 | 5 |

Similar works:

«Council of the European Union Brussels, 3 June 2016 (OR. en) 9801/16 Interinstitutional File: 2015/0268 (COD) EF 156 ECOFIN 547 CODEC 814 NOTE From: General Secretariat of the Council To: Delegations Subject: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prospectus to be published when securities are offered to the public or admitted to trading Delegations will find attached the Presidency proposal for a general approach on the abovementioned Commission...»

«Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices Final Report Contract № MARKT/2011/023/B2/ST/FC Prepared by December 2012 About London Economics London Economics is one of Europe's leading specialist economics and policy consultancies and has its head office in London. We also have offices in Brussels, Dublin, Cardiff and Budapest, and associated offices in Paris and...»

«Zeppelin's Real Estate Tech _ _ 4Q 2010: A Real Estate Newsletter by Zeppelin Real Estate Analysis Limited Phone (852) 2401 6613 Fax (852) 2401 3084 E-mail stephenchung@zeppelin.com.hk Web: www.Real–Estate-Tech.com Hong Kong real estate is still on an uptrend notwithstanding cooler ones across the border and the various tightened transactional measures put up by the Hong Kong authorities. Land auctions also fetched record-breaking prices. Meanwhile, there have been talks of a double dip for...»

«A SOCIAL MOVMENT HISTORY OF TITLE VII DISPARATE IMPACT ANALYSIS Susan D. Carle Abstract This Article examines the history of Title VII disparate impact law in light of the policy and potential constitutional questions the Court=s recent decision in Ricci v. DeStefano raises. My analysis shows that, contrary to popular assumptions, disparate impact doctrine was not a last-minute, ill-conceived invention of the EEOC following Title VII=s passage, but instead arose out of a moderate,...»

«1 of 22 Bankruptcy Issues in Franchising: An Overview 2d ed. An introduction to the key issues for bankruptcy lawyers, franchisors, and franchisees dealing with financial distress Contents: Franchising basics for bankruptcy professionals Franchising basics for bankruptcy professionals 1 Franchise structures 1 Contractual relationships 2 By Rick Pedone and Craig Tractenberg1 Basics of business bankruptcy for franchise professionals 3 Franchise structures Franchise agreements and the bankruptcy...»

«Master Thesis by: MSc. Finance and International Business Catarina Kaalund Andersen, Ca87516 Supervised by: Erik Strøjer Madsen Department of Economics and Business A Study of the Chinese Renminbi to Assess if it is Undervalued March 2015 Aarhus University, Business and Social Sciences Abstract China is one of the largest economies in the world, and has experienced some exceptional growth rates since it started its transformation towards becoming a more open and market-based economy. Due to...»

«Human resource management J. Coyle-Shapiro, K. Hoque, I. Kessler, A. Pepper, R. Richardson and L. Walker MN3075 Undergraduate study in Economics, Management, Finance and the Social Sciences This is an extract from a subject guide for an undergraduate course offered as part of the University of London International Programmes in Economics, Management, Finance and the Social Sciences. Materials for these programmes are developed by academics at the London School of Economics and Political Science...»

«Partnerships that Work: The 2013 White House Labor-Management Summit UNITED STATES DEPARTMENT OF LABOR Partnerships that Work: The 2013 White House Labor-Management Summit FOREWORD Over the last six and a half years, we have steadily recovered from our worst economic crisis in generations. We saw over three million jobs created in 2014, the best year since the end of the Clinton administration. We’re experiencing the longest streak of private-sector job growth on record. In 2009, there were...»

«Mandarin Chinese Compact Dictionary Who an home evolves at the call who is brought the managing picture also is this Mandarin Chinese Compact Dictionary lot to make products in the stock how and like excellent trays make also baked really on the computer you can prevent subject business. Recent discounts the phone unless the business-to-business Mandarin Chinese Compact Dictionary tedious something pdf credit in your repayment. He will not save your automotive download and learn this necessary...»

«November 2008 Veröffentlichungsverzeichnis/Publication list Frank Wätzold Aufsätze in Zeitschriften/journal articles DRECHSLER, M., WÄTZOLD, F. (in press): Applying tradable permits to biodiversity conservation: Effects of space-dependent ecological benefits and cost heterogeneity on habitat allocation, Ecological Economics. EPPINK, F., WÄTZOLD, F. (in press): Comparing visible and less visible costs of the Habitats Directive: The case of hamster conservation in Germany, Biodiversity and...»


«Comput., Environ. and Urban Systems, Vol. 22, No. 5, pp. 497±523, 1998 Pergamon # 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0198-9715/98 $19.00 + 0.00 PII: S0198-9715(98)00022-2 THE DIFFUSED CITY OF THE ITALIAN NORTH-EAST: IDENTIFICATION OF URBAN DYNAMICS USING CELLULAR AUTOMATA URBAN MODELS Elena Besussi1,2, Arnaldo Cecchini 3 and Enrico Rinaldi 4 University of Venice, Institute of Architecture, Department of Social and Economic Analysis of Territory, Stratema...»

<<  HOME   |    CONTACTS
2016 www.thesis.xlibx.info - Thesis, documentation, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.