Supporting an investment in a struggling retailerPre-Acquisition Diligence, Planning & Turnaround
A large national retailer had fallen on hard times. Their stock was down 95% from the highs yet the majority of it’s business had remained healthy. The company had been stalked by an acquirer for months before agreeing to a tie-up, and that merger ultimately failed more than six months after the agreement. The second largest shareholder, upset with the stock price liquidated their position driving the stock price down to a dollar. A sponsor reached out to Radical Consulting to assess the company and identify opportunities for cost reduction and margin improvement as part of a potential investment.
challenge
The first and foremost challenge was assessing the company from the outside. It was imperative from the onset that before opening communication with the company we have a detailed understanding of the company, the people, it’s financial situation and the levers on which we would rely to drive a potential turnaround.
We began to build a detailed set of operating and financial models based on publicly available information, SEC filings, merger agreements, public contracts and layered in additional information from store and channel visits and finally through public forum communications with the executives. We were able to identify a number of challenges within the organization:
- Lack of focus or clear direction
- Poor public – especially investor – communication
- Overspending in areas of advertising & marketing
- Excess inventory
- Poorly aligned SG&A and overhead ratios
- Lack of attention to profitability
- Potential overspending in various areas
solution
We put forth – to the sponsor – a plan to reduce cost, improve margin and grow revenues.
The cost reduction side called for a decrease in the total SG&A and overhead to numbers aligned with today’s revenue and the growth of the digital space and not the historic brick and mortar establishment of the previous decades. With a focus on vendors and overhead, we identified $17.5 Million dollars in run-rate cost reductions. While the realization of those reductions would take some time they would return the company to historic EBITDA ratios and profitability.
In the margin improvement realm, we detailed out a strategy that could achieve an additional $20 Million dollars in margin via net pricing increases. With a more advanced pricing and discounting mechanism, the company could reduce their reliance on company-wide promotions.
The last leg of the stool was a plan for revenue growth, the key here was to not cannibalize existing sales. Our plan, therefore, was to expand the product set to include additional categories on the periphery of the niche, things that were needed by the customer but weren’t currently being offered. To reduce the burden on cash flow these items would be demoed in-store and online but drop shipped directly from the manufacturer at a lower – but still incremental to earnings – margin.
results
In this case, we did not support the implementation of the initiatives in the organization. Instead, our work ended with the analysis and 10-week planning post-investment. All of this work was completed prior to the potential transaction enabling the sponsor to make a decision, supporting the efforts to fundraise and working with executive management and board of directors.