FINANCE

NRF predicts 4% holiday sales increase

BY Dan Berthiaume

Washington, D.C. – The National Retail Federation (NRF) expects holiday sales to increase 3.9% to $602.1 billion, up slightly from last year’s 3.5% increase. The forecast is higher than the 10-year average holiday sales growth of 3.3%.

The group noted, however, that its forecast hinges “on Congress and the Administration’s actions" over the next 45 days as the government shutdown entered a third day

“Our forecast is a realistic look at where we are right now in this economy, balancing continued uncertainty in Washington and an economy that has been teetering on incremental growth for years,” said NRF president and CEO Matthew Shay. “Overall, retailers are optimistic for the 2013 holiday season, hoping political debates over government spending and the debt ceiling do not erase any economic progress we’ve already made.”

The NRF says that economic variables including positive growth in the U.S. housing market and increased consumer appetite to buy larger-ticket items give retailers reason to be cautiously optimistic for solid holiday season gains.

However, much remains up in the air, including fiscal concerns around the debt ceiling and government funding, and income growth, as well as policies and actions surrounding foreign affairs, all of which could impact holiday sales. According to NRF, the holiday season can account for anywhere from 20%-40% of a retailer’s annual sales, and accounts for approximately 20% of total industry annual sales.

In addition, NRF expects retailers to hire between 720,000 and 780,000 seasonal workers this holiday season, in line with the actual 720,500 they hired in 2012, which was a 13% year-over-year increase from 2011.

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INVENTORY

E-Commerce Impacts DCs

BY Tripp Eskridge

Distribution centers have evolved alongside trends such as just-in-time manufacturing and the rise of overnight shipping. Now they are changing again, this time to accommodate omnichannel consumers.

One of the most prevalent trends is the move to larger centers. New warehouse facilities of more than 250,000 sq. ft. — called “big box” buildings — are today designed and built to accommodate both e-commerce fulfillment operations and traditional store distribution operations under one roof. The need to serve both stores and e-commerce operations from a single location requires additional space for staging different processes.

For example, fulfilling traditional store orders means the distribution center receives and ships large volumes of product at one time. To serve e-commerce customers, the facility must be designed to ship single packages, like a single dress. And many times, orders include individual shipping and packaging instructions, personal notes and even personalized giftwrap.

The new crop of omnichannel-oriented centers also reverses a long-term distribution trend by requiring more people. Technological advancements have made inventory and order processing an increasingly automated system in store-oriented distribution centers, which have become larger while requiring fewer people to run them.

But that level of automation has not caught up to the e-commerce fulfillment world, where an order may include one flash drive rather than a case of them. Picking several of these small items, packaging them and in some cases giftwrapping items is not a process that traditional distribution operations are equipped to handle.

These overarching trends — larger, more complex centers with more people populating them — result in other design changes as new DCs come out of the ground, including:

• More parking: The labor-intensive picking and packing process to fill online orders means more parking for employees, which in turn necessitates a larger overall site.

• Higher ceilings: Standard ceiling clear heights in distribution centers increased from 18 ft. some 25 years ago to 32 ft. about five to 10 years ago as the two limiting factors — racking technology and fire protection systems — improved to allow the higher ceilings. Today, technology readily permits clear heights of 36 ft. to 40 ft., enabling significantly more inventory to be stored in a smaller footprint. That’s an important factor for omnichannel retail distribution, given the larger space needs of facilities and surface parking, as well as the desire to be close to urban centers, where large sites can be costly or simply unavailable.

• Mezzanine spaces: New buildings can typically accommodate two or even three levels of mezzanine for picking, packaging, gift wrapping, returns and other back-office tasks. The extra mezzanine levels also provide a strong driver for higher ceiling clear heights.

• Life systems upgrades: ESFR fire protection systems, driven in the past by inventory, must be geared primarily for employees. New designs must also consider evacuation methods for larger numbers of employees, many working on mezzanine levels.

• HVAC and lighting: In newly built facilities, the omnichannel trend dovetails with another mega-trend in real estate development — the focus on energy efficiency and sustainability. DCs seeking to reduce energy costs are investing in LED lighting for cold storage, efficient HVAC systems, solar power systems and photo sensors that adjust electric light levels based on the available amount of natural light. Prismatic skylights that diffuse sunlight across a wide area for maximum daylight harvesting are ideal for a DC’s large footprint.

• Employee comfort, safety and productivity: HVAC systems are not just geared to lower energy costs, but also occupant comfort and safety. Night purge ventilation ensures high air quality; LED lighting in dock areas ensures appropriate light levels for reading documentation; and more stable temperatures result in environments that maximize worker productivity.

Tripp Eskridge is senior VP at Jones Lang LaSalle, overseeing the firm’s national industrial project and development services practice.

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News

Navigating Today’s Debt Capital Markets

BY Jim Hogan

For mid-size retail companies — those with anywhere from $10 million to $1 billion in revenue — the combination of today’s steady growth and affordable capital is rare indeed. There is also ample liquidity as traditional middle-market lenders are being joined by institutional investors with deep pockets and a strong desire to participate in these loans. What’s more, new products are available that give borrowers more flexibility. In short, it’s a near ideal environment for midsize company borrowers.

However, that doesn’t make navigating the debt capital markets any easier. New products and more lenders give borrowers more flexibility, but it makes the marketplace arguably more complex. There are new senior debt options available from banks, financial companies and institutional investors that can be structured as either asset-based loans (ABL) or cash-flow-based loans. Junior debt offerings in the form of second liens and mezzanine funding remain widely available in the private market.

Institutional Investors return

CEOs and CFOs looking to take advantage of the current environment to ramp up borrowing should keep a few developments in mind.

In the past, lending to mid-size retailers was dominated by banks and finance companies. But today, large institutions such as pension funds, hedge funds and bank-run mutual funds account for 60% to 70% of senior lending at the higher revenue end of the middle market.

A big reason for this increase in lending is institutional investors’ desire to diversify their holdings from fixed-rate debt to include more floating-rate debt, which offers some protection should interest rates start to rise. Plus, the yield is relatively good.

More products and flexibility

Historically, the long-term financing available in the bond markets has only been open to larger mid-size companies with revenues closer to $1 billion. Most middle-market companies have had to settle for bank loans that amortized in five years. But following the financial crisis, institutional investors are re-emerging to offer bond-like loan facilities with virtually no amortization to smaller middle-market companies. They’re offering loans with virtually no amortization, as low as 1%, so these loans function more like bonds.

Other borrower-friendly products include “delayed draw facilities” and “incremental draw facilities.” In a traditional loan, the company gets all the money up front and immediately begins paying interest on the whole loan. For a fee, delayed draw facilities give a company the flexibility to draw down the cash and begin paying interest when they need it — often over a one-or two-year window. It’s similar to a revolver but in the form of a term loan. This can be a cost-effective option for borrowers.

What’s more, as banks and institutional investors compete for assets in a slow growth economy, “covenant-lite” loans have also returned. Loan covenants are certain measures that serve as early warning signs should a borrower run into trouble. Covenant-lite loan agreements have fewer restrictions and allow the borrower greater flexibility and often fewer reporting requirements.

Regulatory outlook

CEOs and CFOs should remain attuned to the regulatory issues that lenders face, which have become more burdensome since the financial crisis. This year, the Federal Reserve released new guidance for highly leveraged transactions (HLTs) directing all lenders to be extra vigilant when underwriting loans and to demonstrate adequate capital to withstand losses. It’s too early to know the effects of the new guidance, but it could dampen some bank lending in the future.

Overall, the environment for mid-size company borrowers has rarely been brighter. According to the National Center for the Middle Market, retail executives expect a 4.2% increase in revenue in the next 12 months. More lenders, new products and good terms mean that quality companies have access to capital to grow and take advantage of the country’s economic recovery. By keeping a few key developments in mind, CEOs and CFOs can successfully navigate today’s debt markets and build a long-lasting relationship with the right lender.

Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds.

Today, large institutions such as pension funds, hedge funds and bank-run mutual funds account for 60% to 70% of senior lending at the higher revenue end of the middle market.

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