The acceptance and implementation of a business rescue plan can best be described as establishing a good foundation off which a company can possibly build their future success on. There is also a massive chance that the best business rescue plan may not even touch sides with a company, at the end of the day, we are living in a world where there is so much disruption that it becomes tough to stake (or build) reputations off the back of a successful rescue.
Often, issues such as leadership vacuums, gross financial mismanagement, and poor managerial decisions are root causes for distress. However, we are living in a world where we are facing a once in a generation global cause of distress in the Covid-19 Pandemic.
Some of the world’s biggest brands have found themselves in distress because of lockdowns and shifts in consumerism, both of which were directly caused by the Pandemic. While some of these brands have thrown in the towel, others have implemented ambitious turnaround strategies in the hope of breathing life back into their business. In this article, we will take a look at the turnaround efforts of three companies to try and get some insight into what it takes to find success as a BRP.
A high volume turnaround
Exela has been struggling for a while now, as it has been growing slowly. In mid-2019, its revenue began dropping, and its sales plunged after the Covid-19 pandemic arrived. Since last summer, Exela’s revenues have been falling by around 20% year-over-year. Exela’s management has been trying to evolve its business. The company is exiting its older, less profitable businesses and expanding its digital offerings. Exela now offers solutions such as a digital printshop, a digital mailroom, and document signing.
The article points out that those solutions could easily become more widely used in the post-Covid world. That said, 2020 was a great time for companies in those fields, and Exela was largely unable to take advantage of the opportunity.
Exela is different from most small technology companies. Typically, tech companies become publicly listed using an initial public offering (IPO) or a special purpose acquisition company (SPAC) and have clean balance sheets. In other words, many tech start-ups have a net cash position or only a small amount of debt. Exela, by contrast, had a crushing $2 billion of obligations, including $1.5 billion of long-term debt, as of its most recent financial report. That puts Exela in a difficult spot, as the company’s market capitalization is only a few hundred million dollars. When a company’s debt is higher than its market capitalization, it’s a bad sign.
The article adds that, as a result, Exela’s situation is more complicated than that of the average tech company. Exela’s price/sales ratio may look cheap, as it generates more than $1 billion of revenue annually. On the other hand, to lower its risk, Exela has to address its massive debt.
In May, Exela announced a $100 million at-the-market, or “ATM,” stock offering. That was completed last month. Shortly afterwards, it announced another $150 million ATM offering. Exela’s most recent market capitalization was listed at $193.5 million, though its share count and market capitalization are increasing as it issues more shares.
The article points out that when a company with a roughly $200 million market capitalization issues $150 million of stock, its shareholders will be massively diluted. At a $4 share price, for example, Exela would have to sell nearly 40 million new shares of stock to the public to raise $150 million. Unlike many penny stocks, Exela does have a large revenue base from its existing businesses. If management can pull off a turnaround, the company’s shareholders could enjoy a sizable gain.
Back to basics
The big question hanging over Harley Davidson’s second-quarter results will be a familiar one: has the 118-year old brand sold enough bikes?
The article points out that, after struggling to broaden its appeal beyond middle-aged and affluent riders for several years, the company has gone back to what it knows best, which is selling big bikes, and the decision is making inroads under CEO Jochen Zeitz.
Zeitz’s plan includes selling used bikes, scraping entry-level models and ramping up investment in touring, large cruiser and trike bike segments – its main profit engines.
The article adds that the company has also cut its production and reduced inventory to drive up the average selling price of new bikes.Waning interest in motorcycling as a recreational activity as well as the price of Harley bikes, which can cost as much as a car, have hurt the company’s efforts to woo younger riders.
Zeitz has aimed for low double-digit earnings growth through 2025. Since his plan was unveiled, Harley’s stock is about 26% higher, a sign of confidence in Zeitz’s abilities to turnaround Harley’s fortunes, analysts say.
The article pointed out that the company also reported a 31% year-on-year jump in retail sales in the United States in the first quarter, its first quarterly sales increase in its biggest market in six years.
Positioning is everything
Bob Evans, which had its restaurant division snatched up by Golden Gate Capital for $565 million in 2017, can trace its recent success to a years-long turnaround strategy featuring a host of initiatives that fit into exactly what the chain needed to navigate the pandemic. These measures include simplifying the menu by focusing on core items, revamping the chain’s value proposition to create stronger value messaging in all dayparts, shifting media away from traditional platforms in favor of a larger digital presence, and partnering with third-party delivery companies, in particular DoorDash, and launching a new ad campaign showcasing farmers.
On the operations side, Bob Evans heavily invested in hospitality training for off-premises business, says COO Mickey Mills. Restaurants shifted physical spaces to be more efficient and accurate with takeout orders. The menu was simplified to highlight executable dishes while eliminating ingredients that couldn’t be cross-utilized very well. Mills estimates that Bob Evans changed more than 70 ingredients throughout the menu and upgraded others to create a more quality product.
Cannibalising can be a good thing
The efforts of Harley Davidson and Bob Evans make for particularly interesting reading.
When asked in the past why Kodak never jumped on the digital photography tend (when the company predicted that it would be a trend that would revolutionise the industry), the company said that the main reasoning behind this was because it was reluctant to cannibalise its product offering.
However, this strategy has benefitted both Harley Davidson and Bob Evans. Harley Davidson has decreased the number of bikes that it sells and has focused on its traditional big ticket items (high sellers) in an effort to increase profits. It does not matter how many products you have, you need to execute them well.
Bob Evans not only decreased its menu, it made the bold decision to focus on e commerce and take-outs rather than dine-in options. This may be seen as placing all of your eggs in a single basket. However, with consumerism visibly moving in that direction, Bob Evans may find the same success as Nike who achieved their five year sales target in a single year based on the decision to invest in e-ecommerce.
As BRPs, we need to encourage our clients to make bold decisions without regret. These decisions need to be factually sound and based on months of research which will build a strong case for the decision.
Robin Nicholson is a Director at Corporate-911 and is a Senior Business Rescue Practitioner