Many retailers are preparing for an increase in shareholder activism in late 2020 and early 2021.  The COVID-19 pandemic largely sidelined activist hedge funds in the spring, but as investors and companies have evolved to the “new normal,” activist hedge funds will start engaging with new targets.  The retail industry has been severely affected by the pandemic and is particularly vulnerable to activists who accumulate shares at historically low prices and then pressure companies to shift strategy.

We expect the primary activist thesis in retail to be driven by M&A, as activists take positions in companies and try to initiate sale processes.  Although not as common as M&A campaigns, we also expect to see some activists focused on operational changes and replacing senior management teams, particularly where an activist believes the retailer has not kept up with changes in technology and consumer preferences.  Balance sheet strategies (e.g., pushing for an extraordinary dividend or stock buybacks) are much less likely in the sector given the financial condition of most retailers and uncertainty about when the industry will fully recover.

Brick-and-mortar retailers will be the most vulnerable, but e-commerce retailers are not immune from attack.  Regardless of the thesis, the activist is likely to be highly critical of retail managements handling of the COVID-19 pandemic – including claims that management did not react quickly enough or, in some cases, overreacted and missed opportunities.  Retailers should assess their vulnerability to shareholder activism and review their preparedness.