Focus: Which fashion retailer could collapse next?

Source: https://www.standard.co.uk

With the City still digesting Britain’s retail giants’ Christmas trading, a shortlist of the most troubled names is emerging from the gloom.

As well as dire updates from stock market players Mothercare and Carpetright, a trio of established fashion retailers have found themselves on the naughty step: House of Fraser, Debenhams and New Look. Although they face different challenges, analysis of their balance sheets makes for similarly grim reading.

All three are battling to cut costs and boost sales amid heavy debts racked up over a sustained period. Their troubles stem from the problems all traditional retailers are suffering from: too many shops, a shift to online and cash-strapped shoppers. But it doesn’t stop there: complex loan structures, mis-steps in stocking the right products and wobbly profits could put pressure on them to overhaul their businesses or, worse, lead to their demise.

In the words of one New Look bondholder: “Some of these retailers will have to disappear.”

NEW LOOK

When former New Look chairman Alistair McGeorge handed over to now-ousted boss Anders Kristiansen in May 2014, he trumpeted that the fast-fashion chain “would flourish” under his watch amid persistent rumours of a stock market float. A sales crisis meant it didn’t quite turn out that way.

McGeorge has been parachuted back in and, out of our sickly trio, New Look now appears most at risk of imminent crisis. With £1 billion of debt mostly racked up under private equity owners, yesterday it revealed it sank deeper into the red to £123.5 million, a startling fall from pre-tax profits of £29.2 million the year before.

Aggressive discounting coupled with an ill-conceived attempt to appeal to younger shoppers had alienated its core clientele. Hedge funds have been buying its senior secure debt, triggering speculation that they could be trying to seize control of the business on the cheap.

The company has also been drawing up plans for a Company Voluntary Arrangement — an agreement with landlords and creditors to allow a struggling business to negotiate new terms. In New Look’s case, it is seeking to cut its rent bill and close around 60 of its nearly 600 stores. But critics believe more is needed.

Insurance companies, meanwhile, have got the jitters, and have now refused to cover some suppliers against the risk New Look will go bust owing them money.

Bondholders holding most of the £1 billion debt haven’t yet been formally approached by New Look, but Rothschild is on standby to advise a handful of them on a possible debt-for-equity swap, according to one City source. New Look’s bonds were trading at 48p on the pound on Tuesday, up to their highest in three months, but down from 90p a year ago. McGeorge yesterday said a restructuring deal was not on the cards.

New Look has to make enough money to pay interest on its debt pile until its several tranches of bonds expire in four and five years’ time, plus cover day-to-day running costs. McGeorge, credited with stabilising New Look in his first spell in charge, said the chain had access to almost £200 million of cash, giving it breathing space in the short term.

To add to New Look’s pain, South African tycoon Christo Wiese, who led a buyout of the retailer in 2015, has problems at home. His Steinhoff retail conglomerate is battling a catastrophic accounting scandal. In November, Wiese wrote off the value of New Look to zero after it swung to a loss. Credit ratings agency Moody’s warns its precarious finances could “prove unsustainable” and a return to profitability is “uncertain”.

HOUSE OF FRASER

With the death of the department store often foretold in an online age where specialists thrive, the 59-strong House of Fraser chain looks vulnerable.

The company wrote to landlords last month to ask for rent reductions, despite a £25 million cash injection from its Chinese owner Sanpower in September — £10 million of equity to beef up its distribution centre and £15 million to see it through Christmas. It also inked a deal for £30 million to sell to another Chinese business the intellectual property rights to House of Fraser’s now-defunct own-brands, and managed to find £26 million of cost savings. Alongside poor festive trading, it revealed half-year losses widened to almost £8.6 million.

Insiders say the landlords are sympathetic and new leases should be negotiated soon. The retailer plans to reduce its shop space by 30% over the next five years by sub-letting basements or top floors without closing stores altogether.

However, there are concerns that, despite the recent £25 million hand-out, Sanpower’s investment focus is elsewhere in its huge empire. House of Fraser chief executive Alex Williamson, who joined from the Goodwood Estate, famed for racing rather than retail, took up the reins last year after a series of regime changes.

Williamson, in China for meetings with Sanpower this week, has insisted that Yuan Yafei, the Chinese tycoon and ultimate boss, is committed to the business. But if the capricious billionaire pulls the plug, House of Fraser will be in dire straits. One retail source said: “I wouldn’t be at all surprised if, five years from now, it would be a trading retailer in China, but not in Britain.”

House of Fraser sold £175 million of five-year bonds as part of a 2015 debt restructuring. They are now trading at 75p on the pound, near a record low.

Similarly to New Look, a credit insurer has already decided to withdraw cover to some suppliers including Ted Baker this month.

A downgrade from Moody’s to a “very high credit risk” in December has caused more jitters over its future.

DEBENHAMS

Debenhams isn’t yet under the same pressure as New Look and House of Fraser. The price of its bonds have remained steady, in stark contrast to its share price. Unlike its two sicklier rivals, it still makes profits, but it is not out of the woods yet. Weak Christmas sales, coupled with a profit warning, sent the share price down to 28.18p from a year high of 56.06p. Newish chief executive Sergio Bucher said debt was £276 million in 2016-17. Analysts expect it to be slightly higher this year.

The retailer — which has been targeted by short-sellers — is considering closing 10 of its 176 stores over the next five years and there has been speculation that it may cut dividends in April. The rent bill for its store portfolio — some of which are on leases of more than 19 years — is a whopping £225 million per year. Moody’s downgraded it last month, citing the weak retail market.

All three retailers say they can weather the storm under their new bosses, with more focus on beauty bars, gyms and in-store cafés or just a recalibration of what wares they will sell to whom.

“Things will get better for retail but not before there are loads of casualties,” says veteran retail analyst Richard Hyman, speaking a week after the owner of Joe Bloggs and Elizabeth Emanuel went bust. “There are too many mouths to feed.”

One restructuring expert, licking his lips, adds: “I would be amazed if all three were to survive in the next three years.” The clock starts now.



Categories: Apparel, Asia, Business, China, Retail, South Africa

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