Life beyond a CVA
Full year trading figures from New Look and Carpetright a year on from their respective CVAs, Bonmarché retrospectively agreeing to EWM’s takeover approach and Game being acquired by Mike Ashley.
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- Having launched a CVA last year, New Look is back in the black, if only on an underlying basis. Core underlying operating profits were £33.2m in its latest year compared to a loss of £35.7m the year before. Revenue over the year fell 3.8% to £1.24bn, in line with expectations “given focus on driving more profitable sales and fewer stores”. In its main UK market, like-for-likes slipped 1.6%. On a statutory basis, New Look made a loss before tax of £522.2m, compared with £190.2m the previous year. The retailer said that was principally driven by £423.3m in goodwill and non-cash brand impairment charges as part of its restructuring.
- Fellow CVAer Carpetright has also posted reduced annual losses and heralded strong like-for-like growth in the new financial year. The business reported a statutory pre-tax loss of £24.8m in the year to 27 Apr, down from £69.8m in 2018. Underlying EBITDA was £2.9m versus £7.1m the previous year. Group revenue declined 13.4% to £386.4m during the year. In H1, like-for-likes fell 12.7% as the CVA was implemented. In the second half, the decline reduced to 5.4% and in the first eight weeks of the new financial year, like-for-likes rose 8.5%.
- Fashion group Edinburgh Woollen Mill (the holding company for Philip Day’s retail empire) has posted a marginal (-3.1%) decline in profits to £81.2m in the year to Aug 2018. Performance was held back by Jaeger which saw a deficit of £3.9m before tax. The group (which includes brands such as EWM, Peacocks, Austin Reed, Ponden Home and Jane Norman) saw sales rise from £592m to £935.8m.
Stephen Springham, Head of Retail Research:
Of all the criticisms landlords level at the CVA process, a common one is that it is just the thin end of the wedge and that it is only delaying the inevitable. A failing retailer will ultimately always succumb to full administration and a CVA only provides a stay of execution.
In some instances, this may be true. This proved the case with BHS and Toys R Us and there are still question marks over other “serial offenders” such as Blue Inc and Select. But not all retailers fall into this camp by any means and New Look and Carpetright are both definitely of a different breed, as their respective trading figures this week underline.
It was nevertheless curious to see many in the media hail both retailers’ trading updates as relative triumphs and somehow an endorsement of the whole CVA process. Yes, there are definitely positives in both (particularly a return to underlying profitability at New Look and positive like-for-like momentum at Carpetright), but both have still have a long way to go in their respective turnarounds.
Contrary to the media narrative, this is not ‘phoenix from the flames’ stuff. Despite launching CVAs, New Look and Carpetright are both inherently strong brands and businesses. New Look’s corporate issue was its huge levels of debt (now largely restructured), coupled with its product offer not being as sharp as it maybe needed to be. It is refreshing to see “building brand equity” as one of the key tenets of the overall turnaround strategy.
As a strong market leader in an online-immune product category (albeit one where consumer demand can be very erratic), Carpetright’s Achilles heel was very different – too many stores (and cannibalisation in some areas) and unsustainable rents in some locations. Whether this merited a full CVA may be a moot point for some, but the fact is that Carpetright is now on much firmer footing to move forward.
The acid test for any CVA – will the business still be around in 10 years’ time? I have little doubt that both New Look and Carpetright will be. And I would put my head on the block and say the same for Monsoon, as it currently undertakes its own CVA.
For me to say the same of Debenhams and Arcadia, I would need to see a something more radical strategically than is currently being communicated. As I have written before, I would expect the component Arcadia brands to live on as separate entities under different ownership – with some having better prospects than others. Debenhams, on the other hand, needs a major strategic overhaul that drives top-line growth, rather than merely pre-occupying itself with round after round of cost-cutting.
Two other retailers on our internal ‘CVA Watchlist’ have both come under new ownership this week. Game Digital has, somewhat begrudgingly, agreed to a £52m takeover by Mike Ashley’s Sports Direct, with the video game retailer stating that it had little choice in the decision given current challenges in the retail landscape. Without a new major console launch before at least 2020, and even then likely Q4, Game is facing a tough period where software sales continued to be hit by shifts to digital downloads.
Having initially rebuffed Philip Day’s £5.7m takeover offer, Bonmarché’s board of directors have had a change of heart on the back of a poor first quarter’s trading. This is actually a case of the business turning full circle, it having previously been a sister brand of Philip Day’s Peacocks business. Philip Day tends to fly much more under the radar than other “retail tycoons” such as Sir Philip Green and Mike Ashley, but he is a huge player on the UK high street and, by and large, his empire continues to trade very well. Bonmarché may have found a decent home, but it still needs to earn its keep.
Could either Mike Ashley or Philip Day bid for Arcadia? An intriguing question. Neither is likely to bid for the business outright – the former has already (jokingly?) said that he wouldn’t “even pay £1”. But the component brands at the right price? That is another question altogether. Oh to be at that negotiating table…