Arcadia after the CVA: forecasting the future of retail
Despite the sensationalist headlines, the breakup of Arcadia could benefit the long-term future of the retail groups individual brands. Head of Retail Research Stephen Springham investigates.
5 minutes to read
The future for Arcadia (whatever the outcome of the CVA), weak May retail sales figures from the BRC, trading updates from Joules, Card Factory and Matalan.
The headline writers at the British Retail Consortium surpassed themselves with their declaration that retail sales in May showed “the biggest decline on record.” The numbers were indeed not pretty – total sales down –2.7%, like-for-likes -3.0% - but need qualification that they were against very strong comps the previous year (+4.1% overall, +2.8% like-for-like). Hyperbole aside, this is likely to be a recurrent theme in the current months. Retail sales were very strong throughout Summer 2018 – this was not trumpeted at the time, but will make for increasingly demanding year-on-year comps as the year unfolds.
A very encouraging pre-close update from lifestyle fashion retailer Joules. Group sales for the full year to 26 May soared by 17.2% to £218m. Retail sales rose 22.7% to £159.1m, while wholesale rose 2.9% to £57.1m due to some former wholesale accounts converting to retail concessions. E-commerce sales accounted for half of retail revenues. International sales represented 16% of revenue, up from 13% the year before. Profits are expected to be at the upper end of guidance.
Solid performance from Matalan. The value fashion and homeware retailer posted a 3.8% increase in sales to £1.1bn for the 52 weeks to 23 Feb. Profit before tax increased to £30.1m, up from £20m for the same period last year. Sales growth accelerated over the year – during Q4 (13 weeks to 23 Feb) sales increased by 4.5% to £267m.
Strong figures from Card Factory. For the quarter ended 30 April, total group sales grew 6.4% while like-for-like sales rose 2.4%. Over the period it opened 14 new stores net, compared to 10 the previous year. The new stores brought Card Factory’s total store estate to 979 across the UK and Ireland.
Stephen Springham, Head of Retail Research:
A proposal. Heated debate. Rejection. Redrafted proposal. More negotiation. General impasse. The Arcadia CVA is curiously starting to follow a similar pattern to Brexit. As with Brexit, there is also an over-riding tendency to focus too much on the political machinations and lose sight of the bigger picture.
That the Arcadia CVA proposal has proved contentious and has thus far failed to secure the necessary level of creditor approval should not surprise anybody. As stated in last week’s Retail Note, the indication is that landlords will have a greater say in this CVA than others that preceded it. And many landlords may bear the scars of historic dealings with Arcadia (and BHS). Scars that harbour ongoing resentment for many.
Inevitably, there has been huge media speculation as to the outcome of the CVA, but the net result may well be largely the same. Either the CVA is ultimately approved and the closures / rent reductions are implemented. Or it isn’t, Arcadia goes into administration, the proposed closures (perhaps more) happen anyway, as do the rent reductions (perhaps even more aggressively). We are only talking degrees of evil and relative levels of pain.
The bigger picture is the longer term future of Arcadia, its constituent brands and, of course, its workforce. This outweighs the outcome of the CVA, whatever transpires. I see no alternative than a group break-up, the brands going their separate ways. And I firmly believe this in the best interests for their future survival.
The issue for any conglomerate is that its individual brands are not necessarily always given the individual care and attention they require. Central control may bring some cost benefits, but is detrimental to brand development. A fashion conglomerate has the additional challenge of effectively differentiating between its individual brands. In the case of Arcadia, the most obvious overlap is between Miss Selfridge and TopShop – though both broadly targeting the same market, the former has played second fiddle to the latter for some time.
Calling for the break-up of Arcadia is less revolutionary than it may seem. I have little doubt that Sir Philip Green has been entertaining the same thought for some time and it would be naïve to think that he hasn’t already sounded out potential purchasers for various parts of the business. No one is likely to take on Arcadia as a collective whole, but the individual brands could attract interest in certain quarters. The fact that no deals have been done to date suggest one of three things. Either I am totally wrong in my assumptions (it has been known), or any offers have fallen short of Mr Green’s expectations/valuations. Or any suitors are merely deferring until the outcome of the CVA is known.
What of the individual brands? TopShop / TopMan is still the jewel in the Arcadia crown, even allowing for recent reported under-performance. It is still a strong brand, but would benefit from fresh ideas and a revamp of the product range to make it as consumer-centric as its pure-play competitors boohoo and ASOS.
Less celebrated, but the likes of Dorothy Perkins, Wallis and Miss Selfridge do still have some brand integrity that could be nurtured and developed under new (and separate) ownership. The same could definitely be said of Evans, which before the rise of TopShop, was actually the best performing brand in the stable. Perhaps more than any of the other brands, Evans has arguably been the worst victim of neglect and has simply drifted for many years.
In my opinion, the two ‘problem children’ in the Arcadia family are Burton and Outfit. Although the only menswear brand in the stable, Burton struggles to maintain a clear brand identity. I struggle to understand who the brand is targeting these days. Despite having a shorter history than Burton, Outfit has never convinced as a format, a compromised assembly of Sears/Arcadia brands rather than a curated offer.
The really burning question is who will grasp the nettle and take on any of these brands. Because there are no obvious suitors does not mean that none will ultimately come forward. I can but talk in generics: the best outcome will be if they are taken on by other operators who can orchestrate a revitalisation and reengineering of the brand, coupled with a consumer-centric approach to product. And give them the ongoing love and investment they need. Easier said than maybe done.
As with Brexit, the sooner we have certainty, the sooner we can move on.