Fashion retailers – frontrunners and also rans

Written By:

Stephen Springham, Knight Frank

16 Jun 2019

5 minutes to read

Categories: Retail UK

• Mildly disappointing figures from Tesco. Q1 like-for-like sales in the UK and Ireland rose by 0.8%. On a total basis, sales rose 1.3% to £11.16 billion over the 13-week period. Hampered by a weak performance in Central Europe (Poland especially) Group like-for-like sales rose 0.2%, while total sales edged up 0.4% to £13.9 billion. As much as anything, the subdued growth in the UK reflects an increasingly challenging comp base, with grocery sales in 2018 significantly boosted by last summer’s prolonged heatwave.
• Better figures from Iceland (which often flies under the radar somewhat in terms of coverage). The business posted sales growth of 4.5% to £3.08 billion in the year to 29 March. However, pre-tax profits slipped 8.7% to £140.1m on account of increased staffing and distribution costs, alongside increased investment. Over the course of the year, the business opened 45 new stores, 31 of which were Food Warehouse outlets. A further 50 new sites are planned for the current financial year, a run rate on a par with more heralded operators Aldi and Lidl.
• A slightly curious announcement from Smiggle, warning that its Australian parent company Just Group could pull the plug on funding for its UK business if economic conditions deteriorate. Smiggle blamed its owner’s stance on the “uncertain and volatile” macroeconomic environment in the UK market, a fairly facile explanation for its own possible shortcomings. In its latest accounts (for the year to 28 Jul 2018) EBIT tumbled 35.1% to £7m. Net profit slumped 32.9% to £5.7m on sales of £69.6m, which were up 25%. Top-line growth was driven by rapid store expansion, which saw 133 standalone stores open between Feb 2014 and Jul 2018. Since then it has opened just one new shop and three concessions.

Stephen Springham, Head of Retail Research:

Brand, product, leadership. The three most important facets of fashion retailing. Followed by execution, a generic term that includes more specific retail disciplines such as supply chain, channel strategy, store design and marketing, to name but four from a very long list.

This is the context that frames the raft of announcements from UK fashion retailers over the past week. This is what separates the good retailers from the bad, the flourishing from the failing. Oversupply is one of the 10 Structural Failing we identify in our ‘Price of Change Report’ and no sub-sector is more over-supplied than fashion. There is simply not enough demand or growth to go round. For fashion retailers, there is simply no hiding place.

The approval of Arcadia’s CVA (at the second time of asking) inevitably dominated the headlines. As I argued in last week’s Retail Note, this only buys Arcadia time rather than redemption and fundamental shortcomings in all three of the key facets outlined above need to be addressed head on if the constituent brands are to have a long term future.

Amidst all the retail punditry (informed and otherwise) it has been debated whether Arcadia’s store closure programme runs deep enough. To my mind, this is largely irrelevant. Store closures will only cut costs, they will not re-build brands, improve product and instil visionary, hands-on management, the central planks needed for Arcadia’s recovery. Nor will salvation come through online, as more one-eyed analysts are suggesting (TopShop selling through ASOS a good idea? Really? Would Tesco sell its own brands through Sainsbury’s? Of course not).

Select’s CVA was also approved, with resignation rather than expectation from most landlords. “Until the next time” seems to be the common consensus, kicking cans rather than the bucket.

At the other end of the performance spectrum, we also had stunning trading figures from Boohoo. For the three months to 31 May, group sales surged 39% to £254m, with the UK up 27% and international markets up 56%. For the current financial year, guidance on revenue growth was maintained at 25%-30% with an adjusted EBIDTA margin of around 10%. All three sub-brands (Boohoo, PrettyLittleThing and Nasty Gal) are all continuing to deliver.

The reason for Boohoo’s enduring success? Excellent brand(s), customer-centric product and astute leadership, underpinned by strong executional disciplines (especially marketing). The fact that it is an online pureplay and has no physical stores is largely irrelevant. If it were found wanting on any of the core facets, being an online pure-play would afford it precious little resistance. Consumers shop brands, not channels. And Boohoo’s strength lies in its brand, not in its channel of operation.

Throw into the mix Ted Baker, the long-time high flyer issuing a profit warning. Group revenue increased 3.8% in the 19 weeks to 8 June, but total retail sales slipped by 0.3%. The business downgraded guidance on underlying pre-tax profits for the year to 25 Jan to between £50m and £60m.The official reasons given for the shortfall were unseasonable weather across North America (to a degree, justified) and a highly promotional retail environment across global markets (nothing new there).

From the outside, it seems impossible to separate the relative fall from grace of Ted Baker with changes in senior management. Ray Kelvin, founder and CEO, has of course, stepped down in the face of (denied and unproven) allegations of misconduct. It is certainly not my place to pass any comment or judgement on these issues, but from a completely objective standpoint, Ted Baker as a commercial enterprise will inevitably suffer without his input. Through its many years of out-performance, Ted Baker ticked all the fundamental boxes of brand, product and leadership. Now there is a question mark in at least one of these.

Above all else, this underlines the ongoing importance of leadership in retail. In all honesty, this is something that is increasingly being overlooked, but is absolutely fundamental. Without casting any aspersions to any particular individuals, too many retailers these days are being run by accountants rather than merchants (as they call them in the US).

To make a footballing analogy, would Man City or Liverpool replace Messrs Guardiola or Klopp with an accountant? I think not. Why then would a retailer?