Private Equity Ownership – the Common Denominator for Retailer CVAs / Administrations
Private Equity = Retailer Peril
4 minutes to read
The relationship between private equity and retailer distress, the collapse of East, trading updates from H&M, ScS and Joules.
- H&M announced a 32% drop in net profit for its global operations in its fourth quarter. Sales in Q4 also declined by 4% to SEK 108.1 billion, although for the year as a whole group turnover grew by 4% to SEK 232 billion. The business admitted it had not done enough to develop its multi-channel proposition. Globally, the company plans to close 170 underperforming stores, but will open around 390 new ones - around a quarter of which will be H&M’s other brands, such as COS, Monki and Afound.
- Much better figures from Joules. The lifestyle retailer reported group revenue of £96.2 million (+18.2%) for the 26 weeks ended 26 Nov 2017. Retail revenue increased by 16.2%, with online sales up 19.7% and store sales up 14.2%. Joules’ statutory profit before tax rose by 22.8% to £8.3 million and the business also upgraded its full year profit expectations.
- Some comfort at the big-ticket end of the market after Carpetright’s post Xmas profit warning. Upholstery and carpet retailer ScS reported a 2.2% increase in like-for-like orders for the 26 weeks ended 27 Jan. On a two-year basis, like-for-likes grew by 5.3%. But the company’s House of Fraser concessions, which represent 7.4% of group order intake, saw like-for-like orders decline by 0.4%.
Stephen Springham, Head of Retail Research:
“Private equity has no place in retail. Discuss”. My favourite, if slightly loaded, exam question…
A couple of wobbles over Christmas has sparked the inevitable, but frankly depressing, panic over which retailers are about to go bust. As the property industry nervously draws up its ‘watch list’, we have already had our first high street casualty of the year in the shape of fashion retailer East, which has slipped into administration for the second time since 2015. The fate of its 34 stores,15 concessions and 314 workforce are now in the hands of administrator FRP Advisory.
When a retail business fails, more naïve retail commentators than myself always say (with retrospective wisdom) what a bad business it was and how its demise was inevitable. Others may fall back on lazy generic chestnuts such as weak consumer demand and the rise of online. There also seems to be a curious perception that a retailer can have one bad Christmas and then go bust. The issue runs far deeper than any of these, but invariably circles back to two inter-related fundamentals – debt and ownership (current or past).
East perfectly encapsulates this. The business blamed its collapse on the fact that shoppers were ‘reining in spending’ and that ‘high street footfall had plummeted’. But according to the ONS, retail spend in specialist fashion stores grew by a very healthy 4.4% in Q4 – in fact, East itself posted a 6.5% uplift in like-for-like sales over Christmas. Clearly, the trading story is not the full story.
East is private equity owned. As were the majority of retailers that went into administration or bust over the last decade, from BHS to Comet to MFI. And as are most of the other retailers (and F&B operators) currently on the ‘watch list’. New Look, House of Fraser, Maplin, Byron Burgers and Jamie’s Italian have a very telling common denominator of private equity ownership. Debenhams (which I believe has no place on the ‘watch list’, but seems to be there anyway) apparently bucks this trend as it is publicly listed. However, many forget that the liabilities that currently weigh heavily on its balance sheet were the result of private equity ownership between 2003 and 2006 and a debt-backed period of aggressive store expansion.
Of course, it would be wrong to tar all private equity with the same brush – some private equity owners are clearly more forward-looking and visionary than others. But in my opinion, the ‘traditional’ private equity model has no place in retail. Retailers may seem attractive to investors in that they are cash-generative, but they also are capital intensive (or rather, they should be if they are run properly). The notions of hefty financial leveraging, extracting cash, asset stripping and flipping may have worked (or seemed to have worked) in the so-called ‘good times’, but have no place now and are increasingly coming home to roost.
As I’ve said before. Retailers need to be run as retailers, by retailers, not as cash cows by financiers.