HoF and Poundworld – architects of their own downfall
Retail sales figures for May from the BRC, trading updates from WH Smith and Joules, HoF’s CVA and Poundworld’s likely administration.
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- The BRC retail sales figures for May were overshadowed by all the other bad news this week. UK retail sales rose 4.1% overall and by 2.8% on a like-for-like basis. Food (+3.4% overall, +2.0% like-for-like over the last three months).continues to markedly out-perform non-food (-0.5% overall, -1.4% like-for-like). Refreshingly, the BRC termed the Royal Wedding a “distraction” rather than a driver, the weather being the main positive factor in what was the strongest monthly growth since January 2014.
- More of the same from WH Smith. For the 13 weeks to 2 June, total sales were up 4% and like-for-likes were up 1%. The headline figures for Travel (+8% overall, +3% like-for-like) predictably looked a lot better than those for the High Street (-1% overall and like-for-like), although both arms delivered gross margin improvement. The business plans to open between 15 and 20 travel units in the UK and 10 internationally during the remainder of the year, while also progressing its small store high street trial.
- Joules underlined its status as one of the strongest performing retail brands, reporting an increase in annual group revenue of 18.4% to £185.9m in the 52 weeks to 27 May and a marginal beat of analyst pre-tax profit expectations of about £12.6m. Retail revenue was up 15.9% on the previous year “driven by a very good ecommerce performance [and] continued growth” from stores. Joules’ wholesale business delivered a 24% sales advance.
Stephen Springham, Head of Retail Research:
Consumers shop brands, not channels. An absolute retail truism. And one that does not reflect well on either of this week’s retailer casualties, House of Fraser and Poundworld. Rather than victims of the channel in which they operate, both have largely been architects of their own downfall.
At time of writing, Poundworld is reportedly poised to appoint administrators. Is this reflective of wider malaise in the whole value / poundshop channel? Of course not, and it is particularly contradictory to hear media commentary of Poundworld falling victim to waning consumer confidence and declining retail spend. There is limited actual evidence to support either of these two notions, but even if they were true, they should actually be a fillip to Poundworld rather than a drain. A depressed consumer inclined to trade down should play right into its hands.
The issue for Poundworld is actually far simpler – it’s not as good a retailer as many of its peers. A cursory comparison between a Poundworld and a Poundland store will clearly bear this out qualitatively, a review of their respective financial accounts will do so quantitatively. Throw in my hobbyhorse of private equity ownership and you have the usual toxic mix – an over-expanded, uncompetitive retailer with a flaky balance sheet, being run by accountants as a cash cow. Hardly a recipe for prosperity.
I’ve articulated my views on HoF’s CVA before (see The Retail Note from 5 May). Now that it has been formally proposed, we have more detail but the same questions remain. The scale of closures (31) is certainly higher than I anticipated / feared (15-20) and there were a few surprises on the list, particularly High Wycombe, Chichester, Cardiff and Milton Keynes. The closure of Oxford Street is actually less of a surprise, particularly amongst those of us old enough to remember the earlier closure of arguably ‘better’ flagship stores such as Dickens & Jones on Regent Street and Barkers on High Street Ken over a decade or so ago. But it does speak volumes that a high-end premium department store operator will not be represented anywhere within London’s West End.
HoF’s CVA is being met with more resistance from landlords than others that preceded it. But even if they vote against it en masse, it will probably still secure the requisite 75% creditor approval. This again highlights the inequity of the CVA process and the lack of transparency around 1. who all their creditors are and 2. how their influence is weighted. It’s much easier for suppliers and bodies such as the HMRC and PPF to vote in favour of something for which they will not have to shoulder any of the financial burden.
Disappointingly, the media have latched onto the HoF announcement as evidence of the death of the department store. Parallels have been drawn with the demise of BHS and the trading under-performance of Debenhams. Effectively, they are adding one and one and getting five. BHS (a variety store business rather than a department store) was patently different from HoF (essentially a house of premium third party brands) and Debenhams (a mass-market operator majoring in own-brands). Exempt from the association, John Lewis is also a very different business – a full-line department store, with far greater authority in homewares. To tar the whole department store channel with HoF’s brush is as facile as it is misguided.
To return to my original truism: consumers shop brands, not channels. Even if HoF’s CVA is approved and they reduce their rent roll by ca. £50m+ as we tentatively estimate, the business will still need solutions that transcend the financial. The CVA may improve the balance sheet and P&L but it is doing very little enhance the brand itself. The final arbiters on HoF’s future will not be creditors or landlords but shoppers – and brand is what matters most to them.