Hammerson – being seen to be doing something?
Analysing Hammerson’s Strategic Review, strong growth in grocery sales, interims from McColl’s and full year results from Joules.
6 minutes to read
- Further evidence of the positive impact the weather has had on the foodstore market. Kantar data show that grocery sales climbed 3.6% in the 12 weeks to 15 July, the highest rate of growth this year. Alcohol sales reached £287m in the week that England played Colombia and Sweden, while sales of firelighters and fresh burgers surged by 47% and 30% respectively. The Co-op achieved growth of 6.4% over the 12 weeks, while Asda was the top performer of the Big Four (+3.7%). As we discuss in depth in our Foodstore Newsletter), the recovery in the foodstore market is by no means just weather-dependent.
- Such positivity was not reflected in convenience store operator McColl’s, which saw like-for-like sales decline by 2.7% in the half year to 27 May 2018. This was down to supply chain disruption following the collapse of wholesaler Palmer & Harvey. Overall sales were up 19.2% to £601.7m on the back of 300 new stores acquired in 2017. Pre-tax profit was £2.3m in 2018 compared to £4.5m in 2017.
- Joules continues to trade very well. The lifestyle fashion retailer reported an 18.4% jump in annual revenue to £185.9m, while pre-tax profit grew by 25.6% to £11.2 m. In the UK, sales rose by 16.2% while internationally, they increased by 40.4% on a constant currency basis and now account for 13.1% of group revenue. The number of Joules stores across the UK and Ireland has now risen to 123, an additional 15 compared to the end of their last financial year.
Stephen Springham, Head of Retail Research:
Hammerson’s Strategic Review. Symptomatic of the state of retail property and retail markets generally or more a reflection of the way The City works and thinks? I would venture more the latter, underpinned by very negative sentiment towards anything retail-related.
The City loves deals. Hammerson’s proposed takeover of Intu didn’t materialise and Klépierre’s subsequent hostile bid was wholeheartedly rebuffed. No deal was done either way, to the disappointment of shareholders (particularly in the latter case). The inability to do a deal and a dim view on retail markets generally has resulted in Hammerson trading at around a 30% discount to net asset value (NAV).
Is Hammerson a bad business? No. Are its retail assets weak? Absolutely not, many are amongst the most prime retail developments in the country and are largely incubated from much of the well-documented ‘malaise’ in the retail sector.
But in The City’s eyes, Hammerson is in play and is under-performing. Under such intense spotlight, it has to do something, or at least be seen to be doing something both positive and drastic. Hence the need for a Strategic Review, undertaken in partnership with high profile management consultancy McKinsey.
Most of the key initiatives announced make sense. The business will focus solely on two retail segments: 1. Flagship retail destinations and 2. Premium Outlets. It will therefore exit retail parks over the medium term, with a disposal target of £1.1bn by the end of 2019 (and an increased £600m target for 2018).
There has always been something of a miss-match between the quality of its shopping centres (e.g. Bullring/Grand Central in Birmingham, Brent Cross, Victoria Leeds, Westquay Southampton, Oracle Reading) and retail parks (e.g. Didcot, St Helens, Swansea, Luton, Middlesbrough, Merthyr Tydfil).
There is overwhelming merit in focussing all effort on the former, allied with one of the other key initiatives of creating ‘New City Quarters’ around them to maximise value from the surrounding land. All well and good.
Likewise the ongoing focus on Premium Outlets (or Factory Outlet Centres (FOCs), as we call them). Hammerson operates 20 FOCs across Europe, including Bicester Village. Although they fly under the radar somewhat, FOCs are undoubtedly one of the best performing channels in retailing.
The FOC model is such a robust one – transparency, turnover-based rents, short leases, fluidity of tenant. It’s been said many times before, but it remains a model that other retail channels could learn much from. It’s a great market to be in.
The disposal of the retail parks is perhaps less newsworthy than it appears. They have largely been on the market for some time (as have retail warehousing schemes at the other property REITs), in that they would probably have listened to any sensible offers.
But by going public, they have probably done little to increase their value. It remains to be seen whether they will achieve the same pricing actively marketed as they might have done off-market.
Shrinking department store space by a quarter and high street fashion by a fifth, replaced by ‘differentiated brands, aspirational fashion, leisure, events and lifestyle spaces’ is obviously a response to longer term retail trends.
Clothing is definitely the most over-shopped retail sub-sector and HoF’s CVA and continued under-performance at Debenhams have raised question marks over the viability of department stores. Nevertheless, the latter still seems a bit of an over-reaction and something of a slight against its other department store tenants, which include John Lewis, Fenwicks and Selfridges.
If there is a question mark in the Strategic Review, it is the pledge to achieve ‘greater geographical diversification’ with non-UK retail exposure increasing by ca.10%.
If this is more on the FOC than shopping centre side, this is less of a concern. Likewise, if it entails bolstering the shopping centre business in France or Ireland. But embarking on a shopping centre spree in other European markets would fly in the face of an overall plan which is otherwise orientated towards streamlining and specialising in what Hammerson does best.
The other key initiatives (a share buyback of up to £300m, cost savings of at least £7m p.a. through operational efficiencies and lower corporate costs associated with disposals, deleveraging with the intention to reduce LTV to mid-30s% level over the medium term) all fall under the broad umbrella of shareholder sweeteners.
In some respects, the deferral of the Brent Cross extension is probably also being driven by a need to placate shareholders. The extension is probably still very viable, but in the current environment and the way sentiment is so anti-retail, spending cash on substantial new retail development may not seem the right thing to do.
The City’s initial response to the Strategic Review was lukewarm at best – Hammerson’s shares were up just 1% on the day of the unveiling. Although much of the Review makes perfect strategic sense, clearly is it is viewed by many as under-whelming and not drastic enough.
Many shareholders are evidently pinning their hopes on a renewed approach from Klépierre come October. For all its considerable merits and tremendous retail assets, Hammerson remains caught between the rock of a hugely challenging retail market and the hard place of unforgiving (and arguably unrealistic) City expectations.