Week 1 of an unfeasibly long road to recovery

Written By:

Stephen Springham, Knight Frank

19 Jun 2020

10 minutes to read

Categories: Property Sector Retail Topic Covid-19

Introduction

This is the 11th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:

• Week 1 post-lockdown (England and NI)
• What we learned from the official ONS retail sales figures for May
• An update on occupier fall-out

Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.

Key Messages

• Estimated 40-50% of “non-essential” retail stores have re-opened
• Far too early to derive a handle on levels of trade
• Footfall was up +42% on Monday week-on-week
• But footfall figures are misleading as against a negligible base
• Footfall still ca. 50% down on normal levels
• Retail lockdown in Scotland not lifted until 29 June
• Wales expected to re-open from Monday 22 June
• UK retail sales values (exc fuel) down -9.7% y-o-y in May
• Second worst monthly performance on record (after April)
• Monthly data (values +10.3%) and trends largely meaningless
• Foodstores (+7.4%), chemists (+9.7%) and DIY (+5.3%) in positive territory
• Clothing sales decline by a further -63% year-on-year
• Online’s share of spending hits 33.4% from 30.8% in April
• But online’s share of non-food declines from 44.4% to 41.5%
• Only 33% of retailers report an increase in online business
• 23% report a decline in online business (with 31% the same level)
• Poundstretcher and All Saints launch CVAs
• Both push towards turnover rents – not the last to do so
• Oak Furnitureland in “future-proofing” pre-pack administration
• Oasis and Warehouse acquired by Boohoo.

1. Week 1 post-lockdown (England and Northern Ireland)

A tentative rather than triumphant re-opening of the retail sector was always on the cards. And so it is proving, as the retail market takes its first Bambi-esque steps post lockdown. “Non-essential” retail stores in Northern Ireland and England were able to open from Friday 12 June and Monday 15 June respectively. Those in Scotland will have to wait until 29 June (and even then, shopping centres will remain closed), while those in Wales are expected to be allowed to re-open from 22 June.

As predicted, the pace of re-opening will be very staggered. Some landlords had predicted that up to 70% of stores would re-open in the first week, but anecdotally, the proportion would thus far appear to be closer to 40-50% of all retail stock.

Most media coverage was depressingly predictable, focusing on queues outside key flagship locations (e.g. Primark stores in London and Birmingham, Nike Town on Oxford Circus, Bicester Village). These queues were a reflection more of social-distancing measures than a rapid rebound in consumer demand. Nor were they replicated outside every store in the country. Nor have they necessarily been repeated on subsequent days.

It is far too early to get any read on post-lockdown trading. Most retailers are more intent on the practicalities of re-opening and adapting to strict health and safety guidelines to protect their staff and customers. Many are just grateful to be up and running again and have any money at all coming through the til.

Footfall data is all we currently have and is an unreliable barometer of retail health at the best of times. On the initial day of opening, according to Springboard, overall footfall “surged” by +42%. Footfall “growth” was highest at high street stores (+51.7%), followed by shopping centres (+37.0%), with retail parks appearing something of laggard (+25.1%) only because many of the outlets on them were already trading through lockdown (e.g. foodstores).

Footfall data needs to be taken with a huge pinch of salt. Some portions of the media have already read too much into the fact that the corresponding figures for subsequent days dipped to +35%/+36%. Short-term comparisons (e.g, day-on-day, week-on-week, even month-on-month) are largely meaningless. Robust as +42% growth might seem, on a year-on-year basis, footfall is still only around half what it ordinarily would be.

2. What we learnt from the official ONS retail sales figures for May

That month-on-month trends are meaningless as a gauge on market health and true performance. Yet the ONS and most economists continue to major on them. Staggeringly, the ONS even makes reference to a partial “rebound” in its opening summary, flagging a +12.0% increase in month-on-month volumes (+11.8% in values). Stripping out fuel, the figures are still artificially very robust (values +10.3%, volumes +10.2%).

The year-on-year figures paint a far more realistic picture and are the only ones that matter. The key one is that retail sales values (exc fuel) were down -9.7%, with volumes down -9.8%. If April went down as the worst month ever for retail sales (-18.0%), there is scant consolation in May being the second worst we have ever seen. And frankly are ever likely to see in any of our lifetimes.

The polarity between foodstores (y-on-y +7.4%) and non-food stores (y-on-y -42.7%) is ongoing. The figures for clothing (-63.0%) continue to alarm, as do those for household goods (-30.7%), furniture (-63.9%), electrical goods (-15.9%), carpets (-72.1%), cosmetics (-43.5%) and jewellery (-80.6%). The only two non-food sectors to register year-on-year growth were chemists (+9.7%) and DIY (+5.3%).

Online penetration of all retail sales increased from 30.8% of April to a new high of 33.4% in May. Expressed another way, around one third of all spend went online in a period when the vast majority of physical stores were closed. An obvious, but scarily overlooked fact.

There were some interesting nuggets of information and data on the online side. The ONS polled retail businesses with an online service as to the business impact of coronavirus. Just 32.8% said that online sales had increased. 31.0% said that they had stayed the same, while 23.3% said they had actually decreased. The balance either “weren’t sure” (7.8%) are had actually ceased trading online (5.2%). An interesting insight into the complexities of online retailing, which brings into question the notion that it is a guaranteed avenue of growth.

This is likely to represent a “high water mark” for online penetration of retail sales. Perhaps surprisingly, the increased share in May was driven largely by food, rather than non-food. According to the ONS, online’s share of grocery increased month-on-month from 9.4% to 11.3%. Over the next year, we would expect this share to gradually ease back to 8-9%.

On the non-food side, even a partial levelling of the playing field is starting to redress the overall imbalance. Online non-food’s share of spending actually declined in May to 41.5% versus 44.4% in April, a trend that will undoubtedly accelerate now that lockdown is lifted and the re-opening of stores gathers pace.

Even the most diehard optimist would struggle to find too many positives in the retail sales figures for May. But in many ways, the numbers (especially the month-on-month ones) are largely irrelevant and will be so for some time to come. What is important is that sector gets back on its feet, toughs it out over the next few months and builds towards a sustainable future. Quantify that however you will.

3. An update on occupier fall-out

As alluded to anonymously in last week’s note, Poundstretcher’s CVA was confirmed earlier this week. The value operator has appointed KPMG to oversee a wider turnaround plan that “seeks to restructure its UK store portfolio”, stem losses from “underperforming outlets”, shave head office costs and free up capital for investment in “the business’ core estate and product offering”.

The CVA proposes that of the 450 strong estate, a total of 94 stores continue to pay the same rent, 84 stores see reductions of between 30% and 40% over three years, while the remaining 253 stores pay six weeks’ full rent before adopting rents based on each store’s “commercial merits”. A vote on the CVA will be taken on 2 July and will require 75% creditor approval to proceed.

Being an “essential” retailer theoretically benefitting from a consumer flight to value does not compensate from Poundstretcher’s wider shortcomings, which predate COVID-19 by years (Poundstretcher was most definitely on our internal “watch list”). In its last financial year (to March 2019), the business reported an operating loss of £2.2m. The previous two financial years, it was barely profitable, achieving an operating margin of just 0.4% and 0.2%.

But being in the red didn’t curtail its expansion plans. As recently as December 2018, it announced that it had opened 40 stores in the space of three months and was to open 40 more by April 2019, largely through the acquisition of defunct Poundworld stores. A further 120 new stores were originally planned by April 2020, towards an ultimate target of 800 sites by 2022. A classic case of a relatively weak retailer massively over-expanding.

Neither a CVA nor an administration, but Travis Perkins is set to close 165 outlets across its various brands. Not a retailer per se (although it does own Wickes and Toolstation) the builders’ merchant blamed weaker than expected demand for building materials due to the ongoing coronavirus pandemic. The Travis Perkins chain will be the worst affected, with closures focusing on smaller branches where social distancing rules will be difficult to implement and lower trade will wipe out profitability.

CEO Nick Roberts said the business did not expect pre-coronavirus trading levels to return for at least two years. Travis Perkins also said it was “evident that the UK is facing a recession” which in turn would also see a downturn in demand for building materials “during 2020 and 2021”. Around a third of Travis Perkins branches were kept open during the lockdown, along with half of all plumbing and heating stores. It has opened more branches over the last six weeks, although sales were just 60% of pre-coronavirus levels year-on-year in May.

More surprising was Oak Furnitureland’s pre-pack administration deal, although the process smacks more of future-proofing rather than distress or aggressive restructuring. The business has been acquired by Davidson Kempner Capital Management for an undisclosed sum. The sale process was undertaken by Deloitte and includes new funding to be provided by an asset-lending platform affiliated with Davidson Kempners.

The deal means that business will continue as normal for all 1,491 employees at the 105 stores and warehouses, which re-opened from 17 June. Oak Furnitureland’s chief executive Alex Fisher will continue to lead the management team under the new owners. The company’s previous holding company was JB Global Ltd, a privately-owned (and not particularly transparent) operator, The last accounts filed were for the year to September 2017, but showed the business to be healthily in profit, with an EBITDA of £22m.

A fashion operator under private equity ownership with something of a chequered history, All Saints ticked most of the credentials that underpin our “watch list” and has duly launched a CVA. The business is planning a restructuring of its store portfolio through CVAs in the UK and for its US subsidiary. The retailer is putting forward a proposal to its landlords that will see most of its 41 stores in the UK and 42 stores in North America move to turnover rents.

The business said the closure of the vast majority of its store estate around the world as a result of COVID-19 lockdowns had had “a substantial and sudden impact” on its short-term sales. Prior to the COVID-19 pandemic, it had delivered year-on-year revenue growth for five successive years. While that may be true, there are question marks elsewhere in the financials.

In its last reported accounts (to February 2019), All Saints was at least profitable on an operating level, albeit at very low margin (ca. 1.1%). But finance expenses of nearly £30m pushed the business to a pre-tax loss of over £25m (against a loss of £32m the previous year. Delving deeper into the accounts, these finance expenses largely relate to “interest accrued on shareholder loans”.

All Saints challenges are legacy based. Icelandic bank Baugur previously held a substantial stake in the business, until its collapse in the late 2000s. By 2011, the business was saddled with debts of over £50m and was on the brink of collapse, before being taken over by Lion Capital LLP. But residual balance sheet issues provide a weak defence against current market conditions.

Failed fellow fashion operators Oasis and Warehouse will live on, albeit as online-only brands as opposed to store-based ones. Online pureplay Boohoo has acquired the intellectual property of both brands from Hilco in a £5.2m deal, having bought its former stablemates Karen Millen and Coast last year. The acquisitions will see Boohoo “integrate Oasis and Warehouse onto its platform, allowing both brands to benefit from the group’s insight, infrastructure, supply chain and operating model”.