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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Voluntary Arrangements - CVAs

Post-Christmas apocalypse for the retail sector?

retail, high street trading,As we head for its most crucial shopping period in the wake of Mothercare and Mamas & Papas collapsing into administration, I make no apologies for revisiting the UK’s retail sector.
Following last month’s Brexit Halloween deadline and with Black Friday, Cyber Monday and Christmas ahead of us retailers have reportedly stockpiled seasonal products earlier than usual but the consumer uncertainty remaining no one knows how much stock will remain unsold in the new year.
The Confederation of British Industry, the country’s leading business lobby group, said retailers’ stock levels compared with the volume of expected sales had risen to the highest point in October since it began compiling retail sales estimates in 1983.
This is against a backdrop of dramatically narrowing profit margins, falling consumer confidence and repeated demands for comprehensive reform of business rates falling on seemingly deaf Government ears.
A new report by the global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, has found that store-based profit margins for the top 150 UK.retailers have more than halved in less than a decade – dropping from 8.8 percent as seen in 2009/10 to 4.1 percent in 2017/18.
This, it says, is the result of increasing operating costs, inflexible lease structures and changing shopping habits. Yet, it concludes that there is still demand for the High Street physical retail experience “presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle”.
But with a December 25th Quarter Day deadline for the payment of quarterly rents, cash flow is likely to be tight for many retailers who won’t get much support from landlords.
Indeed, headwinds are building up for retail landlords in the retail sector such as Intu, the shopping centre owner, which has warned that it will have to raise more money from shareholders.  It has said that its rental income has been battered by a wave of controversial retailer restructures, by such retailers as Monsoon and Arcadia, using CVAs (Company Voluntary Arrangements) to negotiate rent reductions.
In addition to rent, rates are also an ongoing problem for retailers. On October 30th the Treasury Committee, a cross-party group of MPs, called for an urgent review of the whole business rates system, saying that it was broken, having outpaced inflation for many years and grown as a share of business taxes, placing an unfair burden on bricks and mortar shops. Not only that, but, it also criticised a backlog of 16,000 appeals against business rate decisions and called for the government’s valuation office to be properly staffed.
This was only the latest in a seemingly endless series of calls for reform, that had come from such bodies as the FSB (Federation of Small Businesses), the British Retail Consortium and others throughout the year, with FSB chairman Mike Cherry warning of a very bleak winter ahead.
With consumer confidence currently at a six-year low according to research by YouGov and the Centre for Economics and Business Research Mr Cherry’s prediction isn’t a surprise.
With an estimated 85,000 jobs having already gone from the retail sector over the last year, and approaching 3,000 more coming after the latest retail closures how likely is it that consumers will rush out and spend during the festive season?
The likelihood of any Government action has, of course, receded into the distance given that politicians are now not sitting, but out on the campaign trail ahead of a General Election on December 12th.
Whether a new government can shift its focus away from the ongoing and ever more tedious Brexit saga and onto more pressing domestic concerns remains a very big question but the party manifestos focus on sectors other than the retail sector which doesn’t bode well for them in the short term.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance

What’s ahead for the retail sector in 2019? – February sector focus

retail vanishing from high streets?It has been obvious for some time that the High Street is undergoing massive changes as online shopping gains a growing share of the retail pie.
Not a week goes by without another announcement of a “big name” closure or restructure and the New Year has been no different after mediocre Christmas sales with Hardy Amies and HMV falling into administration for a second time, Patisserie Valerie and Odd Bins filing for insolvency and Marks & Spencer announcing further store closures as part of its ongoing restructuring.
The figures make gloomy reading.
Deloitte says it has been instructed by more than 20 struggling high street chains in the past two months to assess whether they are eligible for restructuring their debts and lease obligations, according to the Sunday Times.
Towards the end of January the Guardian carried out a survey of the decimation that has beset High Streets in 88 major town centres in England and Wales and found that they have lost 8% of their shops on average since 2013.
Some have fared worse than others with Stoke on Trent topping the list with a loss of 23% of its 415 stores in five years.
Clothing and restaurant chains have fared worst, according to the research, but, surprisingly perhaps, charity shops have also been hit.
By contrast it also revealed that “a thousand extra hair and beauty salons have sprung up in our town centres”. Also, convenience stores and independent supermarkets have also grown in almost all town centres.

The stresses and strains on the retail sector

In common with other businesses, but arguably having more impact on SMEs, retail has had to contend with rising minimum wages and pension contributions for staff.
But added pressure has come from the high cost of rent and of town centre business rates, both of which the online retailers escape. Online retail now accounts for 20% of consumer retail spending, which adds to the pressure on High Street retailers as consumer buying habits change. This 20% figure when compared with 8% of shop closures would suggest there are many more closures to come.
At the moment, there are signs that worry about the future of jobs and the unknown impact of Brexit is currently putting a dampener on consumer spending and confidence.

Is there any light in 2019 at the end of the High Street retail tunnel?

Certainly, the Sports Direct owner Mike Ashley seems to think so, as do some others.
HMV has just been purchased by a Canadian business, Sunrise Records, although 27 stores will be closed as part of the deal.
Mike Ashley has purchased a share in House of Fraser stores and Evans Cycles to add to his growing portfolio and has recently had some success in renegotiating rents with landlords in some shopping centres, saving some House of Fraser stores that had been under threat. He is also laying siege on Debenhams hoping to pick up another High Street trophy.
Ashley has been vocal in calling for a complete rethink on business rates and for a 20% sales tax to be imposed on online retailers which would help justify his acquisition strategy.
Sir John Timpson has also called for business rates to be replaced with a sales tax operating in a similar way to VAT.
The MP Grant Shapps has also called for radical action to save the High Street, including a reduction in business rates with which he claims the government has so far only “tinkered” with.
These calls have also been backed by Mike Cherry, chairman of the FSB (Federation of Small Businesses), adding “A healthy high street should be diverse – not just featuring retail but also hospitality, services like hairdressers as well as gyms and shared workspaces for the self-employed. High parking charges and a lack of spaces often put off shoppers from visiting town centres, instead favouring out-of-town retail parks with free parking.”.
To add weight to their argument the OECD (Organisation for Economic Co-operation and Development) has said Britain has the second-highest property taxes in the world with business rates, council taxes and stamp duty making up £1 of every £8 collected by the Treasury.
In a sign of some movement in December it was announced that Nicky Morgan MP, chair of the Commons Treasury Select Committee, will hold a joint evidence session with the Housing, Communities and Local Government Committee to agree the terms of a new inquiry into the business rates system.
The death of the High Street has been predicted for some years but there are signs that some people feel there is life there yet, subject to some radical rethinking and tax reform.

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Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Retail CVAs – are they a triumph of hope over reality?

failed CVA? boarded up shopsMothercare has reported today that it is “in a perilous financial position”.
It seems that rarely a week goes by on the High Street when yet another retailer or restaurant chain announces that it is seeking to restructure its business by entering into a CVA (Company Voluntary Agreement) with creditors.
With footfall on the High Street plummeting, by 6% in March and 3.3% in April, while rents have continued to rise, trading conditions are continuing to be challenging, to put it mildly.
The inexorable shift to online shopping can account for some of this, but there are still retailers that have weathered the storm by developing more agile business models, often by combining online and in-store shopping, by making it easy to “click and collect” or by providing a great in-store experience.
Among the retailers that have announced that they will use a CVA as part of a restructure alongside divesting themselves of under-performing stores and food chains have been BHS, Toys R Us, Byrons, New Look, Prezzo, Select, Carpetright, House of Frazer and now Mothercare.

What are the attractions of a CVA?

Although the CVA is an insolvency process, unlike all the others it can be used to save companies. The others involve the eventual closure of the company.
A CVA requires the support of a majority of creditors who are offered better prospects for being paid than the alternative of closing down the company.
This is likely to be welcomed by a business’ employees who keep their jobs and those landlords and suppliers who keep a customer.
Restructuring provides the chance for a business to raise further capital and also the opportunity to renegotiate onerous contracts, such as leases to agree rent reductions.  From the landlords’ point of view a CVA means they can continue to receive some rent instead of being left with empty buildings for which they will need to find new tenants in a declining market.
From the viewpoint of the struggling business, it offers scope for reorganising the business to address the underlying issues that caused the problems and put it on a more sustainable footing, although they may need the help of a restructuring and turnaround adviser.
Despite the attractions and approval of a CVA, many businesses subsequently fail due to a lack of fundamental change to the organisation and business model as all too often the CVA is simply used for financial restructuring to write down debts and get rid of onerous obligations. It is rarely used as an opportunity to turn around the business.

Key to a successful CVA is the underlying business model

Toys R Us and BHS are perhaps the most high-profile examples of CVAs that failed. Both initially entered into CVAs but shortly after had to admit defeat with Administrators closing down each business.
Clearly, the terms of the CVA are crucial to a successful restructuring effort. It is a binding agreement between a company and those to whom it owes money.
This means that the directors must be honest with themselves about the problems and must take advice from experienced advisers, who will have carried out an in-depth and detailed look at every aspect of the business to identify what can be saved and what cannot.
Crucially for CVAs to succeed, they need to be realistic in terms of retaining debt that can be serviced, including any CVA contributions, but the underlying business needs to be viable with sufficient profits and cash flow to justify survival. If these cannot be achieved they will fail.

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

The shifting sands of retail

 

There are signs of a re-balancing between online retail and physical stores as Asos posts its second profit warning in three months.

The rise of e-commerce was regarded by many as a nail in the coffin of the High Street because it was spared the costs of expensive rents and business rates, in-store staff and high energy costs.

However, in their enthusiasm, it seems that the champions of e-commerce may not have paid enough attention to some of the additional costs involved.

While prices may be cheaper online, there are some additional costs which are turning out to be significant.

Online retailers certainly reap some benefits from centralised warehousing as opposed to a High Street presence. However they have significant packaging and shipping costs, which are proving a burden when dealing with the issue of returns and who pays for them. The additional staff handling costs can also prove significant, especially when administering returns.

This is becoming a big concern for a volatile sector like fashion and clothing, where, for example Asos  in the UK returns amount to 39% and in Germany 58%.

A major issue is the size labels used on women’s clothes. Another relates to the difference between the item on a screen and the one that is received. I know several women who order many items at a time expecting to return most of them. They choose retailers with pre-paid return policies and often return as many as 90%.

There are two examples of retail outlets that have had consistently good performance even over the last few uncertain years: Next and John Lewis.

Both combine e-commerce and a High Street presence, but crucially, both have introduced a hybrid system, click and collect, where customers can order online but pick up their order in a store.

It will be interesting to see how the online retailers overcome the issue of returns.

Plainly High Street retail is not dead yet.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Private Equity, investment and retail

 

Earlier this year we asked whether Private Equity should be involved in High Street retail after several well-known chains had indicated their intention to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint), Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

Several of these IPOs have now taken place, and one has been cancelled.  Fat Face has withdrawn its proposed IPO after deciding that it would be unlikely to raise money at the level it had hoped.

This was after shares in Card Factory fell 10% a week after its launch and Pets at Home losing 3% since its float in March 2014, and despite Fat Face having increased sales to February 2014 by 8.2% following the previous year’s pre-tax losses.

Plainly PE investors are adopting a more cautious approach to the old financially driven model for realising value. The old model often involved a public to private acquisition, repaying private equity owners by loading the company with debt, and then flipping it back into public ownership.

While the prospect of a quick exit has focused the attention of Private Equity owners on public markets, all too often the valuations don’t leave much for new shareholders. The recent decline in shares shortly after being floated is a reminder of the old model that made Private Equity owners so wealthy, often at the expense of public owners who sold cheap and bought back expensive.

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Business Rates – time for a change?

 

As the Chancellor’s March Budget statement approaches, calls for a complete overhaul of business rates have been growing.

The British Retail Consortium (BRC), several large manufacturers (including Tata Steel and Vauxhall), ex Tesco boss Sir Terry Leahy and a number of MPs have been among them. There seems to be general agreement that the current tax regime needs reform.

Some, principally the BRC, have put forward alternative suggestions, one of which is to replace the property-based tax with an energy tax.  There is no doubt that for High Street retailers the payment of rates, set at pre-2008 crash property valuations, has posed a particular challenge given the competition they face from online shopping and changing consumer habits.

But, as the British Chamber of Commerce has pointed out, business rates affect all sectors, not only retail.

The BCC is right to highlight the burden placed by this tax on all businesses. 

There will doubtless have to be a thorough review before any new system is introduced and perhaps now it is appropriate for a more nuanced approach to be considered.

There may be scope for a scale of charges tailored to different sectors of the economy, or tailored to the size of a business, or one based on the number of employees in a premises, which may achieve political as well as tax collection objectives.

We need to support both SMEs and employers to promote jobs and people on whom the economy is depending for growth.

Do you have any suggestions for the Chancellor on a fairer way of assessing business rates?

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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

Transformation of the High Street

 

 So far the end of year trading results are revealing a mixed picture of High Street retail winners and losers.

While Debenhams saw profits drop, John Lewis, House of Fraser and Next have all reported healthy overall profit growth at 6.9%, 7.3% and 7.7% respectively. Most significant in all three cases was the increase in online sales with Next recording a 21% increase, John Lewis 23% and House of Fraser a colossal 58%.

One of the most encouraging stories is the turnaround in the fortunes of the clothing store Bonmarche. Its  400 stores, then owned by Peacocks, went into administration in 2012 and were bought by private investors for c £10 million. 

Restructuring involved closing “dozens” of unprofitable stores and renegotiating rents on others, classic turnaround basics.

One significant factor in this success story that has seen the business now valued at more than £100 million was the laser-like focus of new CEO Beth Butterwick identifying its niche customers and then catering specifically for them.

Bonmarche identified its market as the 40-plus woman, defined how this group preferred to shop and provided clothes they wanted to buy, with the help of designer David Emmanuel best known for designing Princess Diana’s wedding dress.

Another example of a terrific turnaround is Jaeger the fashion retailer that was bought by Better Capital from Harold Tilman in 2012. 

Jaeger has reported a sales jump of 23% in like for like sales for the 13 weeks to 28 December 2013 when compared with 2012. These include a huge increase in online sales which also offered a click and collect service.

Such examples are proving that the High Street is undergoing a transformation.

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Banks, Lenders & Investors Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Unintended consequences

Turning around a struggling economy, like turning a business in distress, is a complex process where it is wise to be mindful of the possibility of unintended consequences.
Here are a couple of examples of ideas and policies that seemed like a good idea at the time.
First, of course, was the idea that it was possible to mitigate the risks inherent in subprime mortgages by packaging them with safer loans and creating complex insurance products for protection such as Credit Default Swaps and we all know where that led us in 2008.
More recently, despite many warnings against creating new housing bubbles, the Government’s Help to Buy lending scheme was supposed to encourage construction firms to start building sorely-needed homes.  What has happened so far? Anaemic growth in house building, surging house prices and an explosion of Buy to Let mortgages.
Removing planning restrictions in order to make it easier to convert redundant High Street shops into homes is one scheme of many to revive struggling High Streets.  How about actually addressing the issue of sky high business rates, last set in 2008 before the financial crisis with a review postponed until 2017?   There are approximately 40,000 High Street shops currently empty. Why would anyone start up a new retail business when business rates are so high?
I am sure you will all be able to come up with many other examples. 
Two questions: why do we seem to be incapable of learning the lessons of history? Do we rely too much on social, economic and business models that can never accurately encompass the complexities of real life and real people?

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Rent seeking is a drain on growth

There has been more media doom and gloom about the High Street, with the news that 10 out of 12 of the Portas Pilots have suffered an increase in empty shops and the CBI’s May retail health check showing the steepest falls in sales this year, not only on the High Street but also online.
This is not solely about the squeeze on household budgets but also about the fact that the High Street, like many SMEs, is not competing on a level playing field.
Economists have a word for financial gain that doesn’t do anything to stimulate either real production or economic growth.  It is called rent seeking. It covers everything from income gained from vast financial sector fees, bonuses and charges on transactions to actual rent received by landlords.
Sports Direct owner Mike Ashley has given landlords a deadline of today (May 31) to accept a deal to reduce the rents on the Republic chain that he “rescued” in February from administration or he will walk away and the 116 shops will close. 
The BBC also recently highlighted the plight of one trader in electrical goods in the “Portas” town of Nelson in Lancashire, who needs to move to larger premises. He has identified an empty property vacated by a national chain but it is still tied to a long lease so the landlord has no incentive to re-let at a lower rent.
Add to that the ridiculously high town centre business rates that are no longer justified in the current climate and that the Government has not reviewed since 2007 – arguably another form of “rent seeking”.
How are SMEs supposed to be the engine of growth when even those with potential to grow are facing such impossible odds?

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Is blaming the weather for a downturn in High Street trade a red herring?

With the somewhat slow and tentative arrival of Spring have come the by now regular comments blaming the weather for the struggles of High Street retailers.
But there are signs that the High Street might not be dead quite yet and that actually the weather is only a small part of the picture.
Research from analysts Kantar recently has revealed that 70% of us still like to try a product before we buy despite the boom in online shopping and that even with the rise of online shopping 90% of retail spending last year had taken place in actual shops and stores.
While trading conditions are difficult in the continuing economic crisis it may be that what is going on is actually a restructuring process between online, out of town malls and the High Street. 
Recently Tesco has cancelled some plans to build larger retail outlets but in common with other large supermarkets continues to develop smaller drop-in stores both in town centres and suburban local shopping areas. Some formerly online only stores are also moving into physical stores in a process called “showrooming”.  They include the Kingfisher-owned Screwfix, furniture store Oak Furniture Land and SimplyBe, owned by online fashion group JD Williams.
Small independents are also said to have a place on the High Street but as a specialist in turnaround and restructuring I would want to look at their business plans, costs and potential cash flow before recommending that they go ahead.
What would help most of all, however, would be for the Government to finally get the point that Business Rates, last revised at the height of the pre-crisis boom and now at an artificially high rate, which increased again in April, are no longer either justifiable or affordable for SMEs like the independent retailers.
According to Graham Ruddick of the Daily Telegraph, even the Policy Exchange, which is said to have close ties to senior Conservatives, is recommending freezing business rates for two years until they can be thoroughly reviewed. http://tinyurl.com/pxm2c2y
In our view a review and revision downward is urgent. Freezing them will only allow the Government to avoid having to consider revaluations and reductions in the hubristic hope that growth will return to pre credit-crunch “normal”.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

First decline in household income for 30 years causes pain on the High Street

The Office for National Statistics (ONS) reported recently that in 2010 real household disposable income fell by 0.8%, its first drop since 1977.
A plethora of profit warnings from major high street retailers is therefore no surprise. JJB successfully agreed a new Company Voluntary Arrangement (CVA) for repaying debt, just two years after its last one. Oddbins’ attempts to agree a CVA were rejected which led to it going into administration.
Meanwhile travel company Thomas Cook announced a 6% fall in holiday bookings from the UK. Dixons announced that it was cutting capital expenditure by 25%. H Samuel and Ernest Jones, Argos and Comet all report falling sales. Mothercare is to close a third of its 373 UK stores and HMV has just sold Waterstones for £53 million to pay down some of its £170 million of debt.
Falling consumer confidence, the Government’s austerity measures and rising commodity prices have led to a steady erosion of disposable income. An April report indicated an increase in retail sales, up 0.2% on February’s, but this was attributed to non-store (internet) and small store sales and probably conceals a continued decline in High Street sales.
After a few years of expansion fuelled by debt, it is entirely logical that the marketplace is now facing a sharp contraction as consumers spend less money while they are concerned about their job security and repaying their huge levels of personal debt.
Many companies need to contract and reduce their cost base if they are to survive. For the High Street retailers this means concentrating on profitable stores and reviewing strategy.
Growth is likely to involve developing experience based retail outlets in dedicated shopping environments or direct sales such as online. The High Street has failed to reinvent itself and the recession has accelerated its decline.