The retail note - 14 March 2017

Written By:

Stephen Springham, Knight Frank

14 Mar 2017

3 minutes to read

Categories: Retail UK

• Stellar trading figures from health & beauty retailer Lush. For the year to 30 June, sales were up 26% to £723m, while pre-tax profit was up 76% to £43.2m. Sales in the subsequent six months to 31 December were up 22%. However, the business warned that future expansion might have to be outside the UK due to risks over Brexit.
• Slowly improving performance at French Connection. UK and European retail like-for-likes were up 4.4% for the year ended 31 January 2017, despite a challenging trading environment during the second half of the year. Overall retail revenue fell 4.9% to £87.9m in part due to ongoing network rationalisation, Nine non-contributing stores were closed in the year, whilst retail space was reduced by 11.7%. A further two stores have closed since the year-end and an additional six stores are expected to close this year.
• Hilco is reportedly looking to lease space within the larger former Staples stores, currently being rebranded as Office Outlet. Up to 285,000 sq ft will be sub-let to other businesses, with the spaces on offer ranging from 5,000 sq ft to 16,500 sq ft in size. Up to 35 Office Outlet stores could be divided, including those in Birmingham, Cardiff and Derby. The move follows Hilco’s acquisition of Staple Inc’s UK business in November 2016.

Stephen Springham, Head of Retail Research:

It was only a question of time before the first retailer casualty of the post-Brexit era emerged. Refreshingly, however, the spectre of Brexit has not been blamed for the possible demise of Blue Inc – and rightly so, as the issues are far more fundamental than the UK’s withdrawal from the EU.

Blue Inc has filed for a company voluntary arrangement (CVA) that will allow it to shut stores and defer payments as it seeks a turnaround. The business apparently needs £3m of extra capital to pay for more stock and to service its debts. The CVA indicates that it wants to shut 33 of its 127 stores.

The property market’s reaction to the news? Resignation rather than any degree of surprise. After all, we have been here before. Only last year Blue Inc put its subsidiary, A Levy, into administration, shedding 76 stores and 500 jobs, before buying back the supposedly profitable parts of the business. Allan Lockhart of NewRiver no doubt spoke for many landlords in saying that it would support Blue Inc’s terms if they were “reasonable”, but most would also agree with his qualifying comment that ”most companies that engage with CVAs ultimately collapse … this is really just a stay of execution”.

Will landlords agree to the CVA? Probably. Will Blue Inc live on? Probably. Will Allan Lockhart be proved right? Probably. Unless someone else with considerable retailing wherewithal takes the business over, radically overhauls it and invests accordingly.

In my line of work, the question I’m most frequently asked is which retailer will be next to go bust. Without being drawn on individual operators, I invariably point to two key ‘alarm bell’ factors - whether there is CVA history and whether there has been a history of private equity ownership (with the two often going hand in hand). Without casting aspersions on every PE-owned business, there are too many instances of failure to suggest mere coincidence. Blue Inc certainly ticks both of these boxes.

Speculating further, I would suggest that any other casualties (CVAs or otherwise) this year are also likely to come from the clothing sector, for the simple reason that this is the most over-supplied retail sub-sector in the country. And for every well-managed fashion operator, there are countless others flying by the seat of their pants. Time will eventually catch up with some of them.

Read the latest Knight Frank UK Retail Monitor