UK retail is in the midst of an extended period of restructuring but administration is by no means the end of the road

Restructuring retail for tomorrow’s growth

INDUSTRY VIEW

The UK consumer economy has been bumping along the bottom of the trough for some time, with little near-term prospect of sustained improvement. British Retail Consortium figures show that we’ve seen negative like-for-like sales across the retail sector as a whole in 11 of the last 18 months, with an even bleaker margin picture driven by the vicious cycle of constant discounting. Alongside the weak macro-economic climate, the retail sector is also undergoing significant structural change, as the shift to omni-channel retailing reduces the need for physical space. And in an already difficult financing climate, some lenders are taking an increasingly tough stance to the retail sector – as seen in the banks’ apparent unwillingness to extend facilities in recent high-profile distressed situations such as Peacocks, Game and Clintons. The net result is an extended period of UK retail restructuring, characterised by high levels of distressed deal activity and extensive space reduction.

Space cull
The sector is probably two years into a five-year period of rebalancing which will result in a 15-20 per cent decline in non-food physical space. Structurally challenged sectors including entertainment, where the internet has completely changed the rules, may well see even bigger reductions - we are almost down to “last man standing” in sub-sectors such as music, electricals and books. The subdued housing market will continue to take its toll on weaker players in related sectors, particularly furniture/ home furnishings. But the largest withdrawal of space is likely to come from the highly competitive clothing sector, characterised by a very long tail of small and mid-sized retailers and aggressive online migration. While much of this restructuring will come from healthy retailers right-sizing their portfolios, we will continue to see a number of failing retailers (often those with unsustainable debt levels) encountering high levels of distress and requiring some form of formal insolvency process. It’s not surprising that ONS figures show retail administrations and CVA s up 35 per cent in the first half of 2012, on the back of a 9 per cent increase throughout 2011. Crucially though, most retailers that have been through administration have emerged as slimmer businesses with optimised store portfolios and more appropriate funding structures and cost bases.

Shoon restructuring
This certainly tallies with the experience of retail restructuring firm GA Europe, which has been active in the UK market since 2010. In May, GA Europe supported a management buyout of footwear retailer Shoon, from administration. Shoon’s passage through administration was not the white flag waving exercise, often associated with insolvency. “We went into administration with a clear plan to work closely with all our key stakeholders in order to give the continuing business the best possible chance, post administration,” explains Shoon’s managing director Stephen Sanders. “While we found the administration process a blunt instrument, it did serve to keep the business alive, protect the profitable core, maintain jobs and give us time to attract new investment.” That investment, from GA Europe, provided funding for working capital. The firm also took a minority equity stake. This met the management team’s requirement for a supportive investor prepared to roll up its sleeves, and played to GA ’s core retail operational expertise. “Strategically and operationally, GA is bringing a new level of commercial rigour to the business,” enthuses Sanders. “Their role extends way beyond that of a lender.”

“Strategically and operationally, GA is bringing a new level of commercial rigour to the business,”

Also on the agenda is leveraging the existing base to develop extra revenue streams through new channels including web partners and concessions. Sanders is also confident that the business is scalable once again, having been slimmed down to 11 stores from 23.

Time critical
The administration process bought Shoon’s management sufficient time and space to find the right restructuring solution – it traded in administration for three months. By their nature though, most insolvency situations are highly complex and incredibly time critical. For example, the 56-strong value department store chain TJ Hughes suffered against the tough trading climate, and in July 2011 reached the point where administration was the only option. Despite a complex situation with multiple debt holders, GA Europe acquired the £10.2m second-lien debt in TJ Hughes within a matter of days. Immediately post transaction, the restructuring specialist was able to deploy its operational expertise, taking full control of all TJ Hughes stores, while supporting administrator Ernst & Young in some key commercial aspects of the administration. A swift pricing review and targeted programme of markdowns, backed by a comprehensive advertising campaign and aggressive stock augmentation, increased like-for-like sales by 60 per cent. Ultimately this improvement in trading performance enabled Ernst & Young to fully explore all options for the business, resulting in the brand and six stores being sold as a going concern to Benross Group.

Zombies beware
Looking ahead, GA Europe chief executive Gavin George expects UK restructuring activity to remain high in the medium term. “Consumer confidence will remain fragile for the foreseeable future,” he says. “The space shake-out still has two to three years to run, and the lack of liquidity in traditional lending channels looks set to continue.” There is also likely to be a further mini-wave of restructuring when interest rates eventually start to rise. “Although we are unlikely to see rising interest rates before consumer sentiment improves, highly geared zombie retailers will then struggle to service their debts, while banks will be better placed to crystallise their losses, says George. “At this point we would expect further bank-led insolvencies.” However, he does predict healthier days further ahead once the sector has fundamentally rebalanced. And if there was some short advice for George to offer stressed and distressed retailers? “Actively manage all your key stakeholders, get a clear view of key working capital pinch points such as quarter dates and supplier payments, trade for cash rather than margin, and make sure you have options – look at other financing routes and engage early with potential investors or restructuring specialists.”

Gavin George
0207 318 0577
www.gaeurope.com
 

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