The last chance for Brait’s New Look?
Brait’s former prize catch is gasping for air. Its UK fashion chain New Look has until next week to get approval from 75% of its creditors on a company voluntary announcement (CVA) — an arrangement between a financially distressed company and its creditors on how to repay its financial obligations.
The CVA, proposed last week, could lead to New Look closing up to 60 of its 593 stores in the UK and cutting 980 jobs. The retailer is also hoping to get its landlords to slash rental costs and agree on revised lease terms across a further 393 stores.
Executive chairman Alistair McGeorge, who was brought back last year after CEO Anders Kristiansen was sacked, says the chain has had "constructive discussions" with "key landlords and strategic partners".
"Given our challenged trading performance and over-rented UK store estate, we are having to take tough but necessary actions to reduce our fixed-cost base and restore long-term profitability," he says.
According to Bloomberg Intelligence, New Look could cut its total rent bill in the UK, which was £175m last year, by as much as £66m.
Brait’s sally into the fashion world has been an unmitigated disaster. Having splashed out £780m to buy the retailer in 2015, it wrote down the value of its investment to zero last year due to worsening results.
In its results for the third quarter, ending December 23, New Look reported a year-to-date operating loss of £5.1m and a 6.3% drop in revenue to £1.1bn.
The New Look debacle is the key factor behind Brait’s 76% share price slump since the R170.56 peak it hit on April 4 2016.
Bloomberg Intelligence puts New Look’s total debt at more than £1.3bn, giving the retailer an astonishing debt to earnings before interest, tax, depreciation and amortisation ratio of 29.
The market is worried that Brait may have to stump up more capital to support New Look, rather than simply engineer a clean slate in its portfolio, which also includes Virgin Active, unlisted SA fast-moving consumer goods group Premier and the UK’s discount frozen-food supplier Iceland Foods.
But, says Lentus Asset Management director Nic Norman-Smith, the CVA "may well prove to be a positive. If the process is able to lower the potential for further refinancing, then many investors would welcome it".
New Look is now trying to trade its way out of trouble. Last year it said it would cut £25m in costs a year by slimming down its inventory, cutting back on marketing and making "other cost efficiencies".
While the UK’s high-street retail environment is notoriously cut-throat, McGeorge has acknowledged that New Look’s problems have, to a large extent, been self-inflicted.
Under Kristiansen the retailer became "too young and edgy", McGeorge said at the company’s September 2017 interim results presentation. And too expensive: "Customer messaging was becoming overly fashionable and did not highlight value."
New Look admits it chased e-commerce sales at the expense of profit (prices online were cheaper than in-store, for example) and it simply had too much "stuff" on its shop floors.
It is unwinding that now by targeting its clothes at "our broad-appeal core customer" and by cutting prices.
Louise Parker, a credit analyst for Bloomberg Intelligence, says New Look management "has one more roll of the dice to stay afloat".