New Look debt deal hands ownership to creditors, trading is mixed
Struggling value fashion retailer New Look appears to have found a solution to its debt problems, but it’s a radical solution that means majority ownership of the chain will pass to a group of its creditors with current majority shareholder Brait left with just 20%.
The company has struck a debt-for-equity deal with key stakeholders and has an agreement “in principle” to slash its onerous debt load from £1.35 billion to £350 million and raise £150 million in new working capital.
Executive Chairman Alistair McGeorge said the agreement “represents a critical step in our turnaround plans and lays the foundations to secure the future and long-term profitability of New Look. It has been clear for some time that the group’s existing level of indebtedness has been constraining our ability to accelerate our turnaround plans and would continue to limit our growth in the future.”
And there's no arguing with that view. The company's debts have been so very huge and acted as a barrier to almost anything it wanted to do to get back on track.
The plan is that the new owners will collectively hold 72% of the company and will take part in the £150 million fundraising, their individual holdings being allocated on a pro-rata basis based on their respective participation in this.
TOUGH UK MARKET
It's clear that this action really needed to be taken, not just because of the debt, but because of the troubled UK market.
“Conditions in the UK retail market have continued to be very challenging,” the company said on Monday. But it added that its own like-for-like (LFL) performance “showed a positive trend from Q1 through to mid-November, driven by the turnaround measures launched at the start of the year.”
Not that it's back in positive territory yet. Total UK LFLs (stores and e-tail) improved from -4.2% in Q1 to -2.3% in Q2, with “broadly flat” UK store LFLs in the first half. But this was offset by declining e-tail as it focused on “profitable sales rather than absolute sales growth.”
That said, core clothing in its stores outperformed the BRC’s overall industry figures by 5.6pts in H1 FY19, with “further progress continuing into Q3,” and with Accessories also improving relative to the BRC. Combined with the annualisation of the changes to e-commerce at the start of Q3, total UK LFLs improved to +4.8% in October and +8.9% in November. This was despite “continued challenges on Footwear which still performed poorly compared to the company’s expectations and the market.”
But as we said, the company isn't out of the woods yet and it added that in late November and December “increased headwinds” driven by lower footfall and markdowns to stimulate trade, meant total UK LFL sales of -5.7% for December, and Q3 total UK LFLs of +0.9%.
The decline was “further impacted by the loss of stores as a result of landlord-enforced closures from the CVA. However, "the exit rights now sit with the company and therefore the group believes it now has the ability to flex its cost base and business model from stores to online more easily than competitors if required.”
While the company said EBITDA for FY19 is now projected to be £84 million, below initial forecasts, it’s relatively upbeat about its progress so far. The relaunch of the brand, with initial attention on key clothing areas since April 2018, has led to “significantly improved gross profit and the company maintaining its leading market position in the 18 to 44 age range.”
It has also significantly reduced its stock and increased the ‘Open to Buy’ option by around 30% every month. And the multichannel strategy is “delivering strong results”. The click and collect sales mix increased to 41% in H1 FY19, driving footfall into stores, and the online platform outperformed the UK online clothing market by 1.7 pts during Q3 FY19.
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