New Look’s landlords have warned that unless the business addresses its underlying debt then the CVA alone will not save the fashion chain.
The struggling fashion chain, which first opened in Taunton, Somerset in 1969, is proposing under terms of the CVA to close 60 of its 593 shops.
It is also considering rent reductions and revised lease terms on a further 393 stores. This leaves only 150 of its shops unaffected.
Address the debt
“The issue with New Look is that yes, it has trading problems and over-rented leases, but it has been carrying too much debt around since about 2006,” said one landlord.
In this instance, “too much debt” amounts to a £1.2bn debt pile in addition to a £10.4m loss made in the six months to September last year.
One landlord affected by the CVA said: “We are all less than happy that yet another CVA is happening where there is effectively no contribution of capital from the equity side of the business, or a write-off of the debt. The only materially disadvantaged creditor is the landlord.”
The CVA has often been viewed as a controversial survival tactic for struggling retailers, particularly after the lengthy demise of BHS.
Other examples of CVA failures in which underlying business issues eventually sounded the death knell include the late Focus DIY chain. Its landlords supported a CVA in 2009, but along with many businesses that opted for CVA in the aftermath of the recession, it ultimately served only as a means to postoning an inevitable death.
According to landlords, New Look’s finance director, Richard Collyer, wrote to them last week with initial details of who would be affected and how severely.
One landlord described their initial discussions with New Look as “punchy” after the landlord pointed out that there have been very few examples of CVA success stories when the underlying business is in debt.
The landlord said: “They [CVAs] don’t have a very good track record of working if there is no reduction in the debt.”
The CVA needs to secure approval from landlords in order to go ahead. Early discussions suggest that despite their concerns, most landlords will likely approve the process.
What is closing?
The majority of the 60 stores earmarked for closure are located in regional shopping centres and town centre high streets.
Geographically, the South East has the most exposure to proposed closures, followed by Wales. Seven closures are planned in Scotland and the South West and three in London including Marble Arch, W1, Moorgate, EC2, and most notably Oxford Circus, W1.
The closures amount to 355,000 sq ft in total and have an average floor size of 5,900 sq ft. The stores pay an average rent of around £20 per sq ft.
SEE ALSO: 60 stores to close as New Look enters CVA
CBRE has been working with New Look’s South African owner, Brait, and Deloitte since January on the retailer’s portfolio.
It has been working on other cost-cutting initiatives for its portfolio aside from the CVA, and in January this year the group axed plans for a new, larger 20,000 sq ft flagship at the Westfield London extension.
Who could take the space?
The majority of closures have been earmarked for the high street and regional shopping centres, rather than New Look’s larger stores, some of which are as big as 40,000 sq ft. These smaller spaces should be easier to relet.
Some, such as Oxford Street, W1, will open opportunities for an array of retailers looking to get a foothold on London’s most famous shopping street.
The 6,298 sq ft property, at 203-207 Oxford Street, holds a prominent position opposite fellow fashion brands Urban Outfitters and Topshop’s London flagship stores.
The site could be suitable for a number of the international fashion brands that do not yet have a UK presence and are looking to debut in London.
New Look’s Marble Arch site, on the other end of the street at 500 Oxford Street, could be harder to relet despite its location. The current layout of the store provides no ground floor entrance, and shoppers must climb a flight of stairs in order to reach the main retail space. This could be off-putting for some brands, particularly those that rely on brand awareness and footfall.
A source close to the situation said: “Some of the sites, such as Oxford Street, will be fine. But things such as its site in Ocean Terminal, Edinburgh, will be a nightmare.”
Expanding fashion retailers in the same subsector, such as H&M and Primark, could benefit from some of the vacant high street and shopping centre space, and from shops with the right catchment.
These two brands have only 300 and 174 stores in their portfolios respectively compared with New Look, which has 600. However, they do prefer spaces in larger towns and cities, meaning that vacant units in smaller provincial towns could suffer.
What about the business?
“The good news is that New Look is a proper business and a proper brand with a national presence, brand heritage and international offer,” said a source. “It is a decently curated brand that works well on the high street, unlike Dorothy Perkins or Burton, which are brands that have no identity and haven’t for the past 20 years.”
Many analysts have been concerned that New Look has lost its way in the fashion world in recent years, and failed to target its customer.
In the six months to September, New Look’s like-for-like in-store sales fell by more than 8%. Online sales also declined by 7.6% in the period, suggesting that the business needs to improve its product range.
Analysts have similarly warned that New Look may need to take more drastic measures to ensure the success of its turnaround plan. These could include closing even more stores than stated in the proposed CVA.
Charlotte Pearce, retail analyst at GlobalData, said: “While the closure of stores will lead to market share loss in the short term, it is a long-awaited and necessary move. New Look is now in danger of slipping out of the top 15 UK clothing retailers this year. The retailer’s plan to close only around 10% of its UK store estate is not enough and New Look must continue to rationalise its remaining oversized store network given it is a huge encumbrance for the retailer.
“A leaner store estate will improve space productivity, increase profit per store and provide a more consistent brand image, which the brand needs to survive.”
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