Stories
At first glance, New Look appears to be sitting rather pretty in Ireland. The Irish wing of the British retail giant has net assets of more than €30 million, including some €12 million nestled in its bank account, and according to its most recent audited accounts, it made a €4.4 million net profits for the year ending March 30, 2019.
However, appearances can often be deceiving. Unless the chain can convince its landlords to reduce rents and creditors to take sharp haircuts, its Irish network of 27 stores will be insolvent by next month. Such a move would result in 475 redundancies and yet another high-profile retail casualty on the Irish high street.
This stark analysis is included in confidential documents prepared by the company to support its court petition for bankruptcy protection from its creditors.
The company last week sought the appointment of an examiner, just days after The Currency first revealed that New Look was weighing up the future of its Irish chain as part of a wider restructure of its UK footprint.
Documents supporting the application outline how the company grew to become one of the biggest fashion retailers in Ireland, only to see its performance crumble over the past 18 months due to falling sales, rising rents, and ongoing financial woes at its British parent.
They also shed further light on many of the issues facing other retail chains, such as eroding margins and changing consumer patterns.
So, can the examiner, Deloitte partner Ken Fennell, save the business from liquidation? And if not, just who will be worst impacted?
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New Look is not an interloper on the Irish retail scene. It opened its first Irish branch in Dun Laoghaire in September 2003, before the heady days of the Celtic Tiger. Like many other retailers, it expanded heavily during the boom, but unlike many of its rivals, it had the financial firepower to survive the crash and gradually built up a network of 27 outlets across the country, many in large provincial towns such as Carlow, Clonmel, Wexford and Killarney.
The chain now employs 475 people, although just 44 of these are full time, with the remaining 431 classified as part-time workers.
An independent expert report, prepared by the KPMG accountant Kieran Wallace, sets out the company’s difficulties in some detail and outlines the strategy for bringing the business back from the brink.
Much of the company’s present difficulties relate to property. All of the stores are held on foot of long-term leases – many of which have ten years or more remaining. Its store in Letterkenny, for example, has 13.1 years remaining, while its stores in Castlebar, Galway, Arklow and Mullingar have 12.1 years left to run.
“The majority of the store leases were created during the property boom in Ireland. These leases contain commercially unfavourable terms including above-market rents, upward only rent review clauses and limited / or no break options,” according to the Wallace report.
“Based on discussions with management, the stores are assessed as over-rented. The combined Estimated Rental Value (‘ERV’) of the above leases is €6.2m which is €4.5m less than the lease rent (€10.7 million).”
The company is heavily reliant on its UK parent to provide both stock and central services. However, in recent times, the UK parent has suffered heavily, something that has impacted the Irish subsidiary.
On August 13, 2020, the UK retailer announced its plan to complete another debt for equity swap, the second in two years. The proposal involves reducing senior debt from £550 million to £100 million and injecting £40 million of new capital to support the business plan.
As part of the restructure, there will be a re-basing of the Group’s UK leasehold obligations through a Company Voluntary Arrangement. The deal will also involve the Irish operation taking a massive write-down in money it is owed from the UK.
Irish trading difficulties
For the 12 months to the end of March 2018, New Look’s Irish operation generated revenues of €57.2 million and made a net loss of €6.5 million. It recorded negative Ebitda of €2 million for the period, which was calculated as operating profit before exceptional items, impairments charges and onerous lease provisions.
“I understand in recent years the Company changed their product focus and failed to capitalise on key trends. A brand relaunch took place in April 2018 however continuous promotions were necessary until April 2019. From May 2019, NLRIL returned to normalised trading, charging full prices for products sold,” according to the report by Wallace.
“In FY2020, Management made the decision to discontinue menswear as a store offering and a greater variety of concession stock was introduced.”
According to the report: “From FY2018 to FY2019 there was a positive upward trend in profit with the Company increasing its profit before tax by €10.8m (to €4.4m). This was largely due to the increase in turnover and also a reversal of onerous lease provisions for loss making stores which was accounted for in FY2018.”
Despite the change in strategy, the company’s performance has been patchy. Revenues increased to €61 million for the year ending March 2019, but this fell back to €53 million for the following year. A €4 million net profits reversed into a €2 million net loss the following year.
“Store rents and staff costs are the most significant costs of the business and amount to 20 per cent and 13 per cent of revenues for FY2020 respectively. Store rents and staff costs amounted to c.€10.7m and c. €6.8m for FY2020 respectively,” according to the report.
“Store rents substantially exceed current market rents in the retail sector. Rents have fallen over the last number of years and NLRIL has not benefitted from these reductions in rents due to the upward only rent provisions in the Company’s property leases. This has meant that the current rates paid by the Company on the various long leases substantially exceed current market rents and there is no scope for the rents on these stores to return to market rents without negotiation of lease terms.
“Service charges for the stores amount to c. €2m per annum, commercial rates amount to c. €1.4 million per annum and utilities amount to c. €1 million per annum. It is clear from work carried out as part of my review that reductions in store rent costs are essential to lowering the Company’s cost base and reducing losses.”
Covid-19 made a bad situation even worse. The company had revenues of just €1.7 million for the 13-week period ending June 27, 2020, recording a €3.8 million loss for that period alone.
Based on current projections, the company expects revenues to reach 43 per cent of last year’s figures.
“This is as a result of no income for the closure period, 50% or greater reduction in sales expected year on year for November 2020, December 2020, January 2021 and February 2021 due to expected reduced footfall and further restrictions which may be implemented by the Irish Government if Ireland experiences a second wave of the virus. The Company expects to be EBITDA loss-making (€9.7m) for the remainder of FY2021, bringing total FY2021 EBITDA losses to €13.4m,” according to the report by Wallace.
Based on these numbers, the company will be insolvent by October 2020 and will be unable to make its payments as they fall due, the report states.
Assets and liabilities
The company has substantial assets, with its statement of affairs showing a net asset position of €31.1 million at the end of June. Of this, some €12 million is held in cash balances. However, this figure is “expected to significantly deplete over the next four months due to the level of liabilities and projected Ebitda losses – €13.4 million for 2020,” the report states.
The company will also be impacted by the problems of the parent in the UK, with just 2 per cent of its €8.8 million debt expected to be recovered.
The report states: “As part of our work, we carried out a review of the trading performance of the Company’s 27 stores. This review included a store by store analysis of historical trading results for FY2018, FY2019 and 11 months of FY2020. The purpose of this review was to assess whether any of the existing stores were viable and to understand the reasons for losses at the underperforming stores.
“The review of store trading for the 12 months to February 2020 indicated that all Stores except the Galway Retail Park (€239k loss) and Cork Douglas Stores (€40k loss) were profitable however this is unlikely to be the case for FY2021.”
Based on the data, Wallace said that the provisions for 2022 and 20223 indicate that the company will return to profitability post-Covid-19 with appropriate reductions in its fixed cost base.
The report outlines a number of steps required to save the business, including:
- The appointment of Fennell as examiner
- Continued support from the UK parent to provide stock and central services
- Ability to continue to trade during the pandemic
- Reduction in store rents through negotiation and/or repudiation of property leases
- The acceptance of an appropriate Scheme of Arrangement by the creditors and members of the Company
- The approval of a Scheme of Arrangement involving a write-down of the liabilities of certain creditors by the High Court.
Total estimated unsecured creditors include provisions of €28 million claims arising from the termination of property leases including estimated compensation for loss of rent and estimated dilapidation costs.
If the company cannot be saved, it will enter liquidation, something Wallace says will impact creditors more heavily. The Estimated Liquidation Statement of Affairs indicates that there will be a surplus of approximately €8.9 million after payment of preferential creditors and estimated costs of liquidation (€650,000). It is estimated that unsecured creditors would receive only a nominal dividend of approximately 27 per cent in a liquidation.
According to the report: “Concerned with saving the business and protecting jobs, the Directors and Management of the Company are seeking to restructure the business and reduce costs, given the performance of the Company in Q1 2021 as a result of the COVID-19 pandemic and the uncertainties that lie ahead particularly where there may be a second wave of the virus. There are risks that stores may be closed for a period of time or footfall may continue to diminish. Unlike other Retailers, NLRIL does not benefit from website revenues.
“In my opinion, the Directors and Management are taking a prudent and well measured approach in line with good management practices. Based on my analysis it would be more advantageous to the members, creditors and employees that an attempt is made to restructure the business through examinership rather than a winding up.”
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The examiner, Ken Fennell, a partner with Deloitte, has between 100 and 150 days to save the business. It will work in tandem with a larger reorganisation of the UK parent through a CVA, a move designed to cut rents across its 500 British stores.
While the retail sector has been heavily bruised by the crisis, most of the casualties to date have been Irish wings of UK retailers such as Debenhams, Laura Ashley and Monsoon. For now, many of the indigenous retailers are clinging on, supported by the various government schemes.
Unlike Debenhams, Laura Ashley and Monsoon, New Look is not simply pulling down the shutters. It wants to stay in Ireland and believes examinership is the best option.
Further reading
Ashley’s Irish initiative: Retail magnate lines up bid for Debenhams’ Irish store network
Falling stock: Counting the cost of high street fashion’s Covid reckoning
