Voices
In the coming days, retailers will pull up their shutters and fully reopen for business. But just what sort of environment can they expect? Will consumers embrace the in-store shopping experience, or will they continue to purchase online?
The pandemic has left few sectors unscathed, but few have been hit as hard as retail. It is not just the fact that the shops have been largely closed for more than a year, something that has decimated revenues and led to the growing tide of rental disputes between retailers and landlords. It is a much greater fear that Covid has accelerated the growth of online shopping, and that people’s shopping habits have been irrevocably transformed.
Central Bank Governor Gabriel Makhlouf has identified retail as a high-risk sector, while a survey of insolvency practitioners was equally pessimistic. This week, the IMF’s Irish mission Khaled Sakr said that many retail outlets will have to be refitted for other purposes.
In recent days, two large retailers have filed new financial accounts in Ireland. Anthony Nicholas runs the Fraser Hart and Fields jewellery brands, while New Look operates a nationwide chain of clothing outlets.
An analysis of the two companies offers an insight into many of the issues facing high street retails – from rents to property valuations and from goodwill to revenue projections. It also provides a glimpse of who could be the retail winners and losers in a post-pandemic world.
New Look, old problems
New Look grew to become one of the biggest fashion retailers in Ireland, only to see its performance crumble over the past 24 months due to falling sales, rising rents, and ongoing financial woes at its British parent. Last year, it sought to appoint an examiner to its Irish business, but it was rejected by the court after a number of landlords argued the business was not, in fact, insolvent.
However, its accounts for the year ending March 28, 2020, a period that is largely before Covid, make for grim reading – both for its financial performance that year and also its outlook.
Let’s begin with the outlook. According to New Look, it expects zero sales this year while it forecasts sales for 2022 to be around 90 per cent of what it achieved in 2020. The base case also assumes a reduction in fixed costs through contract negotiations.
The company has run a number of “sensitivity scenarios” on the projections to understand the impact on the liquidity position of the company of a decline in trade or the impact of a slower recovery in sales.
“Should gross profit be more than 30 per cent lower than projections over the next 12 months then management would need to consider taking mitigating action to manage cash flows across March 2022 as the projected cash balance will reduce to the minimum required operating level as determined by management,” the company said.
“Mitigating actions that management might take include reducing projected capital expenditure, reducing discretionary spend and delaying payments to the parent company. It is management’s view that these mitigating actions would be sufficient to support the management of cash flows across March 2022.
Even before Covid, the company was struggling. Sales fell from €61 million for the year to the end of March 2019 to €53 million for the following 12 months (even though the 2020 figures has an additional week of trading).
The company made a €4 million pre-tax in 2019. However, this swung to pre-tax loss of €23 million for the following year. There are a number of factors behind this – some trading, some financial.
For example, New Look took a €20 million impairment during the year as a result of writing down its leases, freehold premise and goodwill associated with the business. The retailer also had finance costs of €6 million related to leases during the 2020 year. There was no such expense for the previous 12 months.
“Administrative costs increased by €16,276,000 in the financial period as a result of the significant impairment charges recognised in relation to property, plant and equipment, intangible assets and right-of-use assets. This has been offset by the cost savings that continue to be achieved,” the company said, adding that it was in receipt of government wage supports.
The company is reliant on its British owner. However, that company has suffered also, agreeing a Company Voluntary Arrangement last September. As part of that, the parent wrote off €5.2 million owed by its Irish subsidiary.
Sparkling business
Like New Look, jewellery business Anthony Nicholas has operations in both Ireland and Britain. Even before Covid-19, Anthony Nicholas was already working on its balance sheet. In December 2019, the company, owned by the Obernik family and chief executive Noel Coyle, sold four of its Fraser Hart shops in the UK for £31.7 million to Watches of Switzerland, the UK’s largest seller of Rolex, Cartier, Omega, Tag Heuer and Breitling watches.
The move was part of a major refocusing and investment programme announced by the board into its two main brands, Fraser Hart and Fields, as part of an effort to accelerate its development as an omnichannel business. When the money landed, the chain immediately repaid in full all senior, mezzanine and convertible debt totalling £25 million. The remaining surplus went into the business. The deal left the company with 32 Fraser Hart stores in the UK and 14 Fields outlets in Ireland.
Since then, it has sold a further two stores for £5.1 million to Beaverbrook, the Belfast-headquartered jewellery business. The impact of that sale is not included in the company accounts, which are for the year ending June 28, 2020. However, it reinforces the company’s cash position.
According to the accounts, the company had revenues of £77.6 million for the year to end of June 2020. This was down from a figure of £104 million. However, much of that decline was down to the fact that the company’s outlets were closed for a third of the year in question.
Anthony Nicholas made a pre-tax profit of £7.9 million. However, it is worth interrogating that number further as it includes £1.7 million that it received in government wage supports and a £12 million profit on the Watches of Switzerland deal. On an operating level, it made a loss of £2.8 million, a sharp decline on a 2019 operating profit of £2.2 million.
Again, however, this figure is slightly misleading, as the operating loss includes a write-down of £12.8 million. The group had been ascribing a goodwill value of £38.5 million arising from its 2007 purchase of Fraser Hart, but it is ow writing some of that off.
The company’s cash position tells the real story, increasing from £3.4 million to £8.6 million. Retained profits, meanwhile, rose from £19.7 million to £27.4 million. According to the directors’ report, the company has discussed the impact of the pandemic with its bankers and secured an adjustment to its facilities to address any issues arising from Covid-19. The company said it has assessed its 12-month cash-flow position across a range of adverse scenarios and was confident it had put in place the mitigating actions to address any downside scenario.
Further reading
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