High street brands restructure ahead of September storm

Market participants believe trouble is ahead for retailers as the government’s furlough scheme and the business tenancies moratorium come to an end.

“The perfect storm is brewing,” says Matt Howard, partner at Price Bailey. “The furlough is coming to an end. People that have taken out loans, those repayments will need to be commenced in the coming month. You’ve got that double taxation due in the year for those people that have deferred tax.”

During the pandemic, over 40 high-street brands including Jack Wills, Harvey Nichols, and Boots announced restructuring plans. Price Bailey is preparing for a significant increase in calls for restructuring advice.

“We’re expecting, in the insolvency recovery and turnaround team, to see a significant increase in a number of new clients and queries. We’re encouraging everyone to look at their cash flow and to analyse those overheads as we’ve just been talking about and negotiate cost savings wherever they can,” says Howard.

In March, the UK government included in the Coronavirus Act 2020 a moratorium to stop landlords from seizing business properties and exercising their right of forfeiture, initially set to end on June 30. However, the protection from forfeiture was extended to September 30, and many retailers will look to renegotiate or change their lease terms – such as requesting that rent is based on the unit’s turnover or altering the payment schedule – says Richard Hodgson, partner R&I practice at Linklaters.

“There is a rush of retailers that are trying to deal with that head-on rather than leave it to September when they could find that landlords start taking action. That’s why you’re seeing news about restructuring,” he says.

That could drive systematic change.

“Fundamentally it’s about coming off the high street. Different retailers are trying to do that in different ways,” says Neil Smyth, restructuring partner at Mills & Reeve LLP.

“You have probably the most conservative end of that model which is the M&S, Boots and WH Smith, who have resisted using insolvency processes and the most common processes tended to be the Company Voluntary Arrangement (CVA) that many retailers and leisure operators have gone through.”

House of Fraser was one of the big high-street names to have a CVA approved by its creditors in 2018, in which 31 of its shops closed.

“A long line of retailers have been doing that over the last three or four years. That’s one end of the market and a lot of that is driven by private equity or hedge funds investment into the organisation,” explains Smyth.

But M&S has gone through a more traditional approach, according to Smyth, in which it has terminated its leases when they have come up for renewal – a much more expensive process.

Some suggest changes in commercial property over the past few years are shaping the market.

“Property cost is always a big element. We’ve seen landlords bearing the brunt of that and taking a lot of pain in that and that’s shifting how leases are these days in structured and managed right now. Now, more leases are being linked to the performance of the retailer, which is quite a big shift in how the market is operating,” says Zelf Hussain, partner at PwC.

The end of the furlough scheme in September has also hastened redundancies for these high street giants.

“What the government’s furlough scheme has done is it’s rescued a lot of retailers, and in the short-term retailers will continue to exist because of the furlough scheme. But their schemes are now coming to an end, and that’s why you’re seeing decisions made about redundancies,” says Richard Santy, employment partner at Mills & Reeve LLP.

“Arcadia is one of our clients. They’ve come under some criticism today for the approach they’re taking with regards to restructuring and redundancies that they’re making. The message for them is ‘we’re not doing this through choice, we’re having to make these decisions, we’re having to restructure and have people lose their jobs because the business just simply isn’t financially viable.’”

Aside from reconfiguring lease agreements, many retailers are looking to strengthen their online presence whilst reducing staff numbers.

This month, M&S announced 7,00 job cuts, along with the acceleration of its digital and online presence, in which 68 percent of orders were made through home deliveries, compared to 29 percent in the previous year.

Other traditional retailers are now focusing on reinforcing their online presence as consumer behaviour changes, but the process yet comes with a cost.

“Anything that requires transition, there’s always an upfront cost with the payback down the line. How quickly the payback is varied by types of changes you’re making. That’s always the dilemma – the upfront cash,” explains Hussain.

“You don’t get the benefits in cash today, but later. So the challenge is always the right cost to cut without damaging the business as well because you can cut some costs but you’ve still got to invest in others than you’ve got to have the right online presence.”

High-street brands are shifting away from the traditional model, in which they relied on their stores to drive sales.

“There’s a shift from the old model of just opening lots of stores up and doing lots of sales to having a real balance between some presence on the high street and a good presence on online. That was already happening, but this has accelerated that trend,” adds Hussain.

However, the biggest challenge in the restructuring market now is finding investors that will take the business on, explains Smyth.

“These days, professional investors are quick to spot the opportunities and they’re quick to spot the failures. You need investment, you need money, and if you’re looking at administration, you need funded purchases – you need to be able to sell. Putting a business into administration is one thing – but the purpose of that is to get a sale, and at the moment, that’s a challenge.

“People will be interested in buying the IP and taking on the internet platforms and taking on stock, but they’re less interested in the physical assets of the business like the stores and the employees. It’s about trying to command a value that justifies the sale in the first place,” he says.

This week, the Frasers Group announced the acquisition of the fitness and gym chain DW Sports, but only 50 percent of jobs have been saved, according to The Guardian.

Employees are yet protected by the Transfer of Undertakings Protection of Employment (TUPE), the European law which prevents purchases from leaving employees behind, but it does not prevent companies from going through the process of restructuring in the future.

“Investors will want to cherry-pick. Aside from cherry-picking the type of asset that they want like the IP and not the employees or the stores, they’ll be cherry-picking the stores they are taking,” adds Santy.

“They’ll be looking at stores where it is important to have a physical presence and not where it’s not essential for the brand to have a physical presence and where there’s not that tourist footfall – there’s a big difference between people shopping on Regent Street or Bond Street.”

Finally, investors are now looking to pull the assets off the premises instead of buying a business that has premises with a lease.

“It’s much more common now that there will be a licence to give the purchaser some time to pull the assets off the premises and then give the keys back to the landlord so they’re not taking on the obligation, so you see much less assignment of leases to purchase as you did because, particularly in retail, things will be online,” says Smyth.