Philip Green's Arcadia Group is starting to look a lot like BHS.
The department store chain went into administration in April 2016, a year after Mr Green sold it for £1 to Retail Acquisitions, a group of investors led by Dominic Chappell.
Under Mr Green's ownership, BHS, or British Home Stores, suffered years of decline. That's the path Arcadia's other brands – including its jewel in the crown, Topshop – appear to be on unless Mr Green takes some swift action.
The family-controlled holding company for Arcadia, Taveta Investments, reported a 16.5 per cent drop in underlying operating profit to £211.2 million (€243.3 million) in the year ended August 27th, accounts filed at the UK's Companies House show. After £129.2 million in one-off losses – most of that property write-downs – pre-tax profit tumbled to £36.8 million, from £172.2 million.
Of course, BHS was already deep in the red before Mr Green sold it. Arcadia is still making money. It’s also generating cash, although cash from operating activities did fall from £230.3 million to £168.3 million over the period.
But like BHS, Arcadia’s stable of brands are fighting to stay relevant.
Wallis, Dorothy Perkins, Miss Selfridge, Evans and Burton are all battling the twin threats of consumers spending less on clothing, and shopping online. Even Topshop is looking past its sell-by date.
Millennials don't have the emotional attachment their mothers had to Topshop. Ten years ago, hundreds of shoppers converged on its London flagship store to snap up Kate Moss's debut collection. These days, the likes of YouTube star Zoella would pull in the crowds.
Young, fashion-conscious customers now frequent Asos or Boohoo. com, which sell the latest looks over the internet, often undercutting Topshop on price.
There’s also Arcadia’s pension deficit, which more than doubled to £426.8 million over the past year.
There are some signs Mr Green has learned from the BHS debacle. Part of the department store’s problem was that it suffered from years of under-investment.
Mr Green has called in McKinsey to help reinvigorate the retail conglomerate, according to the Sunday Times. Topshop has been quick to embrace social media and other technologies to engage with consumers. But it needs to do more. Asos and Boohoo aren't standing still.
Pension contributions
Mr Green has also agreed to double Arcadia's pension contribution to £50 million a year for the next three years, with the aim of eliminating the deficit within a decade. That's as good as any UK company and better than most, according to pension industry consultant John Ralfe. It's also far superior to BHS, which famously agreed to make good on its pension shortfall over 23 years.
But if McKinsey recommends a costly overhaul, Mr Green must open his own wallet.
Earlier this year, he agreed to pay up to £363 million of his personal fortune to compensate BHS pension holders. Topshop had an enterprise value of £2 billion back in 2012, but it’s probably worth less now.
Leonard Green & Partners, a Los Angeles-based private-equity firm, has written down the value of its 25 per cent stake in Topshop.
Arcadia poured just under £100 million into the business in 2016, more than Asos’s £87 million. But Asos is almost doubling its commitment this year. Mr Green should do the same.
Topshop, as the group’s most valuable asset, should get much of the cash. – (Bloomberg)
