New Look Retail Group

The summer quarter has not been kind to most retailers, but today’s Q2 from New Look shows just how hard it is. At the very last moment the board decided not to bring in the former CEO’s Chief Creative Officer appointee, Paula Dumot Lopes, perhaps thinking the cost of the former Inditex talent too much under the circumstances. Instead, it has brought back Alistair McGeorge as Executive Chair within two months of the previous CEO departing. It’s déjà vu all over again for McGeorge, who was at New Look during another tricky period for the group, back in 2011-14.

Q2 continued the poor start to FY 2018. Apparently New Look had become “too young and edgy” rather than clear good value, which seems something of a repudiation of the strategy of the past couple of years. They pushed online sales at the expense of margins. They finished the season with more stock than they would’ve liked. Unseasonable weather, cost inflation and stiff competition didn’t help either. Results for the half year aren’t pretty:

• Revenue is down 4.5% overall, but like-for-like sales of New Look brand were down 8.6%, and UK store LFLs were down 8.6%. Even their own website sales were down 7.6% compared to -0.6% in Q1. Third party ecommerce was up a couple more points at 17% growth. Gross margin suffered as well, down almost 4 pp to 48.60%. This was a positive holdout in Q1, but they couldn’t maintain the margin. Admin costs continue to be impacted by investment in the online channel and Chinese expansion, showing an extra £45mn or so compared to 1H last year. EBITDA continued to fall and was just £4.3mn by our calculation versus £79.6mn a year ago. Operating profit fell to a loss of £34.4mn, but finance costs of £44.3mn were down over £11mn compared to 1H last year, a rare bright spot considering the £78.6mn loss before tax versus barely a £1mn loss for the same time last year.
• The key feature of the balance sheet remains debt, and with our calculation of LTM EBITDA at £59.7mn that’s a stonking leverage ratio of 19x against net debt of £1.13bn. Cash and equivalents of £93.4mn was a reasonable effort. The £100mn RCF was undrawn at the close of the period, as has usually been the case, its £15mn overdraft was also undisturbed, and the group has now signed an increased bi-lateral liquidity, trade & import facility to £100mn. Total cash, equivalents and facility headroom was reportedly £242.5mn.
• Operating cash flow was at least tightly managed, with working capital contributing a net £65mn to bring operating cash flow to £79.6mn for the six months. That covered capex of £29.6mn and half yearly interest of £44mn. Cash and equivalents were apparently boosted by a restrike of swaps, helping bring it to £93.4mn from £73.2mn at the start of the financial year.

At least the board is moving swiftly to put things back on track in what is a very unhelpful retail environment. The plain fact is that there is far too much debt for the business, and bond prices are reflecting the risk a lot more accurately. The marvels of QE and what feels like an endless boom in equities means that New Look’s £100mn revolver covenant only springs into being if it’s drawn at 25% or more, and then only acts as a draw stop if tripped. So there is a fair bit of liquidity available, but it’s not exactly a comfortable situation when even a 9.20x leverage covenant (and that’s on an adjusted EBITDA basis) is not loose enough. There needs to be a full debt restructure, but at this point it looks like they’re resisting that idea, maintaining they have the time, liquidity and long term support of shareholder Brait. This afternoon’s conference call should be interesting.

Please contact the desk if you wish to discuss.

Penelope Fitzherbert