With retail veteran Nigel Oddy driving operations, a lighter debt load, and a leaner store estate and menswear offer, the fast fashion retailer is primed for a resurgence.
A year ago, New Look was mired in a controversial company voluntary arrangement (CVA), its store strategy was unravelling, and it was saddled with more than £1bn of debt.
A turbulent 12 months later the fast fashion retailer has navigated choppy economic waters, perhaps surprisingly, to be in better shape than many others on the high street.
New Look has been undergoing a much-needed streamlining. Former House of Fraser chief executive Nigel Oddy became chief operating officer on 1 April. Drapers then revealed New Look’s decision to abandon menswear store retail altogether and the business is cutting back its international operations.
Green shoots are beginning to appear: group operating profit for the 39 weeks to 22 December 2018 was £38.5m, compared with an operating loss of £5.1m in same period in 2017. Core adjusted EBITDA rose by 75% to £97.7m, as New Look continued to make cost savings, and improve its operational and financial position.
Revenue fell by 5% to £1.01bn. However, the retailer said this was in line with expectations, as a result of driving more profitable sales.
New Look is trying to take a forensic approach to cutting costs out of the business
Richard Lim, chief executive of Retail Economics
The retailer also announced a debt-for-equity swap in January to reduce its long-term debt by 80% from £1.35bn to £350m.
A key aspect of the strategy has been to focus on costs, observed Richard Lim, chief executive of Retail Economics: “If you take the rationalisation of the store and product portfolio, New Look is trying to take a forensic approach to cutting costs out of the business.
“The last few years have showed that it didn’t have a model for today’s environment: it had too many stores, too much space and all the costs of an expansive portfolio.
“Labour costs are about 40% of operating costs, and the national living wage and apprenticeship levy add to those costs. It has a large fixed-cost base, which has hit its profitability.
“At the same time, it has had to deal with shifts in consumer behaviour towards online, which means more variable costs [for functions] that can’t be covered by existing staff, such as packing, picking and IT.”
The downsizing of its store portfolio is a cornerstone of executive chairman Alistair McGeorge’s strategy after his return in November.
On the whole landlords allowed New Look’s CVA to go relatively unchallenged. A handful did refuse to accept rent cuts, and stores in Launceston, Cornwall, and Portsmouth were taken back, but other events – notably House of Fraser’s own CVA proposal and subsequent collapse in July last year – took the limelight.
Oddy is incredibly operational: he knows how to run stores and gets the principles of retail
One property agent, whose portfolio includes New Look-occupied stores it manages on behalf of landlords, said the retailer’s CVA was less of a priority in the last six months than others: “To be honest, most landlords are happy that New Look is paying the rent and keeping quiet while they battle Debenhams and House of Fraser, among others.
“[New Look] has kept up with rents, paid its business rates and service charges. It probably [still] has too many stores, but the [CVA has enabled the] rent on many to be cut by up to 80%.”
Beating a retreat
In addition to scaling back UK stores, New Look has been slimming down its international operations to cut costs and refocus on its domestic market.
In October, the retailer announced it was closing its 120 stores in China. Last month, New Look Poland filed for bankruptcy, and the retailer confirmed it is seeking a buyer for the 30 stores in its French arm, which faces continued difficult trading. This comes after New Look Belgium filed for insolvency in January.
For 5% of turnover, if anything menswear has been a distraction
Richard Lim, chief executive of Retail Economics
The international retreat has been welcomed by some.
“Some of the international offer was OK in terms of profit making, but realistically if New Look want that market they can go online,” one source said. “Why spend money when you can sell through Zalando? You’ll take a hit on margins but there is much less risk than having stores and worrying about cost models.”
When it comes to turning an ailing business around, sometimes demonstrable experience and expertise is required – and that is what New Look has with the appointment of retail veteran Oddy as chief operating officer. Oddy spent 23 years at Marks & Spencer in various roles, including retail, buying, and establishing its first direct-sourcing office in the Far East. He joined House of Fraser as executive director before becoming CEO in 2015. He has since been CEO of homeware retailer The Range.
Source: Benjamin McMahon
“Oddy is incredibly operational: he knows how to run stores and gets the principles of retail. He can do what Alistair [McGeorge] needs to fix the business,” one industry expert said.
“If New Look shuts international, cuts down its cost base, and concentrates on what drives customers, such as click and collect, online and decent products that sell at the right price, Nigel should be capable of that.”
However, she questioned Oddy’s experience in fast fashion: “House of Fraser and Marks & Spencer weren’t at the forefront of multichannel retailing and turning around product at a fast pace. Can he do that?”
The closure of New Look’s 21 standalone menswear stores was already under way when it announced it would stop selling men’s clothing in its 160 dual-gender stores earlier this month. From autumn 19 season menswear will only be available online via the New Look website, or through third-party sellers Asos and Zalando.
Streamlining menswear seems to be a logical decision by New Look’s management, as it will allow the retailer to concentrate on its core offer.
“Menswear accounts for less than 5% of New Look’s sales. If you think about everything that goes behind having a much more extensive range, such as buying teams, sourcing teams and it makes the HQ functions much more complicated – for 5% of turnover, if anything menswear has been a distraction,” said Lim.
We should now expect to see a rigorous focus on operations, in particular in buying and logistics
Clare Kennedy, director at AlixPartners
One supply source said it was difficult to entice male shoppers into New Look stores: “I don’t think men like shopping in a women’s environment, unless they are with their wives or girlfriends, so it’s is likely that women are buying for their family or other halves. That’s a problem.”
Another industry source agreed that online is the right outlet for the menswear category: “When New Look put menswear on to Asos it did really well. The argument is that the product itself is not that bad, but where do guys shop? Do men even know that New Look did menswear? Not really.”
Clare Kennedy, director at AlixPartners, said the recent changes should allow New Look to focus on product and operations, which will be crucial in helping to improve the business: “With the exit from in-store menswear, management seems to be taking a decision to ‘stick to the knitting’ as New Look gives over floor space to its core markets of women’s and children’s wear.
“This certainly seems a sensible decision and is indicative of the kind of focused decision making that is needed in relation to its offering.
“Along with the much-trailed reduction in store numbers, we should now expect to see a rigorous focus on operations, in particular in buying and logistics.”
The Drapers Verdict
New Look was carrying so much debt just over a year ago, that it was hard to see how the retailer could survive into 2019. Credit is due to executive chairman Alistair McGeorge for managing to stave off the imminent risks to the business for long enough for the CVA to begin to have an effect and reduce costs significantly. With Oddy at the helm, operationally New Look should be a leaner, fitter business going into the second half of 2019.
The key issue long term is how the brand can capture its once-loyal following of young female shoppers, who have, by and large, moved on and not been replaced by a new generation. Product is key to this, and a renewed focus here could reap rewards. If New Look can find its niche and USP once more, it can regain ground it has lost to rivals both on the high street and online.