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Arcadia at a Christmas crossroads

As Topshop CEO Paul Price resigns, and ahead of a slew of lease breaks and the Christmas deadline for the £310m loan repayment on its Topshop London flagship, the future of Arcadia Group looks as uncertain as ever 

As 2019 draws to a close, Arcadia Group is at a crossroads. CEO of Topshop and Topman Paul Price is leaving this month to move back to the US, after two years at the helm. The news, confirmed by Arcadia this week, comes amid a series of new hires at the group, looming lease break clauses as part of its company voluntary arrangement and the deadline for the £310m mortgage repayment on the Topshop flagship. 

Paul price ceo topshop topman (3)

Paul Price

Arcadia Group’s fall from grace culminated in seven close-run company voluntary arrangements, which allowed it to renegotiate reduced rents and lease terms on 194 of its of 566 stores. The CVAs also identified 23 underperforming stores across the UK and Ireland to close.

At the time, Arcadia owner Sir Philip Green reportedly called it a “win”. However, six months on, as landlords weigh up the relative benefits of keeping Arcadia as a tenant – and amid speculation that the group will eventually be broken up – question marks remain over its future shape.

Under the terms of the CVAs, the landlords of stores affected by reduced rents have until the end of December to exercise the option to break their leases, otherwise they will be locked into them until 2021. Drapers understands that some have taken advantage of the opportunity to play hardball with the high street retailer. 

One property agent told Drapers he had been informed that up to 40 stores across all of the Arcadia brands are either in the process of being taken back by landlords, or under renegotiation: “We served notice on a number of [Arcadia] stores and will take possession in March. It responded within minutes offering to negotiate new lease terms.

“Arcadia is not doing anything until it receives a break notice [from landlords]. Those landlords who have options in terms of new tenants may well break.”

An out-of-town retail property agent added: “There is anecdotal evidence of landlords actioning break clauses to get better terms, but only on the very best sites. A lot of landlords won’t want that space back.”

Red alert

In September, Arcadia, which owns Topshop, Topman, Wallis, Burton, Dorothy Perkins, Evans, Miss Selfridge and Outfit, revealed that group operating losses for the 53 weeks to 1 September 2018 had sunk to £138m, from a £199m profit the previous year, and warned that it may require additional financing to execute its turnaround. Turnover for the period dipped 4.5% year on year to £1.8bn.

In the results,  it noted some risk around the £310m mortgage repayment due this month on one of its prime assets and the jewel in its retail crown: the Topshop flagship store at 214 Oxford Street. 

Topman autumn 19

Topman autumn 19

As part of the CVAs, the credit facility on this property was rolled over from June to December, but the deadline is now looming. Arcadia is understood to be in talks with lenders including US private equity firm Apollo about refinancing the loan. However, nothing had been concluded as Drapers went to press on Tuesday. Arcadia declined to comment when contacted by Drapers, but a spokesman confirmed that the loan “would need to be secured before the end of the year”.

Arcadia has only one good brand: Topshop. The others are in long-term decline

Retail analyst Richard Hyman

Another property agent told Drapers: “Given the extreme lengths [Green] went to not to lose the whole lot [of Arcadia], if he can’t refinance the loan, then I would guess there would be a further injection of funds. 

“You will reach a point, though, at [which it will need to be decided] whether it is worth investing a bit more or giving up [on the company].

“[Green] demonstrated the last time that he has a willingness to find a ‘bite point’ [for landlords, creditors] so that he didn’t lose the whole lot.”

An Arcadia supplier said he was looking for certainty “so we can all move on”: “I think all Arcadia suppliers nervously await news of the refinancing of Oxford Circus, and are hopeful that all the changes they have made impact positively and put them back into profit.”

Retail analyst Richard Hyman said the poor results released in September had stoked concerns about its performance since the CVA votes: “[Arcadia must be] struggling. When you look at how difficult the market is, even good brands are having to run much faster to keep up. 

“Arcadia has only one good brand: Topshop. The others are in long-term decline.”

Breaking up

Rumours of Green’s intention to split Topshop were reignited in October, when it emerged that the company’s new warehouse in Daventry, Northamptonshire, would only handle Topshop and Topman orders

One property agent said: “We wonder if [Green] is going to sell bits of his business.”

Arcadia firmly denied any plans to separate the brands, saying it is focused instead on implementing a company-wide turnaround.

Despite the ongoing headwinds for UK retailers, I am confident that this progress will continue

Ian Grabiner, Arcadia

Over the past few months, there have been some glimmers of light for Arcadia. In October it announced the appointment of former Marks & Spencer buying director Gillian Ridley Whittle as Topshop fashion director. In November, Arcadia made three senior hires to its digital team, as it seeks to accelerate its growth strategy – including to the newly created role of group chief digital officer. 

That month it also announced the appointment of Andrew Coppel as chairman of Arcadia parent company, Taveta Investments. Coppel joined from accountancy firm OH Associates, where he was managing director since 2015, and observers praised the move, arguing that he would bring a “fresh pair of eyes”.

At the same time, Arcadia CEO Ian Grabiner released a bullish statement, in which he said the retail group was making “good progress” as it focuses on improving its digital offer, customer experience and wholesale relationships. 

Among its key wholesale partners are Next, Asos and Zalando, and Nordstrom in the US.

Grabiner said: “Since we completed our restructuring process over the summer, we have been making good progress with our plans, focusing investment on delivering better customer experiences, improving our digital offer and extending our wholesale partnerships. Despite the ongoing headwinds for UK retailers, I am confident that this progress will continue.”

One Arcadia supplier told Drapers: “For us, it has been business as usual. I haven’t witnessed anything negative [when it comes to orders]. 

“I think Arcadia’s push will be online. They’re moving into the digital world and that’s the right move. I agree with their strategy, but it will take time.”

Following Price’s departure Coppel will have to work quickly to find a successor and drive the turnaround strategy forward at pace.

The Drapers Verdict

Arcadia Group’s issues have, to a certain extent, been both alleviated and exacerbated by the company voluntary arrangements that were approved in June.

While the proposals gave the business breathing space to restructure and focus more of its attention on its digital offer, it has dragged out negotiations with landlords. Although it seems unlikely that many landlords will press the button on lease breaks – it is not easy in the current climate to find good retail tenants – it appears some are at least considering it.

Meanwhile, the risk remains that Arcadia will need more financing if it is to complete its three-year turnaround plan. Securing the Oxford Street flagship would help to relieve some of the concerns about the group’s future, while its digital strategy and a string of new hires, including a strong retail CEO could set it on a stronger footing.

 

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