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Bagir restarts talks with M&S after share price crash

Israeli suiting manufacturer Bagir Group is back in talks with Marks & Spencer after the retailer unexpectedly cut orders in May, causing Bagir’s shares to plummet.   

Bagir issued a profit warning to the City only a month after its London stock market debut in April due to M&S pulling orders.

M&S was Bagir’s biggest customer, accounting for more than a third of its revenue. Bagir now expects revenues for 2014 to be between $100m and $104m (£60m and £62m), a $15m (£9m) shortfall compared with its previous forecast. EBITDA is expected to be between $4m and $6m (£2.4m and £3.6m).

N+1 Singer acted as broker on the float, and senior retail analyst Matthew McEachran said that the unexpected drop in M&S custom “has been a major surprise”. He said the two companies are now talking: “Channels of communication have opened up again and they are starting to have more conversations.”

McEachran said “an edict from above” at M&S led to the abrupt reduction in forward orders: “M&S buyers were behaving differently on forward purchasing.” 

Several days later, M&S chief executive Marc Bolland unveiled a sourcing strategy that aimed to directly source around 60% of its clothing within the next three years.

“M&S is trying to change its intake margin,” McEachran said. “They have thrown a lot of balls into the air and said ‘look, we need to change things’. The more flexible suppliers will be the ones able to fit in with that approach.”

He said that Bagir was “about as flexible as a tailoring manufacturer gets” as it operates by sub-contracting work to factories, with only one Egyptian factory jointly under its ownership.

The loss in business meant Bagir was forced to renegotiate its banking covenants with lenders, and this week announced it had successfully agreed new terms. It will not be penalised for the change to its banking agreements, Drapers understands, owing to the long-standing relationships it has with lenders Bank Leumi (UK) and Israel Discount Bank.

“With UK banks, it could have been different,” McEachran said.

As of December 31, 2013, Bagir and its subsidiaries employed more than 1,000 staff. McEachran said much of the planned $1m (£600,000) cost reductions this year will be “relating to payroll”. Planned investment that will now go unimplemented will also help shave down costs, he added.

McEachran said a trend towards retailers directly sourcing product has led to suppliers “fighting for a smaller piece of the jigsaw”. Bagir’s heavy dependency on M&S – 32% of its total revenue at the time of its listing – “was flagged up during the flotation process”. But he pointed out that Bagir had been in the process of diversifying its contracts and that previously M&S represented more than 70%.

Bagir’s interim results are expected in September. The float has proved to be “a steep learning curve for the group”, McEachran said. “It is in the process of reconfiguring itself. It is working very hard at it,” he added.

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