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Has Edinburgh Woollen Mill found the secret of youth?

When Edinburgh Woollen Mill (EWM), the clothing and homeware retailer with one of the oldest customer age profiles on the high street, swooped to complete a partial takeover of the somewhat younger-profiled Jane Norman after it collapsed into administration last month, it took the brand name, 33 stores and stock from all its stores and concessions into its fold.

The deal has left the retail industry baffled as to how a women’s young fashion chain will fit into the strategy of the Scottish-based knitwear chain, which largely serves the silver pound.

Variously described as fiercely private, under the radar, and, by one analyst, as “an enigma”, EWM undoubtedly has a low profile compared with its high street counterparts, despite owning a significant network of stores. As news broke of the unexpected acquisition, the company’s unusual mode of operating was apparent in its failure to anticipate the interest the deal would generate: it took more than 24 hours to send out a press release confirming the acquisition and offered no insight into what its next step might be.

According to a source at a retailer that perused Jane Norman’s books, that first step will have to be investment, and plenty of it. That particular retailer decided against making a bid for the chain because it required too much capital expenditure. It estimated that Jane Norman needed immediate injection of about £15m to get it up and running again.

While the collapse of Jane Norman came amid a black week for retail, which saw numerous retailers go into administration or announce plans to slash store numbers, the young fashion chain’s problems began long ago. According to a source familiar with the situation, the chain has had a highly leveraged balance sheet since now-defunct retail group Baugur acquired an 80% stake in the business in 2005. Against tough retail conditions, Jane Norman had little room for error and the rot set in when the business went into decline around 2007/08, not long before its majority shareholder collapsed.

Its problems became acute at the end of 2010 when the combination of poor buying and sub-zero temperatures kept Christmas shoppers at home, an issue that was compounded by a majority of the high street going on Sale pre-Christmas.

“Consequently, Jane Norman ending up immensely overstocked,” explains the source. “In the first quarter of 2011, it breached its banking covenants, defaulted on an amortisation payout of £3m and began to run out of cash.”

A lack of cash flow was cited as the final straw that led Jane Norman into administration and, perhaps unsurprisingly, it is understood suppliers are still seeking payment for orders, and EMW will need to address the issue in order to persuade them to supply new product for autumn or deliver what they are currently holding for the chain.

EWM’s low profile does not match the network it has built up, which comprises 351 EWM stores, including high street and destination stores, and 100 Ponden Mill outlets, which focus on selling bedding, linen and accessories for interiors. While little is known about the way EWM does business, one thing its multi-millionaire chief executive Philip Day has proved in recent years is its ability to integrate struggling businesses.

In 2008, it acquired 43 Ponden Mill stores and 77 Rosebys units and has since consolidated the two businesses into the Duvetco subsidiary. It has reduced Rosebys to an own-label offering and created 106 standalone stores, branded as Ponden Mill. Some 24 EWM destination outlets have a Ponden Home department within them.

In August 2009, EWM acquired the entire share capital of golf clothing manufacturer Proquip Holdings, which it has absorbed into its golf business. The brand is available in EWM’s destination outlets.

For Neil Saunders, consulting director at Verdict Research, EWM’s strategy on these brands offers an indication of what it might be planning for Jane Norman. “I suspect he [Philip Day] is the kind of person that gets bored very quickly and is always looking for the next venture. There is a degree of opportunity about the Jane Norman acquisition but it will be with a view to broadening the branded portfolio.”

Added to this is EWM’s stated aim of reducing the age profile of its consumers - since 2005 it has been working to bring this down from 60-plus to 45-plus. This has put the business through a tricky transitional period. Sales have been hit as core customers have been alienated by the group’s efforts to attract younger customers with more fashionable designs and, to date, it has not attracted enough sales from newer customers to replace the lost business.

In the year to February 27, 2010, turnover dropped to £156.8m from £157.8m despite the opening of 21 new stores. Pre-tax profits also fell, by 2.2%, from £23m to £22.5m.

But Saunders is convinced it is the right strategy for EWM to pursue. “As it stands, its customers will die off so it needs to balance out the business to be less reliant on that older consumer,” he explains. “In the past, it hasn’t taken enough risks to achieve that.”

Although the acquisition of Jane Norman challenges the notion that EWM is risk-averse, Saunders is convinced it will look to continue operating Jane Norman as a high street chain. “There are one or two things that EWM is thinking - one is to acquire the stores so it can play around with its brands, but it has lots of EWM stores already. How many more does it need?”

Retail Week Knowledge Bank senior analyst Wendy Massey believes EWM will also install Jane Norman-branded sections into its destination stores, as it has done with Ponden Mills. “It has been focused on the destination stores recently and has been looking to inject a more fashionable edge,” she says.

If EWM can pull off the integration of Jane Norman, which in the first instance will be revitalised through a new design team, the result will be a broader, more balanced portfolio of the core EWM range: clothing for the older market, homeware, gifts and young fashion. All of which would give Day a more significant business if, or when, he looks to make his exit.

Saunders adds: “EMW probably looks a bit anaemic right now. A diversified portfolio would give him something quite valuable that will enable him to [eventually] sell it for a premium.”

 

Edinburgh Woollen Mill at a glance

Management

Chief executive Philip Day, also majority shareholder (73.20%)
Financial director Neil Houston (15.90% share)
Managing director buying and merchandising Carmel Leigh
Managing director sourcing and manufacturing Paul Gerrard

Number of stores

(as of January 2011)

Edinburgh Woollen Mill 351 (High street 192, specialist tourist shops 94, destination stores 28, concessions (within garden
centres) 37)
Ponden Mill 100 (owned under the Duvetco Ltd subsidiary)

Sales

(for the year to February 27, 2010)

Edinburgh Woollen Mill GroupTurnover £156.8m
Pre-tax profits £22.5m

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