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Picking through the bones of Peacocks

When value retailer Peacocks collapsed under the weight of almost £750m of debt last week, it sent shockwaves through the sector.

Despite months of talks with its banks to restructure the debt, ultimately the company’s management team, led by Peacock Group chief executive Richard Kirk, was unable to agree a way forward and administrator KPMG took control last Wednesday. Sister chain Bonmarché was sold to private equity firm Sun European Partners for an undisclosed sum, although 160 of the chain’s 390 stores will close.   

So what does the future hold for Peacocks and how will the collapse affect the UK high street?

Contrary to the bleak picture painted above, sources at KPMG told Drapers this week it has already been “bombed with interest” from many bargain-hunting private equity groups and value fashion rivals since it opened up the company’s financial results for inspection on Monday.

Though private equity groups Permira and Cinven have ruled themselves out, Sun European and OpCapita are among those preparing bids. Retailer Edinburgh Woollen Mill, which snapped up Jane Norman last year, is also understood to be interested in some or all of Peacocks.

Retailers including Select, Blue Inc, Poundland and even Tesco – for its Express format – have expressed interest in buying some of Peacocks’ stores. Bids from suppliers – with direct manufacturing connections – will also be considered.

When the deadline for first-round bids on January 30 arrives, it is thought KPMG will have narrowed these down to around 10 serious contenders.

A dominant bidder may well emerge, but they cannot be forced to take on all of the 128-year old retailer’s 611 stores and 9,600 staff, and will be free of the historic burden of debt taken on in the glory years.

According to Neil Saunders, managing director of retail research firm Conlumino, there are two possible outcomes: “One is that a private equity company will be interested and will see an opportunity to rationalise the store base to leverage up profits. They’ll put it on a sustainable footing and sell it off.

“Retailers like Edinburgh Woollen Mill (EWM) will be interested in parts of the business because of the store numbers. It’s interesting because EWM has Jane Norman and this could be a nice complement, putting it in the value market.”

Supplier worries

All of this will provide no comfort to Peacocks’ suppliers, many of which could lose millions when the debt is written off before a sale.

Suppliers are already combing through the small print of shipping agreements and contracts, desperate for ways to claw back goods, diverting them from Peacocks’ warehouse so they can cut out the labels and ready the goods for reselling.

Those with goods already delivered and with payment terms favouring Peacocks will be worst hit.

At the time of going to press, Drapers had learned that around £180m worth of stock was at stake: £140m was within the Peacocks business and another £40m in transition from production bases.

One supplier – which had delivered 40,000 units of eight styles just days before the administration – was unable to retrieve the stock. Another had £1.6m worth of accessories in production. 

As the shockwaves from Peacocks spread across the wider value sector, the sector is now bracing itself for a period of consolidation, according to Verdict practice leader and analyst Maureen Hinton.

Larger, more successful operators will pick up the consumer spend, with Primark, the supermarkets and smaller value retailers such as Select and QS the likely beneficiaries.

“It’s still going to be a difficult segment to trade in,” says Hinton. “You have to have a strong brand. Consumers are cutting back on the number of items they buy, but are not trading down. It’s very difficult to maintain the value position. Retailers are segmenting their ranges into value, middle and premium, so they have something to make margin on.”

KPMG has said there won’t be any more redundancies or store closures under its tenure, after cutting 249 head office jobs in Cardiff last week.

But what happens next will depend on the new owner, and in a world where 190 bricks-and-mortar stores plus a website is considered coverage enough, store sell-offs and closures seem almost inevitable.

Spiral of debt

  • Peacocks’ debt nightmare began in 2005/06, when chief executive Richard Kirk staged a management buyout backed by hedge funds Och-Ziff Capital Management and Perry Capital.
  • The structure stemming from the buyout was complex, relying on senior debt, mezzanine financing (a hybrid of debt and equity financing) and Payments in Kind loans, where all interest was to accrue at a rate of 17.8% until payment was due in 2017. 
  • At the time of the takeover, the £150m of Payment in Kind debt was a relatively small part of the business’s £450m price tag. But the subsequent recession changed all that. 
  • By April 2010, when the last accounts were published, the £150m had become approximately £300m. By the time of administration, the retailer’s total borrowings amounted to around £750m, greater than its annual sales, which came in at £720m in the year to April 2010.
  • KPMG put Peacocks’ inability to deal with its debts down to “tough economic conditions” and a “surplus of stores” with high overheads. Lower volumes and dwindling margins in 2011 meant the company had become financially unviable.

PEACOCKS – THE TIMELINE

December 8 Peacocks considers closing up to 200 stores. Lenders and shareholders are understood to be discussing how to restructure its operations and £240m debt.

January 16 Notices of intent to appoint administrators are filed for both Peacocks and Bonmarché, placing the retailers in a 10-day moratorium until a solution to their difficulties can be found.

January 17 Chief executive Richard Kirk is in crunch talks with a mystery investor to thrash out a deal to save the chain. It is understood Kirk has the provisional support of its two largest lenders, RBS and Barclays.

January 18 Peacocks is put into administration after a last-ditch attempt by Kirk to save the business. But the talks collapse when RBS walks away. KPMG is appointed administrator.

January 19 Almost half of Peacocks’ head office staff are made redundant. The 249 redundancies at the Cardiff office bring the total staff number at Peacocks down to 9,351. 266 staff remain at the head office.

January 23 Peacocks’ name, stores and staff are opened up for bids. Sister chain Bonmarché is bought in a pre-pack administration deal by private equity firm Sun European Partners.

‘Too little, too late’: the consultants’ view

Kate Hardcastle Retail consultant, Insight with Passion

Kate Hardcastle

Kate Hardcastle

People had started to buy into what Peacocks was doing, after it upped the fashion stakes and collaborated with Pearl Lowe. Peacocks was the place to go if you needed an update to your wardrobe – it was starting to get the kudos. It had really only started to work out who it was and was beginning to communicate that.

But it was too little, too late. It proves that with product strategy, management doesn’t truly plan for how long it’s going to take to have an effect.

When you’ve got huge businesses like Primark that reign over a particular area, anyone else is going to struggle. Primark and Tesco are producing results every day on that ‘go to’ philosophy.

Even in interiors, a retailer like Ikea does this well. You go there to stock up on the cheap candles, then get some meatballs and buy more while you’re there.

You have to have some great elements that drive core product and fashion together. It might be something cheap to finalise an outfit or the latest maxi dress. Whatever it is, you have to build your area on that. It takes a long time to build reputation.

Fashion retailers in the value sector need to have more sophisticated strategies.

Dan Coen Head of retail, Zolfo Cooper

Dan Coen

Dan Coen

Ultimately, in a recession, you find consumer flight to luxury and value. Given this, you’d anticipate that Peacocks would be thriving, but it’s one of a number of companies structurally wrong for the market.

Companies like Peacocks and New Look have to deal with pressures from various stakeholders, or hedge funds and management teams with limited experience. In the face of an uncertain economic environment and consumers not spending as much as they used to, debt can spiral out of control. There are too many people to herd and you run out of time. Your timeline is driven by repayments around the retail cycles, particularly rent payments.

Peacocks had a massive cost structure from too many shops. Research by Experian showed that in 1990 you needed 300 stores to reach all of your market. It’s now 150 stores.

Companies thriving in this sector will know exactly how to reach their customer and will have the distribution channels to match. They will have a no-surprises approach with all stakeholders tied into the vision and business plan.

The upshot of Peacocks’ administration is someone will get an absolute bargain. This will be a real opportunity for whoever buys it.

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