- Arcadia has gone into administration and Debenhams collapsed into liquidation, leaving a total of 25,000 jobs at risk
- Carnage on the high street is causing difficulty for retail landlords
- Retailers with the financial strength to pick up the pieces - including Mike Ashley's Frasers - could be well placed
Philip Green’s Arcadia is on the brink of collapse and has dragged Debenhams down with it. The two retailers - which are each other's largest customers - have fallen foul of a shift in shopping habits. Poor online offerings and better prepared peers, compounded by the devastating effects of lockdown have ruined both companies. More than 25,000 jobs could be lost if they cease trading.
Yet retail sales across the industry are holding up. According to figures compiled by KPMG and the British Retail Consortium, spending rose nearly 5 per cent in October compared to the same month last year - the fifth consecutive month of expansion. Despite deep recession and woeful employment figures, Brits are still shopping. While coronavirus might be keeping people home-bound for now, shoppers will return to the high streets once the danger has passed.
But what will be waiting for them when they return? Next (NXT), Zara, Primark? The pool of retailers that have the financial fortitude to survive repeated lockdowns is shrinking. As former Investors Chronicle journalist and retail expert Harry Wallop pointed out on Twitter, “When Woolworths collapsed 12 years ago – with 800 shops – the vast majority of those shops were soon taken over by fast-growing retailers: Poundland, TK Maxx, Iceland, Home Bargains.” In 2020, closed Burton, Wallis or Topshop sites seem to have just one possible suitor - Mike Ashley.
The self-professed “bricks man, not a clicks man,” has made it his mission to save the laggards of the UK high street. In the last few years he has built a position in many struggling brands - Mulberry, French Connection and Jack Wills, among them - and rescued retailers including House of Fraser from administration. His company's rebrand speaks volumes about the strategy: this is no longer Sports Direct; Frasers Group (FRAS) is a portfolio of retailers.
Arcadia’s administration offers him a pop at another host of fashion brands going cheap. Debenhams - which before its liquidation had been in rescue talks with JD Sports (JD.) - comes with a fleet of well-connected department stores. Like House of Fraser, it’s a hallmark of a dying era of UK retail, but one that Mr Ashley is keen to breathe life into. The company has now confirmed that it is talking to Debenhams' administrators and "hopes that a rescue package can be put in place and jobs saved".
Not everyone is enamoured by the strategy. “‘Mad’ Mike Ashley continues to give a very good impression of somebody who tries to win a game of Monopoly by buying up the useless brown and light blue squares on the board,” said retail analyst Nick Bubb. However, enthusiastic buying is not a bad plan, especially in a game of Monopoly where Park Lane and Mayfair are absent - even the UK’s highest quality retailers are struggling to drive decent growth in 2020.
It is also perhaps harsh to describe Frasers’ portfolio of brands as the “useless brown and light blue squares.” The company’s sports brands, including Karrimor and Slazenger are hardy, practical and in high demand, especially from parents of young children. Jack Wills, Mulberry and Hugo Boss appeal to young adults - Arcadia’s brands would slot nicely into that market. Mike Ashley is aiming for what he describes as “elevation” of his company; to outsiders, “domination” would perhaps be a better adjective.
For struggling retail landlords, that is an ominous sign. Both Arcadia and Debenhams count British Land (BLND), Landsec (LAND) and Hammerson (HMSO) among their landlords. For the latter, both groups were among the top 20 tenants at the end of last year, accounting for 2 per cent of passing rent. The failure of the companies will not only result in an immediate loss of rental income, it is also likely that the terms signed with new tenants will also be less generous - Hammerson signed new leases at an average 7 per cent behind previous passing rent during the first half of the year. That would give a retail titan like Mr Ashley, with the heft of Frasers store portfolio behind him, every opportunity to bargain hard for more favourable lease terms.
What's more, the high profile failure of the two UK retail giants is likely to have repercussions beyond the landlords that have signed leases with them. UK high streets are already grappling with an excess of retail units, which is forcing rents down and causing property groups to think of ways to reconfigure space. That is manifesting itself in a drive towards mixed-use developments, including building more residential properties and incorporating greater leisure facilities. Moving towards alternative uses may prove a lifeline for commercial landlords in the long-term but it is likely that they will have to suffer much more pain in the near-term as retail administrations rise and rents come down further.
As for ‘mad’ Mike and his expansion strategy, investors should be cautiously optimistic. Despite the contentious personality of its chief executive and major shareholder, Frasers is a well run company, with a solid balance sheet and increasingly unique market position. High street retail is shrinking, but is not going to die: “It’s a [much] smaller pond,” said Mr Ashley, “but the fish are going to be enormous, and I want to be one”. We think investors should dive in too. Buy Frasers at 440p.