One of the UK's best know department stores, House of Fraser, has announced that it has asked some of its landlords for rent concessions. They have also confirmed that they have appointed KPMG to advise on possible turnaround strategies. Given KPMG are experts at the retail CVA ( as we are as well of course!) then it is likely that they will pursue this option. This has echoes of the collapse of BHS which tried to persuade landlords to write off some of its rent debts via a company voluntary arrangement. However, as was evident, BHS had bigger problems and as we know collapsed into administration despite the reported support of its landlords.
House of Fraser is the latest of a line of retailers, including Debenhams, Mothercare and Selecta that have posted disappointing results post Christmas and in the case of Selecta have been rescued via a CVA. Next was a notable exception but they have always had a very strong mail order/internet business which has supported their overall business. The main issue is that many retailers have failed to adapt to the new market with the discounters, such as Primark, growing rapidly and changing shopping habits - most notably the shift to online.
Expensive High Street stores can be cut back provided that the lease allows for early termination. If not the only way out is to surrender the lease that can be very expensive or use a company voluntary arrangement (CVA).
A CVA allows the retailer to determine its lease obligations which can greatly help the company's cashflow.
House of Fraser may not be seek a CVA but the fact that it is reaching out to its landlords is ominous as it might be looking for the 75% support by value that would allow it to make the others bound by the arrangement.
It remains to be seen what will happen but given the massive change facing retailers it may well be that High Street rents are simply too high and do not reflect the current market.
A recent report out by Deloitte has shown that the retail sector has seen the first rise in insolvencies in 5 years with larger stores in particular being hardest hit.
Keith Steven Managing Director of KSA Group said; "We could be witnessing the unwinding of the zombie company construct. This clear out of over indebtedness and poor performance didn’t happen in 2009-11 as would have normally happened
Now perhaps banks PE investors are now more focused on survivable businesses and are saying enough is enough?