House of Fraser’s new management team want a chance to prove that a slimmed down business can be viable, but do they deserve a chance?

Last week, House of Fraser published a transformation plan for investors on the back of its controversial company voluntary agreement. Now the dust has settled a bit, ahead of the key creditors vote on June 22, it’s worth looking at how much of the plan makes sense.

In passing, it has to be said any sort of information from the beleaguered House of Fraser management team is to be welcomed, as just over a month ago it was reported that one investor, namely Sports Direct, was launching legal action against HoF for freezing it out of getting any up-to-date financial information – despite its 11% share stake.

“Companies in trouble can inevitably be accused of exaggerating the problems, but House of Fraser is clearly in a lot of trouble”

Sports Direct also criticised the “opaque” Chinese investor dealings in House of Fraser and last week’s presentation did not, unfortunately, reveal anything further about why the current wealthy owners Sanpower cannot provide more support and why it wants to sell a 51% stake on to the Hong Kong-based company C.banner. The latter is mainly a footwear business but also owns Hamley’s, which is also hardly a picture of great retail health.

It might go without saying, but Sanpower seems to have only ever been interested in the House of Fraser brand name and its expansion potential in China. It has only been able to offer token support in House of Fraser’s battle to defy the worsening economics of UK department store retailing.

Haemorrhaging cash

Companies in trouble can inevitably be accused of exaggerating the problems, but House of Fraser is clearly in a lot of trouble and is right to say business is unsustainable in its current form. It is losing money hand over fist, after a terrible first quarter, and haemorrhaging cash: even in the year to January 2018, which was flattered by one-off items, the cash outflow was £66m, which is nearly as much as the £70m C.Banner says it will “invest” in the business if the CVA goes through.

Last year’s results were distorted by a mysterious exceptional profit of £25m from “the sale of house brands to Guangzhou Sunrise Trading Limited”, as well as other odd income moves in the P&L column.

But the underlying trading pressures were clear: gross sales fell 6% to £1233m and gross margins were about 70bps down at 36%, with the operational leverage wiping out what little underlying operating profit was made the year before.

The new financial year has started badly. The 13 weeks to April 28 saw like-for-like sales slump 7.4% compared to last year, while gross margin of 32.8% fell 350bps, presumably because of increased discounting. The first quarter is seasonally the lowest trading quarter but the undisclosed negative EBITDA outcome was as much as £31m worse than a year ago.

The better weather in May should help quarter two, notwithstanding the impact of the negative PR House of Fraser has had recently, but the way things are going gross sales look to be heading for £1,150m in the year to January 2019 and operating losses will be over £50m, so something must be done to placate the banks.

Self-inflicted pain

House of Fraser is certainly not the only retailer to complain that “a perfect storm of circumstances has seen top-lines get squeezed and costs rise”, given the rise of online shopping. However, confidence is not helped by the worrying admission by the management that there have been self-inflicted problems as well: “moving our leading ecommerce business onto a new platform, changing the pricing of our house brands and reducing the number of womenswear private label brands hit sales hard”.

In the short term, the answer to the problems of the business is to “create a smaller, higher-quality and more focused store estate” and there were few surprises in the list of 31 stores House of Fraser wants to close, though it is a bit odd that the small high street store in Richmond has survived but the store in the Milton Keynes shopping centre has not.

Whether the business has a long-term future even if the CVA plan goes through –which is by no means certain – is less clear. Even the remaining 28 stores may be too many for the marketplace to support.

“The hope is that a shrunken House of Fraser can become an ecommerce-led retailer in the premium/luxury space”

House of Fraser says it plans to retain 70% of the current turnover of the business on a pro forma basis after the store closures and improve profitability through cost savings. That seems optimistic in the current retail climate given the weight of competition.

The hope is that a shrunken House of Fraser can become an ecommerce-led retailer in the premium/luxury space, focusing on being “a house of brands”. The actual experience is likely to be that the space HoF wants to dominate is already occupied by the likes of Selfridges and John Lewis, as well as Farfetch, Matches et al, and the business will have to shrink even further.

House of Fraser claims “extraordinary support and will to win from brands in all categories”, but its landlords will doubtless take a more hard-nosed view of its recent record and survival prospects.