Aurora’s dawn

Fashion is a test of your wits,” Derek Lovelock, chief executive of newly renamed fashion group Aurora, once mused. Today, his words are more pertinent than ever.

The veteran retailer, who once headed the Sears womenswear business, has again been at the helm of a business he and his team created, only to see it unravel.

At the start of the month – in the wake of the nationalisation of its lender, Icelandic bank Kaupthing, and the downfall of its backer Baugur – Mosaic and its seven fashion brands were forced into pre-pack administration.

Shoe Studio has since been sold to rival footwear retailer Dune and Principles is experiencing an undignified demise after administrator Deloitte’s failure to find a trade buyer.

However, Mosaic has re-emerged on the other side as Aurora – meaning new dawn and a symbol of renewal – a leaner business comprising former Mosaic brands Karen Millen, Coast, Oasis, Warehouse and Anoushka G. Rid of crippling debt and its connection to the defunct Baugur, is Aurora now free to fight harder for its place on the high street?

Aurora deputy chief executive Mike Shearwood says yes. “For the first time in five months, the Aurora team will be able to work alongside the brand teams, focusing on trading the business,” he says.

“We can now say Aurora and our brands are in a place whereby we have a good balance sheet, a sustainable level of debt and we still have great brands and great people.”

Chain of events

The former-Mosaic management’s focus was forced to shift – to the detriment of business performance – when Kaupthing was nationalised in October last year.

Kaupthing’s difficulties brought various factors into play. The biggest impact on Mosaic was the loss of its working capital facility. The retailer had also just moved its hedge over to Kaupthing.

The effect on profits of losing that hedge was a£30m hit, leading to a profits warning at the end of last year.

Negative press comment surrounding the Icelandic banking collapse and Mosaic’s connection to 49 per cent stakeholder Baugur resulted in nervy trade insurers pulling credit insurance to suppliers.

Mosaic’s management were forced to find a way to restructure finances after debt became greater than the value of the business. A debt-for-equity swap followed, with management in the new company taking a stake of between 5 and 10 per cent.

Shearwood insists that the management “explored every option possible to make Mosaic a viable proposition with the debt structure that was in place at that particular time”.

The result was Aurora, which emerged from the ashes of the pre-pack with 732 concessions, 321 stores, 8,700 staff and just two investors – Kaupthing and the management.

Shearwood says the consolidation will allow greater focus. “Pre the bank going into administration, the business was performing well,” he emphasises.

Despite the need to issue a profit warning following the loss of its hedge, Shearwood maintains that the half-year results to the end of July were “great”, with EBITDA up 6 per cent to£33.4m on group sales up 5 per cent to£410m and the international business ahead 14 per cent.

“It is true to say that the business has not performed as well as it should have in the five or six months since the bank went into administration. This is due to the Mosaic management team being focused on securing the future of the brands and the brand teams reassuring their key suppliers and partners in the face of negative publicity surrounding the business,” he says.

Aurora now has debt levels of about a third of what it had previously and “an absolutely sustainable and workable working capital facility,” says Shearwood.

In the immediate term, Aurora’s management is working to maintain its established supplier relationships. Lovelock is in the Far East at present, talking with key suppliers and meeting UK suppliers too. Shearwood says suppliers will be paid back within legal frameworks.

“The trade credit insurers are not going to switch on straightaway, but over the next weeks and months we will start talking to them and demonstrate the strength of our financial position, solid payment history, and we are hopeful they will recognise this and reinstate insurance,” says Shearwood.

The retailer is also working to offset the currency situation and maximise margins. “The teams are buying better and leaner”, he says. “The teams have bought very tightly and stocks are cleaner than ever before, with lower markdowns than previous years.”

He adds that the former Mosaic brands were “seriously disadvantaged” after the hedge was lost, leading to a 25 per cent increase in the cost of buying clothes. However, he maintains that the majority of Aurora’s rivals will be in a similar position from mid-2009 when the majority of the advantageous hedges run out. “It will be a level playing field whereby everyone will be negotiating from the same base,” he says.

Aurora is in negotiations with the landlords of 90 stores about locations that it says are not as profitable as it believes they should be.

Separately, it will close about 30 shops in the oldest locations and move to one head office and operate from one distribution centre, in Oxfordshire.

“We are going to be a much leaner, more efficient business with a smaller group of brands that we can concentrate on and that are really well respected in the high street,” says Shearwood.

“There will be better synergies within the group now we are purely fashion brands. The one thing this has done has proven to us how good our people are, because they have all been working in really adverse conditions and come through it really well.”

Shearwood would not comment on the brands’ individual performances. “There is a fair amount of work to be done to stabilise the situation and get them back on a firm footing,” he admits, although he claims that Mosaic would have “delivered or exceeded” EBITDA targets if Kaupthing had not hit administration.

Verdict retail analyst Sarah Peters believes Aurora has a chance of reinstating its competitive edge. She says: “It is still going to be difficult for Aurora. They have lost their hedging function, so costs have gone up.

“The brands are very strong but over the past few months the management has been distracted. Now they are able to focus on the business of retailing. They have a more streamlined portfolio, they can focus on the brands and add a competitive streak to the high street.”

Shearwood laments the failure by Deloitte to find a trade buyer for Principles. The sale process began before Mosaic’s administration.

“Every brand has its own strategy and vision and they were on their journey to reaching that goal,” he says. “We had seen more success from some brands than others. Shoe Studio needed re-engineering and utilised a large amount of working capital, disproportionate to the other fashion brands. Principles needed repositioning in the high street but we didn’t have the luxury of time.”

But following the administration, the sale process was taken out of Mosaic’s hands.

Setting aside the external factors that brought down Mosaic, can Aurora survive and thrive as a fashion group? Previous retail conglomerates have fallen by the wayside in tough times – Sears and Storehouse both famously came apart.

Retail Knowledge Bank senior partner Robert Clark sees some similarities with the earlier collapses in Mosaic’s demise. “It marks the end of a latter-day conglomerate that did not perform as a centralised conglomerate,” he says. “They seemed to be slow to integrate it following the acquisition of the Rubicon brands in 2006.”

However, Clark argues that a fashion-combined structure need not be a handicap, as Arcadia has shown. He says: “Mosaic didn’t appear to have the centralisation of functions and approach to buying that Arcadia has. There is no reason why Aurora shouldn’t be another Arcadia. In practical terms, it [such a structure] will not have an impact as far as customers are concerned. They are respected brands, they just need to ride out the downturn, like every other retailer. It will depend on the product in the window and the product and value equation.”

Another source says that the pre-pack of Mosaic and subsequent creation of Aurora was a straightforward “tidying up exercise”. He notes: “In essence, all that Kaupthing has done to Mosaic is what the Icelandic government did to Kaupthing.

“They have stepped into what was effectively insolvent, nationalised it and separated off the bits that were bad. Down the road they will be able to be sold on to management or investors.”

Shearwood says that Kaupthing has been supportive throughout the process and it is its intention to back Aurora for the foreseeable future because that is the best chance of recouping part of its investment for creditors.

He maintains: “This was a good business, with great brands and great people and it was forced into this position by circumstance. We are continuing with the same brand strategies – there is no reason to change them.”

Others in the industry agree. One source concludes: “Management are incentivised and have the security to do their job. They should be able to get credit insurance back. The four retail brands are in the sunlight now.”

1999 Derek Lovelock joins Oasis – which includes the Coast chain – as chief executive from Sears

2001 Management buyout, backed by PPM Ventures

2003 Secondary buyout, backed by Baugur

2004 Oasis links up with Karen Millen and Whistles in a£120m merger. Corporate name becomes Mosaic

2005 Mosaic floats on the Icelandic Stock Exchange

2006 Mosaic acquires Rubicon – owner of Warehouse, Principles and Shoe Studio – for£353m, backed by Baugur and Kaupthing

2007 The company is taken private by Baugur for£850m

2007 Mosaic poaches UK Inditex boss Mike Shearwood as deputy chief executive

2008 Whistles demerged in a deal backed by Baugur

2008 Icelandic banking system collapses; Kaupthing is nationalised

2009 Baugur Holding falls into administration

2009 Mosaic enters pre-pack administration; Shoe Studio sold to Dune; Debenhams buys Principles assets

2009 Mosaic management and Kaupthing create Aurora