Sir Philip Green says the weather has been both unseasonably mild and wet recently, but Arcadia’s problems are more deep-seated than that.

Sir Philip Green says the weather has been both unseasonably mild and wet recently, but Arcadia’s problems are more deep-seated than that.

When Sir Philip started his customary breakfast with journalists this morning to discuss the Arcadia final results (for y/e August), some of them may have choked on their cornflakes when he revealed that “in the first 10 weeks of 2013/14, like-for-like sales were down 3.7% versus last year, affected by unseasonably mild and wet weather”.

Of course, retailers’ favourite mantra is “if in doubt blame the weather”, but the records of retail weather experts Planalytics show that September was actually no milder than last year (given the cold snap in mid-September) and though October was a bit milder and wetter, it was by no means unusual and it is also not unusual for it to rain in November. Still, the widespread frost yesterday morning will have cheered the great man up and colder weather is on the way, it would appear.

However, Arcadia is not the only fashion retailer to be finding life hard. Marc Bolland at Marks & Spencer made a point last week of flagging up the weak BRC Retail Sales survey for Clothing sales in October and New Look warned on Tuesday that “current trading is more challenging”.

These mid-market clothing retailers are being squeezed in two ways. In general, there is some evidence that the overall clothing market is being squeezed by the sheer amount of money that is being spent by consumers on mobile devices and other gadgets, at a time when household incomes are still under some pressure. And in market share terms, the growth of the top and the bottom of the fashion market (most evident in the remorseless growth of Primark and online fashion) is squeezing out the high street retailers in the middle.

Sir Philip Green is just too big in UK fashion retailing to avoid the squeeze. He has a decent foot in the better end of the market, via Topshop and Topman, but the mid-market chains such as Bhs, Burton, Evans and Dorothy Perkins are clearly struggling.

Sir Philip and his team are working hard to trim down all the stores that were opened by Arcadia back in the mid-1980s, but Retail Week Knowledge Bank estimates that he had still had as many as 2,400 UK outlets at August 2013 and 9.6m sq ft of selling space, which is an awful lot of footage.

With total annual sales stuck around the £2.7bn mark, despite the push overseas, sales densities continue to fall, so it is easy to understand why Sir Philip is so keen to cut his UK rent and rates bill. Arcadia’s overall like-for-like sales were down by 2.7% in the last financial year and it was only a useful 120bps improvement in gross margin, thanks to better sourcing, that enabled him to limit the fall in underlying operating profits to £221m, from £225m in y/e August 2012. The operating margin of 8.1% is still respectable, but it is well under half what it was back in 2005.

And although he raised a chunky £350m from selling 25% of his best business, Topshop/Topman, to the US fund Leonard Green (no relation) at the end of last year, it is now clear that most of Arcadia’s profit comes from Top Shop/Top Man.

As usual, there was no divisional breakdown today of the performance for last year, but one of the more interesting revelations in today’s Arcadia accounts is that the minority interest charge (ie the share of after-tax profits attributed to Leonard Green’s 25% share of Top Shop/Top Man) was as much as £27.6m for just 8/9 months of the period. Annualise that, gross it up and add back the tax and there wouldn’t be much left of the pre-exceptional pre-tax profit of £168m (after goodwill).

Bhs clearly continues to lose money and it is not obvious why the rumoured suitors for the business would pay much for it. Nor is it obvious how Sir Philip could disentangle Bhs from the rest of Arcadia, given the number of group ‘concessions’ in the stores.

So, given the tough environment, what is Sir Philip doing to hold back the tide? Well, cash generation remains a priority, but he needs to keep the store base looking fresh, so it is good to hear of the revamp work that has taken place on all the Arcadia stores in the Bluewater shopping centre and that more store refurbishment work will take place this year. Overseas franchise expansion is another priority.

But, with the UK retail market moving so quickly online and Arcadia under-exposed in this area, the middle market in high street fashion is a tough place to be and Sir Philip will need ‘the weather’ to be on his side if he is to be able to report better profits this time next year.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.