The Australian owner of stationery retailer Smiggle has laid the groundwork to increase the pressure on landlords in upcoming lease negotiations by aligning store fit-out costs with break clauses.
Smiggle’s parent company Premier Investments has put plans in place that would allow the retailer to either drastically reduce rents or walk away from 117 of its 134 UK stores, as it nervously eyes a “very distressed and uncertain macroeconomic environment”.
In a bid to put pressure on landlords, Premier has taken a A$25.9m (£14.1m) hit on its balance sheet this year by bringing the fit-out costs forward for the majority of its UK stores, effectively writing off early costs associated with the stores and showing the retailer’s seriousness about walking away if better terms cannot be agreed.
As break clauses come up, following Smiggle’s UK debut in 2014, one retail property source said this is an attempt to “call landlords’ bluff” as Smiggle seeks the kind of rent reductions achieved by other retailers through administrations and CVAs.
As the source explained, if the costs had not been accounted for, “a landlord might say to them ‘we don’t think you will break because you will incur a £100,000 write-off if you do’. It simply means a retailer is not having to write off individual amounts per shop when breaks are exercised.”
A source familiar with the situation said: “By doing this, Smiggle take a hit now because they’ve got the cash to do it, and accelerate the amortisation.
“They can then go to landlords and say: ‘we would like the conditions of people next door’. You’ve seen it with other retailers getting CVAs; taking 20% or 30% rental cuts. It’s simply a negotiating tactic.”
The source insisted that there were “no planned store closures or job losses” in the short term, but that Smiggle would reserve the right to walk away from any leases with landlords that do not “play ball”.
Premier Investments published its annual results for the 2019 financial year on the Australian Securities Exchange, which showed total global sales across its brands were up 7.5% and like-for-like sales were up 4.2%.
Smiggle delivered global sales of $306.5m AUD (£166.8m) and online sales contributed 18% of UK sales.
Speaking to shareholders when it published its results, Premier chief executive Mark McInnes said: “Many landlords have offered capital incentives and lower rent to attract international fashion companies and we have been asking for exactly those same capital deals and rental deals. It’s not our objective to close stores, but if landlords don’t provide realistic rents we will.”
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