Earlier last week, UK high-street apparel retailer New Look announced plans to close 85 stores, up from the 60 it announced in March. These closures are happening under the auspices of a restructuring deal (a CVA, first introduced as a “company voluntary arrangement” in the Companies Act 1980). Simultaneously, it unveiled a return to profitability in its first half, with revenues continuing to fall but also operating profits of £22.2 million, up significantly from a £10.4 million loss over the same period a year earlier. What’s going on?
What is a CVA? A company’s creditors and owners agree on a course of action to save the company, rather than declaring insolvency. That way, the creditors and the owners get something back, though the creditors likely need to exercise some patience.
What’s the purpose of this CVA? The main focus of the CVA is to cut costs faster than revenues fall. Clearly the cost of the lease and associated property taxes are not proportional to sales, so stores are the obvious candidate for cost-cutting. Back in March, we had hoped to find buried in New Look’s CVA release evidence of supply chain efficiency and inventory-turn acceleration (as in the case of Marks & Spencer), but the release described only “cost-cutting.”
Who are New Look’s creditors? Suppliers, along with landlords and local authorities raising business rates on New Look high-street stores.
What happens next to high-street apparel stores? Perhaps the antidote to business rates is the rash of pop-up shops that we now have. There are still lots of entrepreneurs with an eye for the apparel business who can make deals buying and selling a collection for a reasonable margin — but who also don’t want to make the commitment to lease and tax payments month in and month out.
See much more on retail trends, check out our 2019 predictions for retail, and see my colleague Michael O’Grady’s take on the impact of New Look’s store closures on its business. We’d like to hear from you: What do you think about New Look’s news, and which actions would you take?