Via Wolf Street

Asset stripping by its owner, years of brick-and-mortar meltdown, topped off by the Pandemic. Suppliers, landlords, and pensioners twist in the wind.

By Nick Corbishley, for WOLF STREET:

One of the UK’s largest brick-and-mortar fashion retailers, Arcadia, has crashed into administration, becoming the country’s biggest corporate casualty of the Pandemic so far, according to its administrator Deloitte. But it had already been weakened by years of brick-and-mortar meltdown and by asset stripping by its owners.

Arcadia employs 13,000 workers and runs 422 stores in the UK as well as 22 outlets overseas, a far cry from the more than 2,000 outlets it operated globally in 2004 when current owner, Philip Green, took over the company.

Arcadia’s brands include such retail stalwarts as Topshop, Topman, Dorothy Perkins and Burton. Since the group has opted for a “light-touch” administration, those brands will be able to continue operating their stores and ecommerce sites throughout the process, while the firm is shielded from creditors’ demands. A buyer is sought for all or parts of the company.

Because Arcadia is privately owned, it does not have to disclose publicly the state of its accounts and how much debt it owes its creditors, including its lenders. According to multiple reports, it owes over half a billion pounds to its pension fund members and suppliers, much of which will now go unpaid.

On announcing its collapse on Monday evening, Arcadia became the latest in a long line of once-ubiquitous retail chains — BHS, which was also owned by Green, Banana Republic, Barratts, JJB Sports, Comet, C&A, Dixons, Debenhams…– that have failed to adapt to the brutal conditions that prevail on the UK high street, including rampant rental inflation, soaring business rates, and the unstoppable rise of e-commerce.

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In a press release, Arcadia pinned much of the blame for its bankruptcy on the lockdowns and other restrictions: “The forced closure of our stores for sustained periods as a result of the Covid-19 pandemic has had a material impact on trading across our businesses.”

But the firm’s fortunes began souring long before the Pandemic. Some date the start of the decline to 2005, when Green paid a whopping £1.2 billion tax-free dividend to Arcadia’s Monaco-based holding group Taveta, whose sole director is Green’s wife, Tina Green. The dividend was the biggest paycheck in British corporate history and was more than three times the company’s annual operating profits that year.

Since 2012, Taveta’s annual operating profits have been falling. The decline accelerated from 2015, as the firm’s biggest brands faced intensifying competition from online-only fashion retailers such as Asos, Boohoo and Pretty Little Thing.

Instead of investing in online channels in the 2000s, Arcadia was paying outsized dividends to Green’s family — a form of asset stripping. Five years ago, Arcadia was the fourth-largest clothing business in the U.K.; today, outrun by ecommerce retailers, it accounts for a meager 2.7% of the market, according to research company GlobalData.

By 2017, the group’s annual profits had morphed into a pretax loss of £137 million. In 2018, the losses had grown to £177 million. The group’s biggest brand, Topshop, posted a loss of over £500 million.

More than ten buyers have expressed an interest in purchasing Topshop out of administration, including online specialist Boohoo, Mike Ashley’s Frasers Group, formerly known as Sports Direct, and a number of private equity players, reports The Guardian. Jane Shepherdson, a former Arcadia director who is credited with turning Topshop into a global brand, says she expects an online retailer to buy the brand and close most of the stores.

“It’s incredibly sad… the worst thing is for all of the store staff, which are mostly women who are going to be unemployed. The supply chains are also going to take a massive hit. I imagine that orders will start to be cancelled very, very shortly.”

Arcadia’s suppliers are owed an estimated £250 million in unpaid invoices. The group’s retail landlords, many of whom were already in deep crisis mode, could also be hit hard. Affected listed landlords include British Land (circa 20 Arcadia stores), Hammerson (15 stores), and Landsec (10 stores),

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The department store group Debenhams, which is going through its second light-touch administration in less than two years, is also exposed, since Arcadia is the biggest concession owner at its 122 UK stores. Debenhams was in rescue talks with its last remaining bidder, JD Sports, which pulled out of the talks as soon as it heard of Arcadia’s demise.

Pensioners will also feel the pain. While Green was exceptionally generous with the dividends he paid to himself and his wife, he left Arcadia’s pension fund with a £350 million budget shortfall. Even after the UK’s industry-backed pensions lifeboat takes over the reins, members of Arcadia’s pension plan who have not reached the plan’s normal retirement age at the administration date could lose 10% of their benefits.

This is not the first time Green has left a company pension pot empty. During his ownership of the now-defunct department store BHS, he stripped hundreds of millions of pounds out of the chain before selling it, for the nominal price of £1, to serial bankrupt Dominic Chappell, who is now in jail on tax evasion charges. BHS collapsed a year later, under the weight of a £571 million black hole in its pension fund, and Green was eventually forced to repay £363 million to BHS’s pension-fund members. By Nick Corbishley, for WOLF STREET.

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