Tuesday 21/01/20

1. In RETAIL-RELATED NEWS, US retail landlords suffer from retail closures, Intu asks for cash, Beales falls into administration, Matalan profits fall whilst options for the future of Reiss and Itsu are considered
2. In UK CONSUMER NEWS, confidence in household finances improves while the London housing market lights up
3. In INDIVIDUAL COMPANY NEWS, BAE Systems buys United Technologies’ GPS business for $1.93bn and Fevertree’s sales fall through the floor
4. In OTHER NEWS, I bring you a really inspirational teacher…

So US retail landlords are suffering as well, Intu seeks finance, Beales collapses and Matalan’s profits fall while Reiss and Itsu’s respective successes give owners cause for thought…

US landlords grapple with thousands of store closures (Financial Times, Alistair Gray and Judith Evans) shows that it’s not just UK retailer landlords who are suffering from the current shake-out of the high street. Landlords face difficult choices. Given that rents tend to make up about 10% of any given retailer’s costs, landlords argue that they could bring rents down to zero and the tenants would still not make money and taking reduced rents would hit the value and/or image of the property. However, the downfall of companies like Forever 21, Payless and Barneys New York have forced landlords to change their approach by offering things like more flexible lease terms and a sliding scale of payments pegged to sales. Figures from Cushman & Wakefield show that rents in some prestigious Manhattan addresses have fallen by about 17% year-on-year but they say that the real situation on the ground may be more severe than this figure suggests. * SO WHAT? * It sounds like the UK is not alone in the current decimation of its retail landscape. The main difference, I would say, is that the US is suffering while the economy is booming – which would imply that if the wheels start to fall off, there could be some serious problems in the future. At least in the UK, there is more excuse for retailers doing badly given the overall cloud of gloom that has been hanging over us particularly since the Brexit referendum in 2016. However, it is imperative for landlords and retailers on both sides of the Atlantic to adapt to the changing tastes of modern consumers.

Talking of retail landlords, and following on from yesterday’s speculation, Shopping centre owner Intu’s shares fall as it aims to raise up to £1bn (The Guardian, Kalyeena Makortoff) shows that the company did announce the fact that it wanted to ask investors for money, but declined to say how much. The share price fell by 7% on the news (in addition to the 80% drop it has experienced in the last 12 months) as this latest move just highlights the company’s massive £5bn debt pile. * SO WHAT? * This sounds pretty bad, but some analysts think that the company could well ask for more than the £1bn figure being bandied around as retail property prices are expected to fall further.

Beales collapse leaves 1,000 jobs at risk as bosses fail to find buyer (Daily Telegraph, Laura Onita) highlights the ailing department store’s fall into administration following on from recent speculation. KPMG was brought in to find suitors but none were fielded and efforts to raise money or cut rents all failed. The website has been taken down but the stores themselves will stay open while the administrators continue to seek out buyers for the business. * SO WHAT? * Everyone, including Beales’ boss Tony Brown, likes to blame rates but the fact is that many department stores sell products that aren’t exclusive and can be bought more cheaply elsewhere. I also get the feeling that they are less of a “destination” than they used to be and tired formats just drag out a terminal decline towards irrelevance. As places like Selfridges and Fortnum & Mason have shown, there IS a place in shoppers’ hearts for department stores with a bit of flair – and the mid-market operators need to learn from them. In the meantime, department stores will continue to die…

The gloom continues with Profits fall as Matalan feels chill (The Times), as the company’s revenues fell in the latest quarter by 1.2% versus the previous year – although the good news is that its online business showed growth of 25%.

On the other hand, relative success has led to Owner set to test taste for Reiss (The Times, Tom Howard) where Reiss’ owner, US private equity firm Warburg Pincus, is considering cashing in on one of the high street’s rare successes by potentially selling the majority stake in the business it acquired in 2016. There was no official comment on this story that was first reported on Sky News. Then in Pret founder plans float for sushi chain (Daily Telegraph, Hannah Uttley) we see that Julian Metcalfe is thinking about floating sushi chain Itsu on the stock market in order to raise funds to make a major US expansion. He wants to grow it to 1,000 stores in the next few years. Metcalfe started Itsu in 1997 and is the majority owner with a 54% stake. * SO WHAT? * It’s good to see successes on the high street, but you do wonder whether the owners are thinking of getting out while the going’s good! Fair enough for someone like Warburg Pincus where the objective was no doubt to make a profitable exit at some point not too distant in the future, but maybe Pret’s founder is taking a look at the longer term. I’m sceptical about whether Itsu can be a success in America given that there’s more competition there for sushi, but you never know.

Confidence in household finances improves and the London housing market heats up…

OK, so it’s only a survey, but Election lifts mood about finances (The Times, Gurpreet Narwan) cites the findings from the latest IHS Markit survey which show that pessimism on household finances has lessened since the general election – but that it is still in pessimistic rather than optimistic territory. This improvement in sentiment was mainly driven by expectations of house price growth, although weaker inflation has also helped to put a lid on some costs. * SO WHAT? * It’s a mild positive to see something like this, but concern remains about the

economic backdrop – and until we see more clarity on that, we aren’t going to see any major changes. It does show, however, how important house prices are to feelings of prosperity.

Talking about house prices, in London house market leaps to life (Daily Telegraph, Sebastian McCarthy) we see that the number of new buyers registered with estate agent Knight Frank hit its highest level for mid-January for over 15 years! It also said that the number of viewings and deals had also risen. * SO WHAT? * This sounds positive and, as I’ve said before, it is particularly notable at the higher end of the market. London, in particular, was suffering going into the end of last year, so the relief at BoJo’s majority was pretty apparent. As I said in the earlier article, house prices really are key to individuals’ feelings of wealth – so although this sort of chat can be pretty boring, it is actually quite important to track!

BAE Systems buys into military GPS, Subaru complains about American ambivalence on EVs and Fevertree has a ‘mare…

BAE Systems to buy military GPS business from United Technologies for $1.93billion (Wall Street Journal, Doug Cameron) shows that BAE Systems has decided to consolidate its position in the US defence market by agreeing to buy the Military Global Positioning Systems business from United Technologies for $1.93bn. This will be its biggest acquisition in over ten years – but BAE Systems added that it was also going to buy Raytheon’s Airborne Tactical Radios business for $275m. * SO WHAT? * United and Raytheon are trying to get approval for their own merger that they announced last year, which will

create the world’s #2 military supplier by sales, so I guess the sales of these two very strong businesses to BAE Systems is in anticipation of that. I would imagine that more disposals are likely in order to appease the regulator.

Fevertree shares fall 25% as UK sales shrink (Financial Times, Myles McCormick) highlights trouble for high-end tonic maker Fevertree as it admitted yesterday that profits had contracted in 2019, sending its share price down by 25%. Christmas trading was sluggish in the UK and the company cut its revenue guidance for the second time in quick succession. * SO WHAT? * It seems to me that we may have reached “peak gin” in the UK in 2018/19 (the UK is Fevertree’s biggest market) and that it will be more important than ever for the company to make a success of its overseas ventures. Sales were up by 33% last year in the US but Fevertree is trying to position its brand as being “premium” rather than “super-premium” to get better volumes. Tough times for a company that has pretty much only known success and massive growth rates.

And finally, in other news…

I thought I’d leave you today with the really inspirational teacher in This teacher raised money for 1,000 books so her students would learn to love reading (The Washington Post, Hannah Natanson https://tinyurl.com/ukzqsg4). Things like this really do give you faith in humanity! What a great teacher!