Will House of Fraser close stores as advisers are drafted in?
The prospects are looking grim for House of Fraser with news that the struggling retailer has called in advisors to look at its restructuring options, which means store closures could be on the horizon.
KPMG has been drafted in by the Chinese-owned company with reports that a formal company voluntary arrangement (CVA) might be just around the corner following an earlier informal request to landlords to agree to major rents cuts.
Sky News reported that while a CVA is a possibility, there is no certainty that it will happen, but that the involvement of KPMG as of this week means some cuts to its store numbers are likely. The company currently operates 59 UK locations and directly employs around 5,000 people, although 12,500 more work there in branded concessions.
A number of UK retail businesses have used the CVA approach in recent months, the most high profile fashion industry company to do so being New Look. But such a formal agreement with creditors is no guarantee that a firm will be able to achieve what it sets out to. Toys R Us, for instance, went into administration just a few weeks after getting its CVA approved.
Retailers are being hit hard in the UK at the moment by a perfect storm of negative factors. These include a fast shift of British consumers to online shopping, which is denting footfall to physical locations; weak economic circumstances that are making consumers cautious about spending; and even the wrong kind of weather. The early autumn season was damaged by high temperatures while early spring was hit by heavy snow.
House of Fraser has been struggling for some time and had a difficult Christmas period after it refused to resort to the big discounts that rival Debenhams introduced. While this helped its margins, it meant Christmas sales were weaker than hoped-for.
Another problem House of Fraser is facing is a heavy debt load, which includes a publicly traded £350 million bond. Globally, unsustainable debt has driven several retailers under in recent months.
It's unclear whether the current deal that is being pursued by House of Fraser's parent company to sell a 51% stake to Wuji Wenhua, a little known Chinese tourism group, might boost its financial position.
It’s also uncertain what other major shareholders might do. Mike Ashley, who also owns a large stake in Debenhams, controls just over 10% of House of Fraser through Sports Direct International and some observers has suggested he might want to pursue a merger between the two department store chains.
House of Fraser is due to present details of its full-year trading performance to bondholders in the weeks ahead.
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