The sun shines on retail again

By Alex Brummer, April 15, 2010

The speed with which retail has bounced back from the "Great Recession" is impressive. The high street was hard hit by the aftermath of the global credit crisis, consumer spending fell off a cliff and a number of retailers, including Woolworth, Zavvi, childrenswear chain Adams and footwear group Stylo went into administration.

The sector was not helped by the collapse of the Icelandic banks, the main lenders to such vehicles as Baugur with interests across Britain's high streets and malls including enterprises such as toy specialist Hamleys, the frozen food retailer Iceland and up-market department store group House of Fraser.

A year later, however, and the retail sector is looking a great deal healthier, despite the decision of the government to raise VAT back to 17.5 per cent in January after 12 months of holding the rate at 15 per cent. The temporary cut pumped an estimated £11bn back into the economy.

Evidence of the repair work and increasing confidence among retail groups has been seen across the market. It ranges from luxury goods brand Net-a-Porter, to the mid-market as represented by Marks & Spencer, as well as the bottom end where discount clothing retailer Matalan has been resurrected.

Among the more stunning success stories was the sale of the British-based on-line fashion business Net-a-Porter to Swiss luxury goods group Richemont in a deal which valued the enterprise at £350m.

Increasing confidence among retail groups has been seen across the market

Founded by former journalist Natalie Massenet in 2000, just as the dotcom bubble was bursting, Net-a-Porter has proved an unexpected success. It was the first up-market fashion group to score a success on the internet, marketing a variety of the best brands and delivering them directly to the desks of the world's busiest women professionals and magnates.

The financial and managerial muscle behind the Net-a-Porter story has been supplied by chief executive Mark Sebba, a veteran of merchant bankers Charterhouse, who previously was involved in pioneering video delivery over the internet. The decision by Richemont - the owner of such iconic brands as Cartier and Mont Blanc - to keep Sebba on suggests that luxury brands group recognises his contribution is still needed post-sale.

Sebba reports that 2010 is off to a good start "with particular emphasis on an increase in first-time customers". He believes that the links with Richemont will assist it in adding new brands to the Net-a-Porter offering.

In the mid-market, Sir Stuart Rose added to the immediate optimism with his swansong report as executive chairman of the group. New boss Marc Bolland, who is credited with turning around the fortunes of Bradford-based grocer Wm Morrison, takes over M&S, which is bouncing back from recession, in the next few weeks.

In the first quarter, with the assistance of some aggressive advertising and marketing, M&S reported underlying sales increases of 5.1 per cent, a far better figure than the market had been expected. With the help of the group's historically best lines, like women's underwear, it reclaimed lost market share, which rose to 11.9 per cent in the 12 weeks to the end of February from 10.8 per cent last year.

Despite the buoyant performance, analysts were disappointed. They fear the extra sales have been bought at the expense of profit margins.

There is also concern that the upcoming actuarial valuation of the pension fund will throw up a deficit as high as £1bn which will prove a drain on future cash flow and could affect the dividend. As importantly, Rose told me that the stock market was disappointed by his refusal to upgrade the profits forecast for this year (2010-11).

He is fearful that once the pre-election boomlet fades, the country will have to face the reality of huge cuts in public spending and tax rises - which could include a VAT rate of 20 per cent or 21 per cent - which could snuff out the present buoyancy. Nevertheless, brokers Panmure Gordon still regard M&S as a buy, noting that even after a recent 20 per cent rally in the shares they are still selling on cheaper price to earnings ratio than is traditional for the nation's favourite retailer.

The mid-market, like M&S, struggled during the recession, creating room for the down-market retailers. Primark, part of Associated British Foods, boomed, and a series of newcomers to the high streets like Poundstretcher expanded rapidly.

The winners included edge-of-town discount retailer Matalan.

The ailing group, once seen as a potential rival to M&S, was taken private four years ago by its founder John Hargreaves with some of the money borrowed from failed Iceland bank Kaupthing. Hargreaves nursed it back to health and recently sought to refloat it on the stock market for £1.5bn. When the offering was cancelled - because of a lack of enthusiasm - Goldman Sachs stepped in with a new financing package.

This allowed Hargreaves to pay himself a huge dividend of £250m.

Neither the Goldman Sachs refinancing nor the Hargreaves dividend would have been possible but for the restoration of the business and the brand. Moreover, if Britain were to slip back into stagnation or worse, the discount retailers, like Matalan, could yet enjoy a further renaissance at the expense of middle market. No wonder the departing M&S chief refuses to put on rose-tinted spectacles.

Alex Brummer is City Editor of the Daily Mail

Last updated: 11:31am, April 15 2010