A crucial Christmas in Store for three besieged UK retailers

[LONDON]

After a year to forget for British retailers, investors are betting some of the UK's major chains now face a make-or-break holiday shopping season.

Among those with the most at stake are department-store operators Debenhams Plc and House of Fraser Ltd., as well as fashion retailer New Look Retail Group Ltd., owned by embattled billionaire Christo Wiese. Despite Black Friday promotions having been spread over two weeks in November, all three retailers are among the few still discounting by as much as 50 per cent.

The weekend of Dec. 9-10, widespread snowfall across the UK caused a 9.1 per cent drop in the number of shoppers at British retail destinations, according to researcher Springboard, leaving retailers hoping for a glut of pent-up demand to materialise before Christmas.

That's adding to the strain wrought by soaring labor and sourcing costs exacerbated by the Brexit-induced weakness of the pound, as well as a squeeze on Britons' disposable incomes. Last month, Next Plc Chief Executive Officer Simon Wolfson said consumer behavior was subdued and he didn't expect that trend to change over the peak shopping season.

Then there's the rise of e-commerce, which is sucking demand away from physical stores and leaving them struggling to adapt. Such concerns helped to prompt Unibail-Rodamco SE's US$15.8 billion acquisition of shopping-center operator Westfield Corp. this week.

"Historically Christmas trading has kept the wolf from the door for a lot of struggling retailers, but I'm not sure that's going to be the case this time around," independent analyst Richard Hyman said by phone. "The golden quarter isn't looking so golden." The tough conditions have already claimed several victims. Austin Reed, once tailor to Winston Churchill, collapsed last year. That was quickly followed by the demise of BHS, which put 11,000 people out of work. This year a clutch of smaller retailers - including fashion chain Jaeger and furniture seller Multiyork - have buckled under the pressure from rising costs and weak demand.

Debenhams, a midmarket department-store chain that traces its roots to an 18th-century London fabric store, isn't yet under the financial stress of New Look or House of Fraser. But while the business generates cash and net debt is stable, demand isn't: Like-for-like sales in UK stores have fallen for 10 consecutive years, according to Deutsche Bank estimates. Short selling of the company's shares has surged to the highest level since the financial crisis.

"Debenhams has operating profits only just ahead of their rents, rates and utility bills. It's a race between them and House of Fraser as to who will go down first," according to Crispin Odey, whose hedge fund Odey Asset Management holds a short position worth 21 million pounds, equivalent to 5.1 per cent of the company's outstanding shares. "The real trouble will come in January." Investec analyst Kate Calvert upgraded Debenhams to a hold rating this week, saying the shares had fallen to a level where a takeover offer is becoming more likely. Sports Direct International Plc founder and CEO Mike Ashley holds a 21 per cent stake in the company.

Spokesmen for Debenhams, House of Fraser and New Look declined to comment for this article.

In November, Brait SE - an investment vehicle of South African billionaire Wiese, who's also the biggest shareholder in troubled Steinhoff International Holdings NV - wrote off the value of its 780 million-pound (US$1 billion) investment in value fashion retailer New Look after just two years of ownership. After the departure of New Look CEO Anders Kristiansen in September and an 8.6 percent decline in comparable sales in the first half, Brait has been trying to stabilise the retailer's performance.

A tranche of 700 million pounds of New Look bonds fell to a record-low 40 pence on the pound on Thursday, according to data compiled by Bloomberg. Its unsecured bonds are quoted at less than 21 pence on the pound.

The debt was quoted near face value at the beginning of the year, but losses for creditors are now likely following an "implosion of profitability," according to CreditSights analyst Helen Rodriguez. The accounting scandal at Steinhoff has wiped more than US$2 billion from Wiese's wealth and is another unhelpful development for New Look, Rodriguez said.

Moody's Investors Service cut House of Fraser to Caa1, seven levels below investment grade, on Dec. 8. The retailer, which operates 59 department stores across the U.K., is in danger of breaching its debt covenants, analysts said. That's despite a recent cash injection from its Chinese owner, Sanpower Group Co., to give it enough funds to do business through the holiday season.

Law firm Orrick, which specialises in debt restructuring, listed House of Fraser as among a potential "increased number of insolvencies and restructurings in the retail sector in the near future" in a November report. The retailer's 175 million pounds of bonds due in 2020 are quoted at 86 pence on the pound, near a record-low 81 pence in June, according to data compiled by Bloomberg.

BLOOMBERG