How to Save Fashion Retail 101

(Bloomberg Opinion) -- Britain's New Look Retail Group Ltd. has reached an agreement to restructure its debt. The deal gives the chain of fashion stores crucial breathing space, and provides a blueprint that others in the industry are likely to follow as they grapple with online competition and dwindling consumer confidence.

The debt-for equity swap will cut gross borrowings to about 500 million pounds ($643 million) from 1.35 billion pounds and reduce annual cash interest payments by about half to about 40 million pounds. As part of the deal, the company will issue 150 million pounds of new bonds. Depending on the take up of these new securities, Brait SE, the South African investment company backed by Christo Wiese, will see its controlling stake in the retailer shrink to between 18 percent and 30 percent.

How to Save Fashion Retail 101

For New Look's managers, this is a good result. Chairman Alistair McGeorge and his team have set a benchmark for how to respond to the storm engulfing the industry.

Rather than embarking on piecemeal closures, the retailer shuttered stores in one fell swoop. It entered a company voluntary arrangement in March, allowing it to reduce its rent bill. What's more, this was accompanied by a turnaround plan: it tackled clothing ranges that weren't appealing to older customers. It reduced costs, pulled out of China, and focused on profitable sales rather than absolute revenue.

How to Save Fashion Retail 101

That allowed the store to stanch the decline in the six months through October. But it wasn't immune from the spending slowdown in November and December that also hit rivals like Asos Plc. That made the need to tackle borrowings even more pressing.

New Look, which has about 500 U.K. stores, still needs to improve its range of footwear and accessories, and navigate the cautious consumer – but it is now on a much firmer footing. Its success bodes well for others in the industry looking to restructure.

Debenhams Plc is also working on a refinancing, something that could include a debt-for-equity swap. If the chain can raise cash to reinvigorate more stores along the lines of its impressive new outlet in Watford, England, it may have a chance.

But there are crucial differences between the two retailers. So far, Debenhams has only taken a gradual approach to eliminating stores. And unlike New Look, its managers face a disgruntled shareholder in the form of Mike Ashley, whose Sports Direct International Plc controls 28 percent of the company. Last week, he ousted Chairman Ian Cheshire and removed
Chief Executive Officer Sergio Bucher from the board. Engaging with Ashley to win his backing will be crucial.

The way forward won't be easy. But New Look demonstrates that with a comprehensive store closure program and, crucially, the right strategy to back it, beleaguered retailers to can live to fight another day.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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