There's cost cutting in store for Arnotts
Arnotts has opted out of a costly lease on a second store and repackaged its debts as the famous retailer tackles a €260m debt pile, writes Roisin Burke
Published 07/03/2010 | 05:00
LATE last month, Arnotts struck a deal to buy its way out of the costly lease on a second store. With a debt pile of €260m, Ireland's biggest department store name badly needs to rein in costs.
Arnotts Project, a four-floor space in Dublin's Jervis Centre cost €5m to set up and opened down the road from the Arnotts Henry Street flagship store just last year. It will shut up shop in March.
Its massive debt caused key shareholder Boundary Capital to pronounce its 28 per cent Arnotts stake as essentially valueless.
On the plus side, Arnotts has secured a major repackaging of its debt with backers Anglo Irish Bank and Ulster Bank. Originally due for repayment this April, repayments have been stretched out to 2013.
The new credit lifeline still means a massive burden, however, a potential €86m -- plus a year of debt to service, plus the millions of interest due on top of that. The last figures for Arnotts showed a €29.6m operating loss.
The group's debt albatross is due largely to the property-buying spree that amassed a land cache for its €900m Northern Quarter plan. It got the planning green light recently but "there's no start date, it's on hold", an Arnotts source said.
The 5.5-acre megabuild of shops, apartments and a hotel was to occupy the chunk of Dublin city's shopping heartland between Henry Street and Middle Abbey Street, with frontage on to O'Connell Street. In the right climate, it could have netted hundreds of millions of euro in leases, concessions and other revenue for decades to come.
Losses arising relating to the Northern Quarter property come to €104.8m, the group says.
Boundary put €40m, half its market capital at the time, into buying 28 per cent of Arnotts in 2007. It borrowed €29m of that €40m to buy a share it says is now materially worthless. As part of that same deal, Anglo Irish Bank's Anglo Private co-invested, paying €25m for around a 17 per cent stake. Whatever Anglo Private's high net-worth clients might have ponied up to be part of that investment, they can't be happy now.
The reason Boundary bought into Arnotts was to reap the rewards of the Northern Quarter development. Dealmaker extraordinaire turned beleaguered debt firefighter Niall McFadden founded Boundary and was also a driving force in acquiring investment property for Northern Quarter. He's no longer a director of Arnotts Holdings, as of September, but is still a shareholder.
Boundary owes Anglo Irish Bank around €38.6m and has been trying to hammer out a new arrangement on servicing that debt for months. The Anglo Irish facility is supported by a personal guarantee from Mr McFadden.
The private equity vehicle lost €50m after tax in 2008 and its investment values more than halved to €31.6m, down from €82.8m the previous year.
Arnotts group chairman Richard Nesbitt and his family own the other 55 per cent of the store group. In 2002 the two main shareholders, the O'Connors and the Nesbitts, teamed up in a buyout that valued Arnotts at €257m.
Following an unseemly public tussle about value, the O'Connors exited the business in August 2007 with €40m in their pockets for their 24.7 per cent share, suggesting a value of €161m.
The combined €65m, 45 per cent Boundary/Anglo Private stake purchase in September 2007 valued the group at circa €143m, but hopes were pinned on vast profits to be unlocked by the Northern Quarter.
Arnotts is far from alone in facing challenges. The billionaire owner of Brown Thomas, Galen Weston, called Selfridges boss Paul Kelly back to run Brown Thomas in September.
Up to now overseas giants like Debenhams may have had some edge, according to Davy Stockbrokers, but that's changing. "We reckon that many retailers (especially some of the larger foreign-owned chains) entered the recession with fat margins," it said in a recent analysis, "but those margins have slimmed down, and rents and wages are likely to come under further pressure."
Davy puts clothing retail sales at being down 22 per cent since mid-2007, furniture and lighting reduced by 26 per cent, items at department stores slashed by 21 per cent and discretionary goods like jewellery and toys cut by 19 per cent. These figures imply a retail model like Arnotts has been hit hard.
"Savage price discounting hints at further shrinking margins or deeper cuts in wages and rents," the broker said of the domestic retail sector. "Prices are still being slashed by retailers."
While it expects retail sales volume to bottom out this quarter and return to modest growth in Q2, "the value of sales may keep slipping for a couple of quarters yet as retailers continue to cut prices".
Arnotts says bosses saw all this coming 18 months ago and have been planning for it.
Former Brown Thomas CFO Declan Delanty was brought on board. A host of buyers and fashion director Deirdre Devaney were also poached from Brown Thomas. Dundrum Town Centre's former head of marketing Jane O'Keeffe was recruited.
Group CEO David Riddiford is an experienced hand, having worked with Levi Strauss, the Burton Group, Harvey Nichols and Selfridges. Chairman Richard Nesbitt is viewed by peers as one of the best retailers in the business.
"Arnotts will get through this," says Retail Excellence chief executive David Fitzsimons. Other big names mightn't be so lucky.
"Prestigious retail names will fail," he predicts chillingly. "There are well-respected retail brands on the brink of failure."