New Look - further thoughts and details

All,

Some take aways from New Look’s call today:

- Clearly the retail environment is tough on every player (except Zara), not just New Look.

- Management are executing the changes that were advertised, even if we felt that some could have been taking effect a little sooner.

- Not counting LCs, the company may end the year with 5x leverage again.

Performance:

- The dramatic £42m fall of revenues was £-20m driven by the store count reduction in the CVA with the remainder somewhat split by menswear, lack of consumer confidence and weather. Those lost £22m then translated into lost £10m of LfL Gross Margin and with savings of some £5m beyond those achieved in the CVA the EBITDA impact was £-5m for the remainder of the business post CVA. In fact EBITDA is impacted by a £3m FX translation adjustment. So the rough math really works quite well.

- Q2 LfL sales were reportedly 2% above last year for the first 8 weeks and have since tailed off however. Margin on those sales was approx. 1.1% down at the same time due to promotional acrivity, somewhat offsetting the gains. Also menswear is in the process of being placed by new concession.

- The areas that took longer to address: Footwear, Denim and Accessories are reportedly doing better. The company has hired a new head of purchasing for the Footwear section.

- Previous guidance of £100m EBITDA for the year is now an aim. Management have identified a further £14m in savings - although neither did we receive much detail on their origin, nor do they seem to offset the dropped EBITDA in Q1 as Alistair himself called guidance now “a tad optimistic”.

- Now fully hedged for Brexit.

Liquidity:

- The inventory position is dire again. While the company tried to lend perspective to current inventory vs last year, the reduced number of stores should have clearly demanded some £20m less inventory, not more, even if volume was down and the increase price mix driven. Alistair unfortunately was not quite clear about whether or not we can now expect a reduction of those £20m on top of the identified £15m, which would come as a result of buying later. Presumably if there were a combined $35m to extract, we’d have heard of it all along the call.

- Somewhat underlining the nervous state of affairs at New Look is the fully drawn RCF and Overdraft facility (the £15m cash portion). The company could save money by paying down the majority of the lines.

- Managemnt stated they could reduce the CapEx+Interest hurdle from currently £70m to £60-65m if need be. The statement came unprompted and, combined with the new assessment that EBITDA of £100m this year may be a stretch, illustrate the state of affairs.

- The Operating Facility quarterly step down will commence this month and continue to step down by £10m each quarter. Given the facility’s cash portion is fully drawn and only has £16.9m of headroom for LCs etc, the company must find liquidity by December or use cash from balance sheet to repay it.

Ongoing Restructuring:

- As regards the paradigm shift towards an inventory chasing business as opposed to cutting, we have been promised that shift for nearly two years now. We understand that implementation takes time, but were actually “already” looking forward to more of an effect in this SS collection.

- New Look's ranking on Google searches has dropped due to algorithm changes. The issue is partially to blame for the underperformance of the E-commerce business, but has been addressed.

- New Look brought their customer care centre back in-house.

- Ongoing restructuring efforts have brought about a significant reduction of top brass and recruitment of mid-management.

- Inventory now consists of 55% core product, 40% broad appeal product and only 5% trend product (from 75% trend and broad appeal product and only 25% core product). This is truly asignificant change. According to management early results are encouraging. Fashion and colour content have been reduced across the collection.

- The company still retains full flexibility on its B-grade stores under the CVA.

Wolfgang



Wolfgang FelixNEW LOOK