Monday 13 January 2014

Helping major retailers to help themselves cope with 2014

Given that the Christmas trading results were merely the latest in a succession of indicators that all is not well in retail land, it should come as no surprise that the major players are taking steps to keep the stock market happy.

In the absence of real sales growth, and apart from Debenhams’ request for more direct help via additional discounts, the key alternatives available to retailers are sale & leaseback, and taking longer to pay, in order to improve financial results.

Sale & leaseback:
As you know, this means selling their shops to a finance institution and leasing back the premises, which means there is technically no change from a trading point of view, except that significant quantities of cash are released from the assets. The only difference is the retailer is now paying rent, which comes off the bottom-line, and can hit their net margin.

This is why Morrisons still own 90% of their real estate in that Sir Ken was always unwilling to cede control to a landlord. However, most other retailers have gone halfway over the years, to say 50% on sale & leaseback, using the released funds to buy more property and finance takeovers. It can also be used to pay back to shareholders in order to ease pressure on the share price.

This is why over the weekend it emerged that Morrisons may sell & leaseback 10% of their estate for £800m, pay it back to shareholders to compensate for the recent fall in share price. This will still leave them owning 80% of their estate, conservative compared with their peers…

However, the real problem in UK retail is the redundancy in large space caused in part by the growth of online. This means that finance houses will want to reflect the resulting fall in value via a lower purchase price for the property.

Hence the major retailers will need to try additional means of raising cash, the ‘simplest’ being taking longer to pay

Extended credit periods
In general, a decade ago the average credit period for retailers in the UK was approximately 30 days (compared with 45 in France, 95 in Italy and 150 in Greece). The UK period has now crept out to approximately 45 days, a 50% increase while few suppliers were ‘minding the store’, as least as far as creeping credit was concerned...

Given the ‘impossibility’ of achieving any real reduction in ‘normal retail practice’ all a supplier can do about this new ‘norm’ is refuse to allow any further increase for those customers at 45 days and checking which customers are paying faster, inadvertently…

It is therefore key that a NAM be able to calculate approximate time taken by a retailer to pay all suppliers, and then re-negotiate any difference on their part. Essentially, this means taking the end of year Trade Creditors from the customer’s balance sheet, and given that most retailers are getting average gross margins of 25%, divide the Trade Creditor figure by 75 and multiply it by 100 to get a sales equivalent of the amount outstanding. Dividing this like-with-like figure into the annual sales figure on the P&L will tell you how often the retailer pays their invoices per annum, and this figure divided into 365 will give the number of days the retailer takes to pay suppliers (check the logic with your finance department for reassurance).

If suppliers had monitored and resisted these retail moves over the years, the latest 45 day ‘norm’ might not have been as easily achieved….

Anyway, here and now it means that the NAM can be in a position to go for fair share, at least…

Welcome to the realities of 2014!

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