The fate of Blacks Leisure, the leading British outdoor retailer, was still in the balance early this week as it struggled to reach agreements with landlords over the closure of loss-making stores. This formed a substantial part of the restructuring plan presented by Blacks to Lloyds Banking Group last week, in exchange for the bank’s agreement not to precipitate the retailer’s administration in September.
Blacks and Lloyds reached their standstill agreement on Sept. 23, when it became clear that the retailer would not be in a position to fork out loan repayments due at the end of that month. It was agreed at the time that Blacks would submit an extensive restructuring plan to Lloyds by the end of October – which the retailer has done, as it confirmed in the publication of its half-year results last week, showing much-widened losses.
The plan calls for the closure of 89 loss-making stores, along with the removal of about 50 functions at its head office in Northampton, making up about 20 percent of the company’s staff there. In September, Blacks had already placed Sandcity, the loss-making unit dealing with 11 O’Neill stores, into administration. It remained unclear last week what other measures had been added by Blacks to assuage its banker.
Lloyds confirmed that the plan was in a form acceptable to the banking group, and that it was under discussion, while Blacks said that it hoped to publish more details shortly. However, the retailer admitted that there was still “material uncertainty” about the future of the business in case of no agreement over the rescue plan, or if it did not yield the expected results. This precipitated a sharp decrease in the price of Blacks' shares on the London stock exchange last Thursday.
The standstill agreement sealed in September indicated that the restructuring plan should be implemented by the end of November, which is looking tricky. The company declined to comment on a report in The Times that it was seeking a company voluntary agreement (CVA), whereby landlords would make concessions to avoid the retailer’s bankruptcy. But Neil Gillis, the company’s chief executive, admitted that discussions on rents could determine the company’s fate. He told British reporters that the company closed down 89 stores but was still paying rent on them, meaning it was not better off from a financial standpoint.
The deadline comes as Blacks reported yet another pre-tax loss of £18.1 million (€20.2m-$29.8m) for the 26 weeks ended on Aug. 29, compared with a loss of £6.7 million for the same period last year. This includes exceptional items of about £6.1 million (€6.8m-$10.0m) relating to impairment of property, and restructuring costs. Excluding these items, the retailer’s operating loss for the period still reached £10.6 million (€11.9m-$17.4m), compared with an operating loss of £3.8 million (€4.2m-$6.2m) for the same six months last year.
The retailer’s sales dropped by 6.1 percent to £124.9 million (€139.7m-$205.4m) for the half year – amounting to a comparable sales decline of 1.1 percent. However, its gross margin fell by 2.1 percentage points to 51.9 percent, due to heavy discounts to lure consumers in the depressed U.K. high streets.
Taking the outdoor division only, comprising the Blacks and Millets banners, sales inched up by 0.2 percent to £106.9 million (€119.5m-$175.8m) for the six months. This amounted to a slide of 0.6 percent in comparable terms, which was attributed entirely to loss-making stores to be divested. Also due to discounts and the stronger U.S. dollar, this division suffered an operating loss before exceptional items of £6.2 million (€6.9m-$10.2m), compared with a tiny profit of £0.6 million for the same period last year.
Meanwhile, the board sports division, comprising the Freespirit banner and still including retail activities under the O’Neill brand in this period, saw its sales decline by 25 percent to £20.1 million (€22.5m-$33.1m) for the half year. This was a comparable sales drop of 4.3 percent, which was still much better than the 16.1 percent slide for the same period last year.
Heavier discounts were partly offset by the impact of cost savings in the board sports division, allowing it to report an operating loss before exceptional items of £3.1 million (€3.5m-$5.1m), about the same as in the first half of last year. The retailer has already taken many measures to improve its board sports business. The wholesale activities for O’Neill in the U.K. had already been taken back by O’Neill earlier this year. Separately, eight boardwear stores were rebranded as Millets or Blacks during the half year.
More encouragingly, Blacks stated that its comparable store sales increased by 14.2 percent for the first two months of the second half, ending on Oct. 27. To a large extent, this was attributed to close-out sales in outlets that are earmarked for closure. But more tellingly, Blacks reported that the revenues of its ongoing outdoor stores were up by 3.3 percent on a comparable basis, backing up its claim that it has a healthy core of outdoor stores. Overall, comparable sales of the group’s ongoing stores were up by 3.8 percent for the two months after the end of the reporting period.
The improvement comes after a spate of restructuring measures launched 18 months ago – due to the fact that Blacks had been clobbered even before the onset of the recession in the U.K. The company said that since the start of the cuts, it has removed £8 million (€8.9m-$13.2m) of cost from the group, while introducing a new outdoor retail format that has “demonstrated significant potential” (in the somewhat unconvincing phrasing of its financial report) and making the retailer’s online business profitable.
Excluding the O’Neill stores and others to be shuttered, the Blacks group currently trades from 206 Millets stores and 89 Blacks stores, including six out of town stores. The board sports division has been left with only 14 Freespirit stores.
Adding to the complications around Blacks' future, Ernst & Young was registered by the London Stock Exchange last week as the owner of a stake of about 29 percent in Blacks Leisure. This stake had previously been attributed to Sports Direct International (SDI), the leading sports retailer in the country.
However, the acquisition of the stake was financed by Kaupthing, Singer & Friedlander (KSF), the British arm of the failed Icelandic bank, which held guarantees over the shares. Ernst & Young, administrators of KSF, therefore claimed ownership of the shares. In fact, SDI has already partly written them off, along with a stake of about 11 percent in JD Sports, the third-largest U.K. sports retailer. However, SDI stated after the stock exchange registration by Ernst & Young that it would take legal action against KSF and its administrators with regard to the two packages.