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As the challenging retail conditions persist, an inevitable shakeout and consolidation in the category has been underway for some time, as retailers struggle for profitability.
The challenges run from top to bottom in apparel retailing, from the Myer, David Jones and Harris Scarfe department store groups through to the Big W, Target and Best & Less discount department store chains to specialty retailers.
International brands are causing some of the disruption in category sales but not all of those new brands in the market are doing well, with the Topshop/Topman partnership with Myer struggling and Oroton Group re-assessing its license rights to the Gap.
While Solomon Lew has had success in operating international brands in Australia, the Myer and Oroton experience questions the value of license deals. Oroton Group reported a 12 per cent decline in sales for the seven Gap stores in New South Wales and Victoria for the first half of the 2017 financial year.
Mark Newman, Oroton Group CEO, told investors the brand’s summer range missed the mark with customers with lower foot traffic into stores and lower levels of inventory.
Newman is hopeful a stronger online presence will improve brand visibility and accessibility, but talks with the Gap’s United States headquarters about the alignment are proceeding.
Oroton Group is keen to ensure the Gao license agreement doesn’t become a drag on its operations like the Brook Brothers brand which, along with Gap, was secured by the publicly listed Australian retailer after Polo Ralph Lauren terminated a long term license agreement in 2013.
Oroton’s sales for the latest half fell by 11 per cent to $67.1 million, while net earnings dropped by 52 per cent to just $1.8 million as the company put on a brave face, its ongoing struggle to plug the hole left by the loss of Polo Ralph Lauren.
With its current muddling performance, there is speculation the Oroton Group is a potential takeover target with several potential Asian suitors mentioned, including L Capital.
A takeover at Myer?
Myer’s struggles with Topshop/Topman and the local brand Sass & Bide have not deterred the department store group from aligning with British retailer, John Lewis.
Like Oroton, there is now speculation about a takeover play for Myer, speculation that has become stronger since Solomon Lew acquired a 10.8 per cent stake in on market purchases of the Australian Stock Exchange.
While Lew has indicated he has no intention at this stage to make an offer for Myer, he is now the retailer’s largest shareholder and has suggested he is likely to continue to add to his holding with further share purchases.
SFG in limbo
Also in play currently is the Specialty Fashion Group (SFG), which has received an initial $135 million takeover proposal from Al-Alfia Holdings, a Qatar-based investment company which also owns Harrods in London.
The takeover bid is currently in limbo due to complications related to probate assessments following the death of the father of Al-Alfia’s sole shareholder.
There is also a potential stumbling block for the bid if the largest shareholder on SFG’s books, NAAH, refuses to sell its 20.2 per cent stake. NAAH is an investment company owned by Cotton On’s Nigel Austin, and his cousins, Ashley Hardwick and Michael Hardwick.
Under the planned Al-Alfia takeover, SFG’s longstanding CEO would retain a shareholding in the retailer and continue in his current role. The overseas suitor may well prompt Austin to consider any potential benefit of a counter bid that could secure NAAH or another Cotton On-linked entity to control SFG.
However, Al-lfia’s 70 cents a share bids represents a healthy premium on the becalmed share price, with investors adopting a ‘wait and see approach’ to what may eventuate for the retailer, which operates 1,066 stores in Australasia, the United States and South Africa.
SFG’s brand portfolio includes Millers, Katies, Crossroads, Autograph, City Chic and Rivers and accounts for around 14.3 per cent of specialty womenswear sales.
ARJ up for sale
It is understood, although not confirmed by Naomi Milgrom, that ARJ Group Holdings, which includes the Sussan, Suzanne Grae and Sportsgirl brands, is to be sold.
Started by Fay and Sam Gandel in 1939 in Little Collins Street in Melbourne, Sussan became a leading fashion brand, expanding with the development of shopping malls.
Milgrom bought the business from family shareholders in 2003. As CEO, she had acquired Suzanne Grae in 1988 and Sportsgirl in 2000.
The Sussan Group has 550 stores in Australia and New Zealand and generates sales of around $470 million.
While the group is profitable, sales growth has been relatively modest over a number of years and, as with some of the other icon fashion brands in Australia, Sussan, Suzanne Grae and Sportsgirl have struggled to maintain momentum, albeit Milgrom’s brands have an estimated 9.3 per cent market share in the specialty womenswear fashion category.
A float on the horizon for RAG
The ARJ Group is apparently more interested in a trade sale than a public float of the chain in contrast to the Retail Apparel Group (RAG), which is currently undertaking an investor roadshow to generate support for a prospective $400 million public float after Easter.
RAG is owned by private equity firm, Navis Capital Partners and operates 386 stores across the Tarocash, yd, Connor, Johnny Bigg and Rockwear brands.
Andrew Reitzer, the former CEO of Metcash, has been overseeing the preparation of RAG for the listing on the ASX.
The retailer posted a 14.8 per cent lift in sales to $198.1 million for the first half of the 2017 financial year.
For the full 2016 financial year, RAG lifted sales by 15.4 per cent to $326.2 million.
Earnings growth has also been solid for the retailer, despite minor losses in the developing Rockwear and Johnny Bigg brands and investor attending roadshow presentations have been told the company has identified significant opportunities for new store rollouts.
Navis Capital Partners bought RAG from another private equity firm, Champ Ventures, in 2011 for $175 million with its advisers, Goldman Sachs and Fort Street indicating the business would realise $400 million on a public listing.
The latest contortions in the apparel category follow the acquisition by Noni B James Packer’s Pretty Girl Fashion Group last year in a deal worth around $75 million.
As a publicly listed company, Noni B was close to collapse in 2014, before being rescued by Alceon Group, an investment company established by former Babcock & Brown and JP Morgan bankers Phil Green and Trevor Loewensohn.
The bankers took control of Noni B in a $16 million deal and bought the 370-store Pretty Girl Fashion Group from Packer’s Consolidated Press, lifting Noni B’s annual sales from $110 million from around 200 stores to about $300 million from 600 shops.
The Pretty Girl Fashion Group included four fashion brands, Rockmans, Table Eight, BeMe and W Lane.
Pepkor gears up for overseas competition
In another major deal in apparel sales, the Pepkor-owned Harris Scarfe department store chain is rolling out the British department store brand, Debenhams, in Australia as well as introducing the selected ranges in its own Harris Scarfe stores.
Pepkor’s Harris Scarfe and Best & Less chains have struggled for profitability and the Debenhams move is designed to counter the entry of other international retail brands to the Australian market.
Given the experience of Myer with Topshop/Topman and Oroton Group with Gap, the Debenhams strategy is not assured of success, but Pepkor is confident it can boost sales for Harris Scarfe and secure a customer base in a chain of flagship stores under its own brand.
The first Debenhams standalone store will open in a 3,600sqm two level site in St Collins Lane complex in Melbourne later this year.
Woolworths, the South African retailer, has also moved to shore up its profitability with a restructure of its Australian interests by merging the David Jones and Country Road Group administrations in a regional headquarters based in Melbourne and overseen by David Jones CEO, John Dixon.
The Country Road Group of specialty chains includes Country Road, Trenery, Witchery, Mimco and the 75 store Politix menswear chain that Woolworths acquired last year.
There is now industry speculation that Woolworths might be interested in buying Milgrom’s three fashion brands, an interest that might well spark another joust between the South African retailer and Solomon Lew.