Scale has been the question hanging over the head of Specialty Fashion Group’s (ASX: SFH) board and chief executive Daniel Bracken since unveiling a $31 million divestment of most of its portfolio on Monday.
More than $600 million in annual revenue and 750 stores will be transferred to new owner Noni B under the deal, leaving SFH with just one, albeit profitable, business.
Plus size brand City Chic will be the company’s new focus, bringing in $134 million in revenue for the twelve months to December 2017 across a portfolio of around 110 stores.
But Bracken doesn’t believe a lack of scale will hamper SFH’s efforts as it looks to expand the business at home and abroad.
“There’s not a need for scale to drive the benefits and health of the City Chic business,” Bracken told Inside Retail.
The former Myer deputy chief, who was brought on several months ago to assist with finalising a structural review that ended in Monday’s sale, said there’s plenty of low hanging fruit to keep City Chic’s appetite for growth busy in the coming years.
That will include further store expansion in Australia and New Zealand, as well as more investment in international operations through drop shipping operations in the US, UK and possibly other markets.
With $19 – 20 million in underlying earnings before interest, tax, depreciation and amortization (EBITDA) expected to be generated from the plus size business in FY18, its easy to see why shareholders have sent a rocket up SFH’s share price over the last 48 hours, increasing it 57 per cent to a 10-month high.
SFH will be a smaller business, but it will no longer be a victim of Australia’s rapidly changing retail landscape.
Unlike the majority of SFH’s portfolio City Chic is a fashion-focused apparel brand targeted at young women aged between 18 – 35. Online sales are 37 per cent of its business and fast-growing wholesale operations are generating capital light wins around the world.
But Bracken said City Chic’s success in recent years has been hampered by SFH’s broader position as it has been unable to realise its full potential– until now.
“We’ve had a business that as a group was broadly under capitalized for a number of years, and yet within it we’ve got a shining star that needs to blossom and grow,” he said.
“This decision allows us to really get behind the City Chic business.”
Aside from international expansion local store growth will also be a priority for the brand moving forward, including trials of larger 260sqm stores.
Bracken has undertaken his fair share of landlord negotiations since joining SFH but does not believe a lack of scale will hold back City Chic’s negotiating position within Australia’s largest centres.
“City Chic adds greater credibility to the portfolio than scale did,” he said. “It’s a highly successful business in a niche sector with good growth.”
Euromonitor International consultant Bettina Kurnik said the move would be a move away from SFH’s traditional demographic, but not for the first time.
“Concentrating on a more youthful, fashion-forward demographic through its plus-sized City Chic brand means that Specialty Fashion Group is moving away from its traditional demographic; however, it’s not the first time has had a drastic shift in direction, having divested its discount variety business in 2006,” she said.
Further ahead, Bracken said SFH will likely be open to acquisitions in the future after focusing on City Chic for a period, which would enable it to grow a new portfolio of brands that compliment a successful foundation.
Although Bracken himself won’t be around to steer any such deal, he’s slated to leave the business once the handover process is completed, which he expects to occur in October
In his place City Chic boss and company veteran Phil Ryan will step into the captain’s chair to steer SFH’s newfound future.
As for the divested brands, which Noni B will now try to turnaround, Bracken said substantial investment would have been required to fund a SFH led recovery effort.
“Just go look at some of the stores in our brands and you’ll see immediately that the business needed to inject significant capital into the old portfolio,” he said.
“It would have taken a lot of cash and a lot of time to execute the redirection of all five of those brands.”
Noni B has not disclosed what it plans to invest in its new businesses, but chief Scott Evans said they will put in what’s necessary to get back to black.
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