Retailer BHS Faces Uncertain Future

High street retalier BHS has collapsed, threatening 11,000 jobs and 164 stores - the latest victim of the rise of e-commerce

Karen Kwok 25 April, 2016 | 5:39PM
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British department store chain British Home Stores entered administration today, threatening up to 11,000 jobs and the closure of 164 stores. This 88-year-old privately owned company will be the largest retailer to fail since Woolworths went under in 2008 at the height of the financial crisis.

BHS’s administrators Duff & Phelps said in a statement on Monday that the shareholders of the company had been in negotiations to find a buyer for the business however unsuccessful. As a result the company’s directors have “no alternative” but to file for administration to protect it for all creditors.

"In addition property sales have not materialised as expected in both number and value. Consequently, as a result of a lower-than-expected cash balance, the group is very unlikely to meet all contractual payments,” the administrators added.

BHS has debts of more than £1.3 billion, including a pension fund deficit of £571 million, which proved a major stumbling block in last-ditch rescue talks over the weekend.

It has been reported that rival retailer Sports Direct International (SPD), is in talks to buy some of BHS's 164 stores but it is understood that any company would only buy the shops if it did not have to take on the company’s pension deficit.

BHS was bought in 2015 by a consortium called Retail Acquisitions, headed by Dominic Chappell, for £1 from retail entrepreneur Sir Philip Green, the owner of the Arcadia retail empire. Green bought BHS for £200 million in 2000.

BHS’s Collapse: Gloom for High Street Retailers

BHS’s collapse is the latest victim in the wider trends facing the high street retail industry. 

The General Retailers sector benchmark has fallen 8% year to date. The benchmark currently valued at £71 billion, including brands such as Marks and Spencer Group PLC (MKS) and Next (NXT), according to AJ Bell, the UK online investment platform.

Poundland (PLND), Mothercare (MTC) and Bonmarché (BON) have all fallen by more than 40% over the past 12 months after weak trading updates.

Russ Mould, investment director at AJ Bell said all of the poor performance shows how hard it is to get to the top of the retailing food chain, saying: “As firms have to contend with price sensitive, internet savvy consumers, as well as cost pressures created by the Living Wage and the need to build and maintain a state-of-the-art website.”

Morningstar analyst Adam Kindreich agrees, saying even the large clothing retailer, Primark faces potential risk to stay at the top of the retailing food chain; “Primark has specific risk linked to its status as a fast-fashion clothing retailer.

“Fashion risk is foremost, but the customer base is also almost entirely composed of a similar young demographic. If something were to constrain the purchasing power of this group, like a large jump in youth unemployment, Primark's sales could be endangered.”

Online sales are a future opportunity to generate higher sales, Kindreich added, and he believed Primark would eventually decide to exploit this additional channel, which would help drive further its sales growth.

Primark is part of the Associated British Foods Plc (ABF), and the company shares has fallen 1% year to date. The stock is currently rated as a one-star overvalued stock by Morningstar analysts. Primark is being hit by the softness of U.K. consumption and is less optimistic about the long-term outlook for sales growth, Kindreich said.

Online Retailer Boom

However, online retailers have done remarkably well as e-commerce replaces traditional bricks and mortar retailers.

ASOS Plc (ASC) the online retailer has gained 1.2% year to date. In mid-April 2016, the company reported growth in profit in the first half of its financial year, driven by good results in both the international and UK divisions, and said it is on track to deliver full-year results in line with guidance.

Boohoo.com (BOO) another online retailer has jumped more than 50% in the past year. The stock has risen 5.3% at 4.30pm today.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ASOS PLC2,530.00 GBP0.00Rating
Associated British Foods PLC1,944.50 GBP0.00Rating
Boohoo Group PLC164.25 GBP0.00
Frasers Group PLC707.00 GBP0.00
Marks & Spencer Group PLC243.80 GBP0.00Rating
Mothercare PLC19.50 GBP0.00
Next PLC8,330.00 GBP0.00

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk