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U.K. Stores Face Most Insolvencies Since 2008 Amid Slump: Retail

Pedestrians pass an HMV Plc store on Oxford Street in London, U.K., on Tuesday, July 26, 2011. The U.K. Photographer: Matthew Lloyd/Bloomberg

U.K. retail insolvencies may reach the highest level in four years as weak Christmas sales leave chains struggling to meet rent payments due this month, according to restructuring firm AlixPartners LLP.

“We are likely to see a number of retail collapses early in the new year and it could include some much-loved names,” Sanjay Bailur, managing director of the advisory firm’s U.K. unit, said in an interview. The outlook is “worse than the last three or four years.”

A disappointing Christmas season may be the nail in the coffin for retailers who have been barely hanging on for years. Many in sectors like value clothing, books, music, and toys “have lost their focus and have ended up with too many unprofitable stores, resulting in failed expansion plans, both domestically and overseas,” Bailur said.

Thorntons Plc, a U.K. confectionery maker, fell the most in at least 22 years today after saying annual profit will miss estimates. Earlier this week, HMV Plc, the U.K.’s biggest CD and DVD retailer with more than 250 stores and 163.7 million pounds ($257 million) of debt, said that insufficient sales may cast “significant doubt” on its future. Outdoor clothing chain Blacks Leisure Group Plc put itself up for sale this month after shares plunged 95 percent in 2011.

Consumer Confidence

U.K. consumer confidence fell to the lowest level since the depths of the financial crisis in 2009 driven by concern about a financial recovery and the euro region debt crisis, according to GfK NOP Ltd. U.K. retail sales slumped 1.6 percent in November, the most in six months, according to the British Retail Consortium, as shoppers held out for discounts and cut back on festive spending amid warnings of a looming recession.

Quarterly rents, which U.K. chains pay three months in advance, are due on Dec. 25 for the majority of retailers. Landlords and bank lenders anticipate that stores will have lucrative Christmas revenue in the till by then, said Jonathan De Mello, head of retail consultancy at property broker CB Richard Ellis Group Inc. Retailers who have had a tough Christmas may not survive, he said.

Thorntons tumbled 39 percent to 23.25 pence in London. Both HMV and Blacks fell to all-time lows on Dec. 19.

The FTSE All-Share General Retailers Index is down 16 percent this year, compared with a 9.2 percent decline in the broader index. Game Group Plc is the worst performer with an 89 percent drop, followed by Mothercare Plc, whose chief executive officer stepped down in October.

Debt to Equity

HMV and electronics retailer Game Group have the worst debt to enterprise value -- the sum of equity and net debt -- of U.K. listed retailers valued at more than 10 million pounds, according to data compiled by Bloomberg. That could leave shareholders open to being “wiped out” if things go wrong, according to Philip Dorgan, an analyst at Panmure Gordon in London.

“The December quarter rent date will be a catalyst for a lot of the retailers,” De Mello said. “It’s a foregone conclusion in many respects that some retailers will pare down stores, some will go into CVA and some will potentially cease to exist entirely.” A CVA is a company voluntary agreement, where creditors are offered compensation in return for ending leases.

“It will definitely be as bad as 2008 in terms of store closures,” he said.

AlixPartners, which is advising Makro, a U.K. self-service wholesale business owned by Metro AG of Germany, said middle-market clothing chains make up the majority of companies seeking advice.

Woolworth’s, Peacock

In 2008, the 815-store Woolworth’s Group Plc chain was the highest-profile casualty of the consumer downturn after 100 years in business. Barratts Priceless Group, a 191-store shoe chain, went into administration -- analogous to Chapter 11 bankruptcy in the U.S. -- on Dec. 8 and Sky News reported fashion chain Peacock may close 200 stores as part of its restructuring. Billionaire Topshop owner Philip Green said he is planning to cull about 250 of the Arcadia Group Plc stores.

“Most retailers have already done the basic ‘lemon squeezing,’ cost reduction” after the 2008 slump that followed the collapse of Lehman Brothers Holding Inc., AlixPartner’s Bailur said.

The focus now is reducing costs through more “intelligent approaches” like adding more staff in-store to encourage customers to trade up within ranges, increasing availability of high turnover products and reducing supply-chain cost inflation.

Instead of pre-packaged administration plans, which can damage the brand’s reputations and result in the wrong stores being closed, he encourages renegotiating with landlords, finding exit strategies for individual leases and assessing demand for potential occupiers.

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