For Subscribers

Get the complete article now!

This interview is a small excerpt from a comprehensive interview published in The Wall Street Transcript as part of the Consumer Sector, available at (212/952-7433) or http://www.twst.com/sectors/consum.html

TWST: Let us begin with some history about the Company – the origin and important milestones to date?

Mr. Hall: The origin of the company goes back over 100 years, but let's start in January 1998 when the Burton Group demerged Debenhams, which is a department store business in the UK, and Arcadia Group was created from the balance of the old Burton Group. At that time the company comprised nine retail brands in the UK market. In the summer of 1999 the company acquired a further five brands from the breakup of the Sears retail business in the UK. Then in the autumn of 1999 the company ran into difficulties primarily because the UK clothing market went into a very serious and severe downturn. We saw some very significant price deflation in the UK market. We witnessed the emergence of the discount sector in a big way with both supermarkets and retail formats like Matalan suddenly bursting on to the scene as a feature in consumers' minds. There was also the start of the explosion in mobile phone and electronic gadgetry and clothing as a product area went right out of fashion. The company was then confronted in early 2000 with the need to refinance, which we successfully completed on the back of a quite radical plan to restructure our retail store portfolio. Market sentiment towards the company continued to harden and the share price fell to a low in October 2000 of 38 pence a share. At that stage there was a management change. Our new Chief Executive was appointed to the company in the autumn of 2000 and the group unveiled its recovery strategy in the spring of 2001. Since that time we have seen recovery in earnings, improvement in cash generation and a recovery in market sentiment towards the stock, which now stands at around 3 pound 95 pence per share. So we have had quite a big turnaround.

TWST: Can you describe your market, your position within that market and the customer base that you seek to serve?

Mr. Hall: We are entirely focused on what we would call the middle market of the UK retail scene. There are really five major players in the middle market. There is Marks & Spencer, who are the largest clothing retailer in the UK. But they are also very much involved in other aspects of the market such as home, gifts and food. There is Next, which has been very successful over the last 10 years. But it's a lifestyle brand focused on men, women and children - and it’s a brand that the consumer either loves or hates. There is Debenhams, which we demerged from the Burton Group in January 1998, that’s the premiere family department store in the UK. And then there is British Home Stores (BHS), which is a more price-driven variety store. Then there's us, Arcadia Group, the number two in terms of market share in adult clothing. Our focus is very much on fashion. We see our role as providing fashion at outstanding value for that middle market.

TWST: Where do you see your brands within the market?

Mr. Hall: We now have six brands. As a business and as part of our recovery strategy we are now focusing on six major brands that fall into three main sectors of the middle market. We have what we call our mainstream brands - a business with a turnover of around 700 million pounds sterling in the UK. And that comprises two brands, Burton and Dorothy Perkins, which between them trade from nearly 900 outlets. They are partner brands in the middle market aimed at 25-45 year old men and women who care about how they look. And two thirds of Burton stores are co-located with Dorothy Perkins so that husbands and wives, boyfriends and girlfriends, partners can shop together in a combined men’s and women’s store. We also have our speciality business unit with a turnover of around 400 million pounds and that has two brands within it. We have a brand called Evans that has around 330 outlets, which is the market leader in plus size women’s clothing in the UK. It serves all the clothing needs of women, which in UK terms means size 16 or larger. And then a brand called Wallis, which trades around 250 outlets, aimed at the more mature 35 plus woman who’s a bit more aspirational and a bit more interested in the fabric and fabrication of the product she buys. And then finally we have our young fashion brands Topshop/Topman and Miss Selfridge, which basically own the 18-25 year old young fashion market in the UK. They are absolutely the leaders. Together they turn over somewhere between 500 and 600 million pounds a year and they are very much aimed at young customers who want up-to-the-minute fashion style.

TWST: When you look at your balance sheet what would you point out if you were talking directly to an investor?

Mr. Hall: I would point out that we have tightened our working capital and we have generated a considerable amount of cash. Most of the property that we occupy for our retail stores is leased, so the company as a result of that has high operational gearing but we have improved the position by disposing of nearly a third of our store portfolio over the last two years. We still have quite high operational gearing as a business and obviously a lot of focus is going into managing the occupancy cost of our stores and all of the elements of our fixed cost base. Our fixed charge cover has improved from one time two years ago to one-and-a-half times now. And we expect that to move toward to two times cover over the coming years as our operating margin improves and our profitability grows.

TWST: When you look may be four or five years down the road - where do you see your company then?

Mr. Hall: It's all about demonstrating that we can sustain and maintain our progressive improvement in the earnings per share of this company. Historically that is not something previous management teams have achieved here. So I think our goal is to convince the market that the model we are evolving for this company is sustainable and that we can protect and preserve and indeed grow earnings even in the tougher times. No doubt this company is going to face tougher market conditions. I think our challenge is to demonstrate as a management team and as a business that we have got the strength of brands and the operational resilience to maintain or grow earnings in whatever market conditions that we have to face. That would be a real achievement for this company.

TWST: What essential message about your company would you like to communicate?

Mr. Hall: That it’s a changed business. Anyone who followed Burton Group in the early 90s or even Arcadia Group in the late 90s will see that Arcadia Group today is a changed business. We have fewer brands. We have fewer stores. We operate from considerably less space, and have reduced our rent bill. We have virtually eliminated our financial gearing and reduced our interest cost and we have significantly improved sales margin and profits. So we are looking at a different business from the one people might have analyzed two, three or four years ago.