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Arcadia Group (UK)

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Arcadia Group is the UK's #2 clothing retailer (behind Marks & Spencer), home to a collection of seven chain store brands led by Topshop and Burton. Known until the beginning of 1998 as Burton Group, the business has changed shape several times since its original heyday in the 1980s. After performance slumped in the 1990s, Burton went on a crash diet, spinning off several brands including department store Debenhams to create a leaner and more focused group. In 2002, the revived and renamed business was acquired by retail entrepreneur Philip Green, whose portfolio already included rival Bhs. Green engineered a dynamic return to form, building Topshop into one of the UK's most fashionable chain brands, and expanding its presence into other markets, most recently the US. Although both owned by Green, Arcadia and Bhs remained separate businesses until summer 2009, when they were merged in a bid to repair Bhs's declining fortunes. In 2015, Green - now Sir Philip Green - sold the still-struggling Bhs to a consortium of investors. Its subsequent collapse generated a tidal wave of negative publicity, especially for Green personally. That was followed by a sharp decline in the group's financial performance from 2017 onwards.

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Brands & Activities

Having delivered spectacular growth in the first years following Philip Green's takeover, both Arcadia and Bhs shown a marked slowdown in performance in the mid-2000s, reflecting the generally difficult economic environment as well as the limits of Green's cost-saving programmes once all available savings have been made. Bhs in particular remained flat, with the result that it was folded into the larger Arcadia Group in summer 2009. Green finally lost patience with that business in early 2015, selling off Bhs to a consortium of private investors for a nominal sum (with disastrous results - see below).

A series of expansions and contractions have left Arcadia with a focused portfolio of brands, targeting several important niches in the UK clothing market. The best-known brand by far in the portfolio is Topshop, now the UK's leading retailer of teenage and young women's clothing. It is partnered by men's outlet Top Man. Once considered a downmarket brand, Topshop's star has risen dramatically since the late 1990s, and it is now regarded as one of the UK's most fashionable chain store brands. In 2006, Philip Green announced plans to launch a new signature fashion label for Topshop designed by supermodel Kate Moss (who was reportedly paid £3m to lend her name and support to the line). Soon afterwards, Topshop's brand director Jane Shepherdson, widely regarded as the mastermind of the chain's reinvention, abruptly quit the company, prompting speculation that she may not have been consulted over the Moss appointment. However Green and Shepherdson both subsequently denied any falling-out. The Moss collection launched to considerable press attention in Spring 2007, and continued to issue new annual collections until 2010. A new collection was launched in 2014, possibly in advance of expansion of the chain into China.

Green also negotiated a deal to sell the line through New York fashion store Barneys, and opened the first New York outlet of Topshop in early 2009. Other stores followed in Los Angeles and Las Vegas. In 2011, the first outlets opened in Canada through a licensing deal with local retail giant HBC, and Topshop launched concession shops in upscale US department store Nordstrom from 2013. By the end of 2013, more than 40 Topshop and 18 Topman outlets were operating in Nordstrom stores.

In 2012 Arcadia sold a 25% stake in Topshop and Topman to US investment company Leonard Green & Partners, whose other investments include Neiman Marcus and J Crew. The deal valued Topshop/Topman at £2bn. Green retained management control. However, in 2018, the US investor wrote down the value of its shareholding substantially, and Arcadia bought back the shares in 2019 for an undisclosed sum.

In 2015, the group sold Australian rights to Topshop and Topman to a local franchisee, part-funded via a minority shareholding by department store Myer. However, performance was weak, and the franchisee went into administration in 2017. Arcadia reacquired full control of selected outlets in Australia later that year.

In 2016, the group unveiled Ivy Park, the first range of clothing from Parkwood Topshop Athletic, a 50/50 joint venture with singer Beyonce. It managed global distribution for the brand through Topshop outlets. That partnership was terminated, though, in 2018 after negative publicity around Philip Green.

Miss Selfridge sells a similar range of fashionable clubwear and accessories to younger shoppers. Burton and Dorothy Perkins offer affordable clothing for mainstream - and slightly older - men's and women's markets respectively, while Wallis inhabits a slightly more upscale segment of the women's market. Evans is the UK's foremost larger-size clothing chain. In a clean break with the traditionally staid perception of this segment of the clothing market, the group launched a range of extreme designs from singer and style icon Beth Ditto in 2009. Outfit is the banner for larger out-of-town warehouse stores which sell a cross-section of products from across all the group's main chains. Towards the end of 2015, the group began testing sales of selected clothing through larger outlets of Tesco.

In 2005, Arcadia acquired the UK outlets of French retail group Etam, a close competitor to Dorothy Perkins, and converted them to the group's existing brands. Etam's children's clothing brand Tammy was transferred to Bhs, the rival fashion retail group acquired by Philip Green from failing group Storehouse in 2000. In 2014, the group acquired a 25% stake in Australian e-tailer MySale which operates a network of sites mainly in the Asia Pacific region selling discounted apparel and homewares in daily flash sales. The main Australian site trades as OzSale.

By early 2015, Arcadia controlled almost 2,800 stores in the UK. The biggest chain by footprint is Dorothy Perkins with just under 600 stores, followed by Burton and Evans, both with around 360. It has a combined share of around 9% of the UK fashion retail market. The group also now has a sizeable international presence, mostly through franchises or partnerships with local retailers. It began that expansion in 2006 to compete with rivals H&M and Zara. The group's brands are active in several Central and Eastern European territories, and there are also operations in Chile, the Middle East, and Asia. By mid 2017, there were more than 1170 additional stores in 36 other countries from Armenia to Vietnam.

Topshop now accounts for just under half of Arcadia's sales, and around the same percentage of profits, followed by Dorothy Perkins. A sharp improvement in financial performance allowed Philip Green to pay back the £808m he borrowed from HBOS to buy the business four years ahead of schedule in 2004. He awarded himself (or rather his wife, in whose name the shares are held for tax reasons) a personal dividend payout from Arcadia of £460m in 2004, and of £1.2bn in 2005. However performance slowed dramatically between 2006 and 2008.

Until 2009, Bhs operated as an entirely separate business. It sells a similar range of affordable mass-market apparel, as well as home furnishings and appliances, through a chain of around 170 stores nationwide. It has experienced more difficult trading since 2005. Despite Green's promise to increase the store's revenues by £250m during the year to March 2006, sales actually fell by almost 2% to £861m, with pretax profits more than halving to £42m. For the year to 2008, profits were £30m on sales of £860m. Green was reported to have engaged in preliminary talks during 2007 to sell Bhs to a group headed by Allan Leighton, former Asda boss and current chairman of Royal Mail, but no deal was agreed. In 2009, he announced plans to merge Bhs into the Arcadia Group in order to reduce duplicated costs. That process was completed in July, and selected Topshop and other Arcadia apparel was sold in Bhs outlets.

Yet there was only limited improvement in the fortunes of the struggling chain. Finally, in April 2015, Green sold the business to Retail Acquisitions Ltd, a newly formed consortium of private equity investors with minimal retail experience. The deal price is thought to have been as little as £1. Bhs struggled on for a year before collapsing into administration in April 2016. No buyer was found and all stores closed a few weeks later with the cost of 11,000 jobs. An additional concern was a huge deficit at BHS's pension fund. Part of that shortfall will be absorbed by a state fund, paid for by taxpayers, but questions were raised over the moral responsibility of the Green family to contribute additional cash to the fund. By October that year, Green had made no concrete proposal to make up the shortfall, prompting MPs to pass a unanimous motion recommending that his knighthood be withdrawn. He eventually agreed to inject £363m of his money into Bhs's pension scheme. A further £30m was paid by Arcadia to Bhs's creditors.

In 2008, Green agreed to acquire a controlling 28.5% stake in Moss Bros, the menswear chain best-known for its sale and rental of formal back tie and morning suits. He sold on the shares just two weeks later to one of that company's main suppliers, Berwin & Berwin.

Financials

Combined sales for holding company Taveta Investments for the year ending August 2010, including Bhs for the first time, rose 40% to almost £2.8bn. Pre-tax profits rose 6% to £213.2m. However the following year proved much more challenging. Revenues to 2011 fell 3% to just under £2.7bn, but the group reported an aftertax loss of £123m, including a large charge for impairment. It also said it would close up to 260 under-performing UK stores over the next few years. Revenues for the year to 2012 were more or less unchanged at £2.68bn, but the group was back in the black with a net profit of £70m. Revenues for subsidiary company Bhs Ltd slipped 5% to £700m, with a net loss of £82m. For the year ending 2013, Arcadia revenues edged up to £2.74bn on the back of expansion, but like-for-like sales were down almost 3%. Pretax profits soared to £481m, including the proceeds of the sale of shares in Topshop and Topman.

For the year to August 2014, Arcadia Group reported statutory turnover of £2.03bn, slightly down on the year before on a comparable basis. Pretax profits more than halved to £275m, excluding the prior year gain from the sale of Topshop shares. Those accounts excluded Bhs, which reported turnover of £668m, also down slightly, and increased pretax losses of £85m. Top Shop Top Man Ltd, consolidated into Arcadia Group, alone reported turnover of just under £1.0bn and pretax profit of £107m.

For the year to August 2015, Arcadia Group reported statutory turnover of £2.07bn, up 2%. Best performance came from the group's US partnership with Nordstrom, where sales through instore concessions jumped by 50%. However like for like sales across the whole group were down a little under 1%. Careful cost control resulted in a 6% lift in operating profit excluding exceptionals to £252m.

For the period to August 2016, Arcadia's first full year after selling Bhs the previous April, pretax profits slumped by almost 80% to just £36.8m. That included a £129m charge for costs associated with the Bhs sale and the ensuing PR scandal. Group turnover was down 17% to £2.02bn, reflecting the sale of Bhs, but also slippage among the group's remaining retail brands. Separate accounts for Topshop/Topman, which is part-owned by investment group Leonard Green & Partners, reported a 2% decline in turnover to £991m and a 22% fall in pretax profits to £84.6m.

Green's personal ownership of the business makes him the UK's largest private retailer by some distance. He credits the revitalisation of the business to his decision to return devolved management control of the individual brands to a team of brand directors. Together, Green and his wife Tina - in whose name the Arcadia ownership is registered - rank as one of the UK's wealthiest couples with a net worth estimated by the Sunday Times newspaper at £2.7bn in 2017.

Background

Burton's was originally founded in 1904 by Moshe Osinsky, a Jewish refugee from Lithuania who had arrived in the north of England a few years earlier. Osinsky changed his name to Montague Burton, and opened a tailor's shop in Chesterfield. By 1910, he had 14 shops in and around Sheffield and Leeds. On the outbreak of World War I, the company secured a huge government contract to supply army uniforms, and prosperity continued into the early postwar period. Business boomed as recently demobbed soldiers created a huge market for everyday men's clothing. By the early 1920s, sales had grown to over £1m, and the company floated in 1929. Those additional funds paid for further expansion and by the 1930s Burton was a household name throughout the country. The business continued to expand until there were more than 600 outlets nationwide by the late 1940s. By the time its founder, now Sir Montague Burton, died in 1952 the company was the world's largest menswear retailer.

In 1946, Montague Burton had also moved into the womenswear market, acquiring the Peter Robinson fashion chain. In 1964, Peter Robinson launched a spin-off chain, Top Shop, targeting fashion-conscious "swinging 60s" women. The company, now Burton Group, continued to expand into different niche areas, acquiring outsize fashion chain Evans in 1971 and Dorothy Perkins (founded in 1919) in 1979. In the 1980s, Principles was launched to provide fashionable clothes for working women. However the hostile takeover of department store giant Debenhams in 1985 after a bidding war against Mohamad Al-Fayad, along with speculations in the property market, finally stretched the group too far. Performance slumped in the recession of the early 1990s. Harvey Nichols, acquired as part of Debenhams, was sold in 1991. In a bid to extend its coverage the group moved into mail order mid-decade, acquiring Innovations (later sold to GUS), Hawkshead and Racing Green. In 1997, the decision was taken to demerge Debenhams as an independent company, a process completed a year later. The main business rebranded at the same time as Arcadia Group. Although the group regained its stability in the early 2000s it was increasingly identified as a takeover target.

A brash and aggressive self-taught businessman, Philip Green had first made his name in the fashion industry during the 1980s, buying and selling the Jean Jeanie denim retail chain at a huge profit before mounting a takeover of quoted discount clothing retailer Amber Day towards the end of the decade. Forced out of that company by shareholders in 1992 as a result of a downturn, Green began a new career as a corporate raider, buying a series of different struggling chains, turning them around and selling them on at a handsome profit. He made his first acquisitions in 1994, department store chain Owen Owen and discount menswear chain Mark One. Over the next few years he picked off a series of other chains from the ailing Sears fashion group, which was steadily divesting its huge portfolio of different UK stores.

In 1997 and 1998, Green acquired Olympus Sports and Shoe Express from Sears, turning them around and then selling them on to other owners. In 1999, after a brutal takeover battle, he acquired for a knockdown price what remained of Sears, including mail order giant Freemans, and chain stores Wallis, Miss Selfridge, Warehouse, Richards and Adams. Over a matter of months, all these too were sold on, earning Green an estimated £180m profit. Freemans was sold to Otto Versand of Germany, Adams to management, and the Sears womenswear chains to Arcadia. This left Green free to pursue a new target. After making a first tentative run at Marks & Spencer, he set his eyes instead on another legend of the British high street, Bhs.

Bhs had been founded in the late 1920s as British Home Stores, a single outlet in south London selling a variety of home products and clothing, with all goods priced at less than a shilling. In 1931 the business went public and expanded steadily, eventually abandoning its low-price policy after World War II in favour of well-made but still affordable clothing. In 1986 the company was acquired by Terence Conran's Habitat Mothercare group to form Storehouse, and was relaunched under the name Bhs, the acronym by which it was already widely known. However Storehouse struggled to compete with other retailers and, following a series of boardroom battles, was broken up in 2000. Green's offer of £200m for Bhs included more than £50m of his own money, and he was able to engineer a dramatic turnaround of the business in just 18 months, tripling profits, and making himself another fortune in the process.

That success earned Green new respect in the business community, giving him greater freedom to make even more ambitious acquisitions. Now he turned his attention back to Arcadia. Despite a considerable improvement in performance since the early 1990s under new CEO Stuart Rose, Arcadia was effectively considered to be in play after fighting off a takeover bid from Icelandic retail group Baugur. The company had already restructured its portfolio, having spun off several brands, including Warehouse and Principles, into a joint venture with managers under the name Rubicon Retail. After a series of to-and-fro bids during the summer of 2002, Green finally won over Arcadia's shareholders with an offer worth £850m. He sold off the group's remaining shares in Rubicon following the successful takeover.

Two years later he mounted a new raid on Marks & Spencer, now under the management of former Arcadia chief Stuart Rose. After several months of occasionally angry sparring with the M&S board, Green abruptly dropped his takeover bid in summer of 2004. (See Marks & Spencer profile for details).

Last full revision 24th November 2017

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