Green plans a £500m payout as he finds Arcadia on the high street

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The Independent Online

Watch Out Paris, here comes Philip Green. Having quickly shrugged off the disappointment of having his £9.1bn bid for Marks & Spencer foiled in July, the retail tycoon is planning to export Top Shop to Europe as his next retailing coup.

Watch Out Paris, here comes Philip Green. Having quickly shrugged off the disappointment of having his £9.1bn bid for Marks & Spencer foiled in July, the retail tycoon is planning to export Top Shop to Europe as his next retailing coup.

His expansionist plans were fuelled by yesterday's bullish results from Arcadia Group, Mr Green's Top Shop to Dorothy Perkins high street fashion empire. It saw operating profits soar 30 per cent, an £807m loan paid off four years early and the promise of a £500m dividend over the next 12 months shared between him, his family and HBOS, the bank that finances much of Mr Green's wheeler dealing.

So what is the secret of Mr Green's success that has left him in control of a debt free fashion chain two years after paying £850m for it having spent much of this year mulling a bid for M&S and now planning an overseas expansion drive in Europe? "I've been doing this for 30 years," Mr Green says. "I know every blade of grass of how the business works. I'm not guessing at it. It's a well oiled machine that runs at speed."

His relentless attention to detail has left Arcadia with a group of "world class brands", according to Mr Green, that he fully intends to exploit.

"We're looking at Europe for Top Shop," he said yesterday. "We're looking at going into European flagship stores, perhaps about half a dozen 30,000 to 40,000 sq ft stores."

Whatever Mr Green's fantasies about Paris and Milan the success of his retailing businesses, Arcadia and Bhs, comes down to a combination of three basic elements. The first is aggressive financial engineering akin to any ambitious private equity group. This is based on raising high levels of short-term debt used to buy ailing companies from stock market investors that is repaid or refinanced rapidly.

Second is a focus on boosting the amount of cash flowing into the group's coffers from high street stores which allows debt to be redeemed and hefty dividends to be paid out. This involves cutting out wasteful capital expenditure, stripping out overheads and the careful husbandry of cash flowing through the business. Waste is eliminated. Also crucial to the whole process is a streamlined, ruthlessly efficient supply chain and logistics operation. Finally, there is a relentless attention to the detail of retail.

Some analysts reckon that in Mr Green's case, 80 per cent of the money he has made in recent years is down to clever financial engineering and 20 per cent from brilliant retailing.

However, it is impossible to say quite what the split really might be. But there is no doubt that Mr Green and his team of buyers and designers have proved brilliant at spotting trends and getting the right stock, manufactured at low costs, into his stores and then into consumers' shopping baskets more quickly and efficiently than anyone else.

Last week Mr Green revealed that Bhs, his other retail business, had paid him and his family a dividend of £187.5m in the year to March. Over the next 12 months Arcadia will yield £500m in dividends, of which Mr Green and his family will receive £460m. The promised dividend is being paid in part because Arcadia is now debt free, having been originally lumbered with £807m of acquisition finance supplied by HBOS when Mr Green bought the business in 2002.

After completing the acquisition, Mr Green wasted no time in raising more than £220m in the form of mortgages on his flagship Top Shop store in Oxford Street, London, and other properties. This cash was used to repay a chunk of the HBOS loan. Such secured borrowing is far cheaper than the original acquisition finance.

"It's over 10 years. We amortise it as well. We are not just paying the interest on it," Mr Green says. "It's a good way of financing as well as keeping out of rent reviews and we keep the asset. If we wanted to be a highly leveraged venture capital investor I could take another £150m out of property from Arcadia but I don't want to do that," Mr Green says.

In the 12 months to August 2003, he was able to repay another £400m of bank borrowings leaving him about £280m to repay in the 12 months to August this year.

But the cash for these repayments has come thanks to the other two elements of Mr Green's modus operandi which are aimed, fundamentally, at improving margins and turning over the company's stock in stores much more rapidly.

Yesterday's results showed that Arcadia stores generated £364.8m of net cash. After paying items such as the group's interest bill and £47.5m of capital expenditure Mr Green was left with a positive cash inflow of £223.4m - plenty of cash from trading activities to help pay down debt.

But to generate that amount of net cash the stores have to trade successfully but also efficiently. It is no use having the right things on the shelves if they have cost an arm and leg to manufacture and ship. "It's not just about price but it's about speed to market. Our top 30 suppliers have efficient formula. It's about where you make it, how you ship it, how you warehouse it. Logistics have got to be razor sharp," Mr Green says.

Arcadia uses fewer suppliers under Mr Green who can operate at bulk in countries such as India, Turkey and the Eastern European states that improves costs throughout Mr Green's business. Arcadia leaves shipping and warehousing to suppliers often only paying for stock once it is safely in its own UK warehouses. He has cultivated key supply arrangements with retail entrepreneurs such as Richard Caring, the rag trade king who is bidding £120m for Wentworth golf club.

Critics argue Mr Green has simply taken a knife to suppliers' margins, leaving them with little choice but to comply given his share of the UK high street.

"With the best will in the world I've succeeded with eight brands. If it was that easy than why hasn't everyone else done it? It's just bullshit," he says.

The question of why other, struggling retailers don't follow suit is an intriguing one. Mr Green offers no explanation. That said, the likes of M&S are in fact adopting the Green model, at least in part. Stuart Rose, the M&S chief executive, is increasing the company's borrowing to hand back cash to shareholders and is trying to make the group's operations more efficiently run.

Operating profits at Arcadia were up 30 per cent to £296m in the 12 months to the the end of August, although top line sales were pretty much flat, increasing just 0.8 per cent to £1.66bn. However, in the seven weeks since 29 August the group has seen sales increase 6.7 per cent with like-for-like sales up 3.1 per cent. Gross margins were also up by 1.2 percentage points on the same period last year.

The high street has had a good September but the flat sales of the previous 12 months simply serve as a reminder that improving efficiency and driving down costs will remain a priority for Mr Green and all his rivals.

"People running this business are allowed more freedom and entrepreneurial flair. There is quick decision making," Mr Green says. "It is allowed to work, to ebb and flow without stopping and starting. I allow my people a lot of freedom."