The Top Man and his plan
Demerging the sprawling Burton clothing group could help unlock profits, writes Nick Gilbert
Sunday 13 July 1997
At one point last week, Mr Hoerner added pounds 226m to the stock market value of Burton Group when he unwrapped a plan to split the Debenhams department store chain from the rest of the sprawling high street retail empire he runs.
Burton shares promptly rose 15p, to the delight of Mercury Asset Management which has backed Hoerner since he took over as chief executive in 1992. MAM holds 20 per cent - one of its largest holdings - worth pounds 371m.
Hoerner will dismantle the group structure and shareholders will end up with separate shares in a renamed Burton Group and in Debenhams. "After we remove the holding company superstructure there is no reason why Debenhams should own the rest of Burton or vice versa," says the 57-year-old American retailer.
He will move closer to street level as chief executive of the multiple fashion chains, from the struggling Burton Menswear to the successful Evans women's shops via Top Shop, Dorothy Perkins and Principles. In the six months to 1 March this year these businesses made profits of pounds 43.5m on sales of pounds 563m.
"This is not a brilliant performance on a world scale even though it looks good compared with the past," says Hoerner, an action man who used to hunt with the Heythrop and pilots one of the two aircraft he part-owns.
"The multiples are hardly the strongest brands on the high street," says John Richards, retail analyst at NatWest Securities. "And in terms of sales per square foot, Next and Marks & Spencer are clearly a lot better with a stronger customer franchise, though BHS and Littlewoods are a lot worse."
Hoerner will part company with Debenhams, which he ran from 1987 to 1992. His hiring then, and the earlier purchase of Debenhams, were two of the few smart moves made by Sir Ralph Halpern. He is also waving farewell to Stuart Rose, a man widely liked by City analysts, who was previously running most of the multiple chain. Rose has lost out badly though he will collect a huge pay-off. "I offered Stuart a role in the new company but he chose not to take it," says Hoerner. That is not surprising; Rose would not have played second fiddle to Hoerner in plans to have three executives of equal status - to each other, not to him - report to the boss.
The 92 Debenhams department stores will be left alone, continuing to be run by Terry Green who is opening more stores and revamping old ones as part of a drive to add 20 per cent more selling space. Debenhams makes a lot more money from its more upmarket customers. In the first half profits were pounds 72m on sales of pounds 610m.
The demerger announcement was timely. Between 1992 and January this year, Burton shares soared from 30p to 162p but slipped back to make an inglorious exit from the FT-SE 100 - bad news for Hoerner, whose annual pay of pounds 915,000 is dwarfed by options worth almost pounds 3m.
In May, Burton's profit figures failed to impress. And with rising interest rates threatening the retail trade, Hoerner tried to arrest the slide by showing off the new Debenhams stores in Dublin and Leeds to retail analysts in the City. "Even that didn't do anything for sentiment," says Nick Bubb, retail analyst with Societe Generale Strauss Turnbull.
But the demerger announcement worked wonders, though not all analysts share Mr Bubb's enthusiasm. He says the demerger is a case of "one plus one, making two point three".
"I am underwhelmed by it," says John Richards of NatWest Securities. "I don't think Burton is a much better investment now than it was before." He reckons the current share price of Burton, which ended the week at 124p, is about right.
Others reckon Burton is worth closer to 150p. On the City's slide rule the demerged Debenhams is worth at least pounds 1.4bn, valuing likely profits at around 15 times earnings, a reasonable multiple for a business growing profits at 20 per cent-plus a year.
Knock the pounds 1.4bn off Burton's current market capitalisation and the entire group of fashion shops is valued at only pounds 400m - well under half the pounds 1bn of Nico denim jeans, T-shirts, Evans size 18 dresses and the rest that sell off the hangers each year.
A Hoerner fan compares that value with Next, like Burton a style victim in the 1980s but long since turned into the wonder stock of the 1990s in the pounds 23bn UK clothing market. The stock market likes Next so much it is valued at well over twice annual sales.
Herein lies the key to Hoerner's plans. Cynics scoff that the demerger is just a bit of financial engineering which does not of itself add any value, as Lord Hanson found when he dismantled his company. Hoerner counters that the holding company superstructure "was a fashion of the 1980s that added negative value to the group" so there is every reason to simplify and strip down the group into its two obvious components.
But no one doubts that the planned reorganisation of the multiples is vital. Indeed, Hoerner is sniped at for delaying. "There is no reason why the company shouldn't have restructured before this," says Mr Richards. Hoerner says simply that Burton was just not sufficiently healthy to undergo major surgery before. Infighting at the top might also have been a factor.
Until now each of the chains has had its own finance, personnel and marketing divisions - an expensive duplication that makes no sense. Hoerner will centralise these tasks, cutting costs and leaving the heads of Dorothy Perkins, Evans, Principles and Burton Menswear free to concentrate on their brands. "The managing directors will have more time to spend sourcing better products and selling merchandise," says Hoerner.
It is clear that in this process Rose will be only the most visible casualty. Hoerner won't say how many jobs will go, how much the rejig will cost and how much overhead it will trim.
But there could be considerable job losses. Mr Bubb says: "The cost-cutting exercise could yield savings of pounds 20m to pounds 30m a year, considerably higher than the market is expecting."
Asked whether he hopes to be seen as a hero for turning the multiples around, Hoerner says: "This would be the fourth time I've turned a business around, and if I do it I won't complain about being called a hero. I'm betting my reputation on it."
There is a more jaundiced view that in opting to run the non-Debenhams operations Hoerner has pulled out another plum for himself. It might be easier to boost profitability at the fashion chains than at Debenhams where, as Hoerner says, "Terry Green has already done an excellent job".
Hoerner says simply: "I don't think you can find anybody who reckons running a retail business these days is easy." Maybe not. But according to one institutional shareholder, their pounds 1bn of sales indicates that the fashion chains' major problem lies more in the cost of selling than on their ability to shift the merchandise.
On this view, Hoerner should be able to generate pounds 100m of profit from the fashion chains in short order. That yields about pounds 70m after tax. Put those figures on a modest 10 times multiple of earnings and the chains would be worth pounds 700m, nearly twice their estimated current value.
But with those options, Hoerner wants to maximise profits. That means selling more clothes as well. If interest rates reach 10 per cent next year and retail spending is hit, improving the brands will be even more vital.
Evans, the store for outsize women, already makes outsize profits. "Its margins are 10 per cent and they reckon they can get the rest of the multiples up to that," says Mr Bubb.
The major problem is men, who do not like shopping, even for themselves. At the Burton shops, around one in three garments sold is bought by a woman buying for 'im indoors. In a survey last year Burton found that only 14 per cent of men "really enjoyed shopping for clothes". Among women the share of happy shoppers was 42 per cent. And when men go shopping they like to buy quick and get out. "Men don't like going in more than one store either," says Hoerner.
The solution is to pack more brands into each outlet. In Guildford and a few other towns the unfashionable Burton Menswear was renamed Style Union, and Principles for Men and Top Man brands were moved in.
As a test Hoerner added more brands in a few Burton Menswear shops which kept the old name. "Both did well, but it posed a dilemma for us," says Hoerner. The Burton stores attracted their traditional customers, who bought the extra merchandise. "At Style Union our usual customers didn't go, but they were replaced by new customers. We have to try for the best of all possible worlds."
There is plenty of scope for improvement. Less noticed in the demerger fuss was the fact that sales at the multiples rose a disappointing 1.4 per cent in the 18 weeks to 4 July. That is one Independence Day the Nebraskan would like to forget.
Meanwhile, Hoerner racks his brains for a new name for the Burton Group, nearly 100 years after Montague Burton opened his first shop in Chesterfield. "We want to divorce it from its past history and start afresh," says Hoerner - a sentiment that applies to more than just a name.
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