In 2015 Brait won an award for best private equity investment, as judged by London-based magazine EMEA Finance.
This was shortly after it bought New Look. The British value fashion retailer was recorded as the largest asset in Brait’s annual financial statements, accounting for 45% of the group’s overall net asset value (NAV).
Now, the £783m investment in New Look has soured, with Brait marking its value down to zero in its results for the six months to September, released last week.
A spokesman for Brait says the erosion of value was due to a number of factors, including the chain’s products losing their broad appeal, reduced flexibility and speed to market, and high costs.
Brait remains committed to New Look, opting to shake up its executive team and implement a turnaround strategy.
"Brait cannot and does not comment on the investment or divestment decisions relating to current or potential investments," says the spokesman when asked if Brait will sell New Look.
Brait’s shares hit their lowest year-to-date level after the group reported a 36.6% decline to R66.62 in its NAV/share compared with September last year, mainly due to the write-down in New Look. At R44.86/share, Brait’s shares have nearly halved in value from the beginning of the year.
Piet Viljoen, executive chairman at asset manager Regarding Capital Management, says the current share price is probably fair value, reflecting Brait’s optimistic valuation of remaining assets Premier, Virgin Active, Iceland Foods and a basket of smaller investments.
"I think [Brait] is valuing its assets optimistically — using quite high enterprise value/Ebitda [earnings before interest, tax, depreciation and amortisation] multiples," he says.
"There is no room for error in using such high multiples. Their head office costs should be capitalised and deducted from NAV to get to a realistic valuation."
Viljoen also thinks Brait "is not really a great rand hedge any more", as consumer goods company Premier — which accounts for 28% of Brait’s NAV — is predominantly South African, and SA is Virgin Active’s biggest segment, with 60% of its 236 health clubs based in the country, contributing 39% of its £557m in total revenue.
"With New Look at zero, I estimate SA makes up 40%-60% of NAV," says Viljoen.
"So with head office costs in pounds, there is a possibility of it being an anti-rand hedge."
But what exactly went wrong at New Look?
In the first set of results incorporating New Look, Brait put H&M, Zara and Marks & Spencer in New Look’s peer group for valuation purposes. Value retailers Primark, Uniqlo and Mr Price were lower down the list.
"New Look’s market proposition is as a value fast-fashion retailer," says the Brait spokesman. "While it competes with online and global high street brands in the UK, it has in the past been successful when focused in its category and its targeted age group."
The category and age group comprise women aged 18-34.
Starting in 2015, former New Look CEO Anders Kristiansen made his ambitions in menswear clear, saying he would introduce gender-specific entrances. The retailer launched six New Look Men outlets in the 2016 financial year, with 15 more added in the financial year to March 2017.
Menswear contributed 13.4% of New Look’s marginal 2.4% increase — to £1.5bn — during that financial year. But no mention was made of its contribution to total sales, which shrank 4.5% to £32.1m, in the six months to September 2017.
GlobalData Retail lead analyst Kate Ormrod says New Look remains under pressure from the likes of Asos, Boohoo and Primark, and has lost relevance among shoppers.
"As [New Look’s] strategic focus [was] on menswear — it wanted to be seen as more of a unisex brand — its womenswear offer
stagnated, a mistake that never goes unpunished by rivals."
Brait responded recently by replacing Kristiansen with Alistair McGeorge, who is not new to New Look. McGeorge served as the group’s executive chairman between 2011 and 2013. He joins founder Tom Singh, who is now playing a more active role in the business, and recently reinstated chief product officer Roger Wightman in attempting to turn things around.
His first order of business has been getting unappealing, old stock off the shelves.
"Given McGeorge’s appointment on November 6, the product range for the quarter ended December 2017 is already committed," says the Brait spokesman.
Ormrod’s advice for the new executive team is to drive product appeal with a differentiated offer and regular newness, thereby reacting to trends faster.
"This is really important to stay top of mind, avoid customers switching to rivals, and encourage consumers to make discretionary purchases during a period of more considered spending," she says.
Ormrod says New Look’s results stand in stark contrast with rival Primark’s 10% UK sales growth in the year to September 2017.
"It shows that even though the clothing market is tough in the UK, it is possible to prosper even in the competitive value segment," she says.
"Interestingly, online always used to be a strength for New Look, but in the recent results its own website sales were down 7.6%. So a struggling online channel means that New Look also needs to focus on reigniting destination appeal for its stores, given it has a large portfolio of 596 stores in the UK. Ensuring there is a consistent shopping experience between physical formats and online is crucial to maintaining brand perception."