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BHS - scores on the doors, mistakes come in fours

by MAX JONES / Tuesday 16th August 2016

One Pound

In today’s market, what can £1 buy you? Well, it can buy you a Galaxy cholate bar, a pint of milk, 40 pairs of Primark hair bobbles, a snickers bar & now it can buy you BHS…

Yes just over a year ago now the large retail chain, that first opened its doors in 1927, was sold by Sir Philip Green to an array of investors for the total price of a snickers bar. Having been bought back in 2000 for the total price of 200 million snicker bars, there has been close examination not only of how Sir Philips waist line hasn’t expanded to the size of Chicago over the last 15 years, but more around where all the investment has gone over the last 15 years.

I appreciate this is a rather complex & intricate study so while it may seem like I am “rushing” through it all today in this blog, I simply want to get the core details across today with the hope that if this is of interest to you, you pick the phone up & have a chat.

So, where did it all go wrong?

1. Property

So, in December 2001 BHS sold 12 stores to Carmen Properties Limited for a whopping £105.9m! BHS then preceded to rent them back for about £12m a year. This agreement meant that over the next 11 years, BHS forked out a mammoth £141 million to the Jersey-based company, for properties they originally sold to them for around £40 million less – where’s the logic in that?

2. The BHS pension scheme

On the 25 April 2015 when BHS went into administration, a lot of the focus was around its pension deficit. A sizable chunk of its outstanding debt – standing at £571m. Why was this so big? Well this dates back to 2008, yes the year more famous for the financial crash than 1966 was for English football. Before 2008 BHS was not in a deficit, however while the pension fund predicted a long-term return of 8.5%, what actually manifested was a feeble return of anything a low as 3% by 2014. Sop between 2008 & 2014, the liability to BHS rose from £428.8m to £645.5m. The money the scheme made in real terms was seen to be a lot lower than predictions & therefore a huge deficit was only a matter of time.

3. Dividends vs Profits

Imagine you’re an owner of a Lemonade stand along your local high street. You buy the lemonade from a manufacture for £1 per cartoon & with your entrepreneurial nous you then sell that same cartoon for £5. Now after your stands overheads & paying your staff you still have, what, £4? £4 profit. But let’s then say you took £10 out of that business to fund your personal life, therefore putting your lemonade stand into a £6 deficit. That would be wrong, illogical, crazy…wouldn’t it?

Interestingly enough one of the criticisms of BHS over the years before it closed was that over the opening 4 year period, £414m had been paid out through dividends. This dividend was so high in relation to the actual profits made by BHS that the actual money made during 2000 & 2004 went from £3335.2m to £86m.

4. Selling to the wrong Dragon!

On the day Retail Acquisition owner Dominic Chappell bought BHS for £1, he had already filed for bankruptcy twice & had millions of pounds worth of debt after a failed venture to build a marina on the Isle of Wight. I mean he was literally swimming in debt! Now I don’t know about you, but I see a couple of red flags there?

I guess one of the questions is what the impact of this collapse will be on the wide retail market. But in a recent interview conducted by the Telegraph with Gary Hobbs, a senior equity analyst at Investec Wealth & Investment, he said that BHS was dragged under by its financial situation more than by wider woes in the retail market. So perhaps it’s not all doom and gloom for the retail market as a whole, although the lessons to be learned are plain to see from the unfortunate events at BHS.
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