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November 6, 2018

New Look returns to profit in H1, sales continue to tumble

Following what one analyst called a "shocking" twelve months, UK-based fashion retailer New Look has returned to profitable sales in the first half of the year as its focus on cutting costs pays off.

By Beth Wright

Following what one analyst called a “shocking” twelve months, UK-based fashion retailer New Look has returned to profitable sales in the first half of the year as its focus on cutting costs pays off.

For the 26 weeks ended 22 September, the company reported an underlying operating profit of GBP22.2m (US$29m), compared to a loss of GBP10.4m in the prior year.

Revenue, however, slipped 4.2% to GBP656.9m from GBP686m last year, in-line with expectations driven by a focus on more profitable sales. New Look brand like-for-like sales, meanwhile, fell 3.7%.

The retailer is in the midst of a turnaround strategy, with a company voluntary arrangement (CVA) approved in March that included plans to potentially close 60 stores. It also recently confirmed it is to exit its retail business in China where “performance has been below expectations.”

A strategic review of the group’s other international markets continues.

In its first-half trading update release today (6 November), New Look claims to have seen improved sales and profitability in key womenswear categories with women’s clothing in UK stores outperforming the market by 5.6 percentage points according to the British Retail Consortium.

It did, however, note challenges remain in footwear and accessories.

In addition, e-commerce profitability continued to increase substantially, while Click and Collect sales mix continued to drive footfall into stores, increasing to 41%. Meanwhile, in-store and e-commerce customer conversion rates continued to improve since the first quarter.

The retailer says it has achieved GBP70m of annualised cost savings, with a further GBP8m identified.

“I am encouraged by our performance in the first half of the year, which reflects the progress we are making with our ongoing turnaround plans to rebuild our position in the UK womenswear market,” said executive chairman Alistair McGeorge. “The significant cost savings which have been implemented are delivering improved profitability and we continue to see better performance in our new womenswear ranges.”

McGeorge added the group is making “good progress” in recovering the broad appeal of its product, evidenced by the improvement in its market performance and customer conversion rates.

“We expect this to continue in the second half as the changes we have made in the remaining categories of our product review start to take effect,” he said.

“We continue to work hard to accelerate our progress, but we are facing into significant headwinds and uncertainties, including Brexit. Clearly the wider retail environment remains challenging and we are not expecting that to change anytime soon. However, we are on the right track and continue to drive further efficiencies across the business. As we look to the second half, our focus will be to continue to improve our financial and operational stability and further capitalise on our brand strength to position us well for the future.”

Sofie Willmott, senior retail analyst at GlobalData, notes while New Look’s turnaround plan will take time to deliver results given the adjustment needed to product ranges, the brand must start to show an improvement in revenue in the second half if it is to avoid permanently joining the plethora of struggling UK multichannel retailers.

“New Look’s CVA, which was approved in March, included plans to potentially close 60 stores and although it is not clear how many of these have been shuttered so far, these changes will place more reliance on its own website, which has underperformed of late (FY2017/18 sales declined 19.2%), with digital sales shifting to third-party retailers,” Willmott adds. “Given that physical sales in the UK clothing and footwear market are not forecast to return to growth until 2022, New Look must prioritise its online channel, driving up online penetration in order to boost total revenue.”

Regarding the retailer’s plan to exit China by the end of December 2018, closing its remaining 120 stores, Willmott says the switch in strategy will no doubt hit profit margins but adds New Look is “wise to narrow its focus on its domestic market, ridding itself of costly distractions, given the tough competition at home”.

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