A new suitor for Specialty Fashion Group?

Millers Bankstown, specialty fashion group, SFGThe change of heart by Gary Perlstein on an exit from Specialty Fashion Group (SFG) would seem to have more to do with conflicting views on the future of the multi-brand retailer than a sudden lost enthusiasm for gardening or Spanish guitar lessons in his golden years.

Perlstein announced in November last year that he would retire from both his executive and board positions after 24 years with the retailer, 14 of which were spent as CEO.

Perlstein indicated he would leave once a new CEO was identified, “making way for new leadership and fresh perspectives and also for me to explore other entrepreneurial opportunities”.

Yet less than two months after his retirement announcement, Perlstein has emerged as a member of a consortium that has put forward a proposal to the SFG board to perhaps privatise the company.

In a statement to the ASX, the retailer has revealed that the Perlstein consortium is not the only potential suitor keen to acquire the entire company or some of its brands.

Anne McDonald, SFG chairwoman, said the retailer has received “a number of confidential, non-binding, indicative proposals for a change of control of the group or the acquisition of certain brands”.

The various proposals have surfaced in response to a comprehensive structural review and assessment of all options and opportunities for the company to improve shareholder value.

SFG scrip has been trading at near penny dreadful levels below 20 cents a share following the effective collapse of a February 2017 takeover bid by the Qatar-based Al Alfia Holding, an $8.4 million loss for the FY17 and profit warnings for the current financial year.

Shareholders at the retailer’s AGM in November were also told that 300 stores will be closed by 2020, reducing the network from around 1,000 outlets across its six brands to about 700.

The store closure program is “front ended” to the current financial year, according to McDonald, with exits from loss making stores on ‘hold over’ leases.

McDonald has not flagged any view emerging on the closure or rebadging of any of the six retail brands or whether a divestment of one of more brands would fit with the plans to reduce SFG’s store footprint.

SFG’s brands are Millers, Katies, Crossroads, Autograph, City Chic and Rivers.

Al Alfia gone AWOL

The retailer has also not indicated whether Al Alfia has rekindled interest in a takeover and has not publicly revealed the other potential suitors, including other members of the Perlstein consortium.

Al Alfia did not progress its negotiations with SFG because it claimed there were issues associated with probate when a key investor died.

Perlstein has a significant shareholding in SFG and there is speculation that another notable shareholder, NAAH, an investment company associated with Cotton On’s Nigel Austin could be part of the consortium.

McDonald advised the ASX that the proposals that have been received by SFG are all subject to a number of conditions, including the satisfactory completion of due diligence, and are expressed as being non-binding and incomplete.

McDonald said an independent review committee comprising the retailer’s directors (excluding Perlstein) has been established to assess the proposals received.

FTI Consulting has been assisting the committee with its review of the business and options for the future.

Perlstein is currently on leave and will formally step down as CEO and managing director on 15 February 2018, shortly before the trading results for the first half of the current financial year are released.

McDonald said discussions with the interested parties are ongoing and are not regarded as sufficiently advanced to warrant any further disclosure at this time.

She said there is no certainty that the proposals will result in a binding offer or whether such an offer would be recommended by the independent review committee and, in turn, the retailer’s board.

SFG is expected to provide an update on the talks with potential suitors when it releases its trading results which, according to an October 2017 trading update, is likely to deliver a decline in earnings of around 50 per cent from the $30.4 million booked for the comparable half in FY17.

The Al Alfia takeover in February last year valued SFG at $135 million with an offer of 70 cents per share, representing a healthy premium on the then on-market trading price of around 42 cents.

Today, the retailer has a market capitalisation of less than $40 million, making it a prime takeover target, albeit a business that needs rejuvenation and, as its current internal review has established, a substantial pruning of its store networks.

‘Over-shopped’, ‘lacking personality’

SFG’s brands are effectively suffering the same dilemma as Solomon Lew’s Premier Retail brands – over-shopped and lacking the personality and pizzazz that made them brand leaders in the past.

They are locked into large store networks with legacy rent and occupancy costs that are eroding the profitability of many stores, as middle market brands are increasingly susceptible to competitors such as H&M, Zara and Uniqlo as well as online retailers.

Despite an experienced management team and investment in repositioning as part of turnaround strategies, Premier Retail has struggled to reinvigorate its heritage apparel brands.

The task ahead for SFG to revitalise its retail brands as a public company or, more likely now, under new owners as a privatised company, is significant and will take time.

The task to revitalise would certainly be easier if the retailer was privatised and would remove a layer of administrative obligations and costs.

The key issue going forward is the bloated store network. At the last AGM, Perlstein noted that attempts to reduce rent commitments and cut costs had failed to improve the bottom line of 159 stores that were included in the 300 stores slated for closure over the next two years.

Shareholders expressed their disappointment with the retailer’s performance at the AGM and some analysts believe Al Alfia backed away from its takeover bid, after taking a closer look at the business – not because of the stated reason of complications with probate on an investor’s estate.

Perlstein established Millers Fashion Club in 1993 with business partners, Ian Miller and Sam Moss, floating as a public company as Millers Retail in 1998 with a network of 147 stores.

The company, which later rebranded as SFG, has grown seven-fold over the past two decades through organic expansion and acquisitions, notably Katies and Rivers.

The acquisition of 160 Rivers stores in 2013 for around $4 million, has cost SFG around $30 million. Ironically, Rivers turned its first profit in four years, just as the retailer’s Millers, Autograph, Crossroads and Katies reported losses.

As McDonald told shareholders last November, Perlstein has led the group’s expansion and response to the changes facing Australian retailers, and has been instrumental in building online sales channels which have been posting double digit sales increases.

The question is whether or not Perlstein retains the passion and the energy to take SFG forward in an executive or board role and whether or not shareholders will provide him with that opportunity.

Shareholders are certainly smarting over losses on their investment in SFG as inevitably an exit from the ASX looms.

 

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