Clerys never bargained for such a downturn

BACKGROUND:The economic downturn hit the retail sector especially hard, but the problems at Clerys were deep-rooted

THE NEWS that Clerys has slipped from the control of the Guiney family has been met with a sense of sadness rather than surprise.

Rumours about the financial state of Clerys – an intensely private, family-owned company – have abounded over the last few years. Latest accounts for Clerys plc show it lost €2 million in the year to the end of January 2011, while turnover fell 15 per cent to €21.9 million in the period.

The inability to service a hefty €26 million in debt owed to Bank of Ireland – accumulated over the last few years as Clerys acquired neighbouring buildings in the O’Connell Street area and invested in its main store – appears to have been the tipping point for the company.

The sale of the business to US private equity group Gordon Brothers and the resulting closure of Guineys and outlets of Clerys in Naas and Leopardstown follow months of speculation about the group’s future. But it’s not the first time the company has been a takeover target.

Clerys rejected two management buy-out offers in 1998 and 1999. Both approaches were led by Tom Rea, who was general manager of the business at the time of the initial proposal in December 1998.

The first approach valued the business at £19 million (€24.1m). The second, in June 1999, valued it at £22-£25 million (€27.9-€31.7m), both reflecting the strong value held by the retailer at that time.

The death in 2004 of Clerys long-time chairwoman Mary Guiney at the age of 103 led to considerable speculation about a change of ownership, and a number of interested parties were reported to have run the rule over the company in 2006. Whether a sale at that point – just as Ireland was approaching the height of its economic boom – would have secured a different outcome for Clerys is anybody’s guess, but from this point on the department store began to lose its way.

The reasons are not difficult to surmise. The economic downturn had a detrimental effect on consumer demand, with the retail sector especially hard hit. But the problems at Clerys were more deep-rooted. Retail experts talk of its failure to respond to changing trends, and its association with an older clientele. Although it invested in its O’Connell street store, introducing concession offerings aimed at younger shoppers, its level of investment never matched the ambition of rival department stores Arnotts and Brown Thomas.

It also suffered from the identity crisis besetting department stores generally. Faced with the growing popularity of the suburban shopping centre, the department store’s one-stop-shop model, offering a range of items under one roof, no longer seemed so unique. As Mary Lambkin, professor of marketing at the UCD Smurfit business school, points out, difficulties at Clerys are symptomatic of an international trend. “Department stores around the world are performing badly. Even big names like Macy’s, Bloomingdales, have had to adapt as the department store competes with shopping centres. The old-fashioned department store that sold everything from needle to anchor is dying out. What we’ve seen is that department stores have been exiting the low-margin parts of the business, such as haberdashery, furniture, and have, in fact, become speciality stores.”

Faced with this long-term trend department stores such as Clerys found themselves caught in a short-term cycle, she explains. “As department stores lost business to the new, high-spec shopping centres, they did not have the money to reinvest in their stores, and began to lose more of their clientele who wanted a different shopping environment.”

The next stage was inevitable – companies such as Clerys took on loans to revitalise their stores, but poor trading meant they were unable to service their level of borrowings when the slowdown came, tipping them over the edge.

Dublin’s department stores also had to deal with the specific threat represented by British branded retailers which arrived with a vengeance on to Ireland’s shopping streets in the early 1990s. Roche’s Stores, owned by the Cork-based Roche family, spied an opportunity, selling nine of its 11 stores in Debenhams in August 2006 in a €29 million deal, with the remaining two closing down as part of the acquisition.

Dublin’s other main department stores, Clerys, Arnotts and Brown Thomas, located on the thoroughfares of O’Connell Street, Henry Street and Grafton Street, all continued to trade. While Arnotts’s modern, stylish revamp of recent years served to show up the somewhat jaded, yesteryear feel of its northside neighbour Clerys, Arnotts was having its own difficulties.

In 2010 its bankers Anglo Irish Bank and Ulster Bank took control of the department store. The problems were linked to property. Arnotts’s biggest shareholder, Richard Nesbitt, embarked on an ill-timed, ambitious €800 million plan to redevelop the block around Arnotts bordering Henry Street, Middle Abbey Street, Liffey Street and O’Connell Street. Arnotts found itself unable to pay its debts, which at €300 million-plus dwarfed those of Clerys.

Since 2010 US private equity group Palladin Capital has been running the store on behalf of the banks, with ex-Brown Thomas chief executive Nigel Blow at the helm. While trading is believed to be strong it still remains in control of the banks, and in the year to the end of January 2011, the retailer recorded a loss of €27.2 million, much of it relating to restructuring charges, interest payments and property impairment costs. It also posted an operating loss of €6.6 million during the period.

Brown Thomas has fared somewhat better. Founded in 1849 by haberdashers and general drapers Hugh Brown and James Thomas, the upmarket department store was bought by Canadian billionaire Galen Weston, who owns Selfridges. In the early 1990s Brown Thomas bought Switzers from House of Fraser, moving into its rival’s Grafton Street premises across the road, dispensing with the Switzers name and integrating the acquired business into the Brown Thomas brand. Latest results for the entity that operates the Brown Thomas group, which covers the Brown Thomas stores in Dublin, Cork, Galway and Limerick and BT2 outlets, doubled its operating profit to €5.38 million in the year to the end of January 2011, with revenue steady at €206 million. Brown Thomas’s debt-free status also sets it apart from rivals.

But while Clerys may have lost its way in terms of modernisation and responding to changed consumer patterns, other factors were at play. Dublin City Council, for example, may have something to answer for. The location of Clerys in O’Connell Street, once the store’s prize asset, has become less of an advantage. Once a prestigious, commercial boulevard, O’Connell Street has deteriorated as a shopping venue as the development of the area has stalled. Unlike Arnotts and Brown Thomas which are embedded in vibrant shopping areas, Clerys is located in a relatively isolated position, making it a “destination” store rather than one that benefits from passing footfall.

Gordon Brothers’s takeover of Clerys means that two US niche finance houses are now major players on the Irish retail scene. It’s a long way from the heyday of the Victorian era when the arrival of the department store heralded in the era of mass consumption.

For many shoppers it is hoped that the arrival of Gordon Brothers will mark a new era in the 150-year history of Clerys.

GORDON BROTHERS THE NEW OWNERS

GORDON BROTHERS is a private equity and investment house based in Boston.

Founded in 1903, the company specialises in buying and selling retail assets. It has been involved in a number of high-profile restructurings, including the liquidation of US bookseller Borders.

After investing €10 million as part of a €90 million financing package for the troubled book chain in 2010, Borders entered bankruptcy the following year, and Gordon Brothers oversaw the winding down of the chain.

It also acquired the assets of troubled photography giant Polaroid in 2009.

The firm has connections with Palladin Capital Group, the US private equity group which is running Arnotts on behalf of lenders Anglo Irish Bank and Ulster Bank.

Mark Schwartz, the head of Palladin Capital Group, is a former executive of Gordon Brothers.

Palladin was at one stage involved with Gordon Brothers as part of a private equity joint venture but later separated from the company.

Gordon Brothers’ European division – Gordon Brothers Europe – is taking over the running of Clerys.

In 2010 the company bought loss-making HPJ Jewellers, which comprised 78 jewellery stores across the UK.

Gordon Brothers closed 26 of the worst-performing stores and reduced the headcount, resulting in the safeguarding of more than 320 jobs.

It has said it is committed to investing in and revitalising the department store.

While Siptu yesterday expressed “cautious optimism” that jobs would be protected, the scale of the new owner’s challenge is thought to be significant, with some retail sources suggesting further restructuring is possible.

SUZANNE LYNCH

END OF AN ERA  FOR GUINEYS

THE HIGH Court yesterday approved the appointment of liquidators to Clery’s sister shop Guineys store in Talbot Street and Clerys’ two home furnishing stores in Naas and Leopardstown.

Taite and Seán Kelly of RSM Farrell Grant Sparks were appointed provisional joint liquidators to wind up Dennis Guiney Furnishings Limited, Naas, Co Kildare, and Leopardstown, Co Dublin, and Guiney and Co, Talbot Street, Dublin. The 29 employees based at these stores will be made redundant.

Michael Guiney stores, a separate company, is not affected.

Clerys new owners, US finance house Gordon Brothers, met with unions and staff at the O’Connell Street store yesterday.

Siptu representative Graham Macken expressed “cautious optimism” the new owners will provide job security to Clerys employees based at its O’Connell Street store.

Some 147 people are employed directly by Clerys at the store, while more than 200 work for the 49 concessionaires there.

Mr Macken raised concerns about pension arrangements for staff. Clerys new owners have not taken on the liabilities of the firm’s existing pension scheme though they have indicated an alternative scheme will be provided, Siptu said.

Clerys chief executive PJ Timmins and finance director John Roe are expected to remain with the company for the time being. The Boston-based private equity group is believed to have paid about €15 million to acquire the retailer’s €26 million debts from Bank of Ireland.