Another good reason to avoid retail stocks – MoneyWeek

AnauctionforfashionretailerNewLookcollapsedyesterdayaspotentialbuyersbaulkedatthe£1。

8bnreserveprice。

Insiderstriedtoblamethe“blipinthedebtmarket。

”Butalthoughthisplayedarole(andit’salsomuchmorethana‘blip’,incidentally)therealtruthisthatthebigplayersarejustrealizingwhatwe’vebeenpointingoutforawhile。

It’sareallybadtimetobebuyingretailstocks…

NewLookwasboughtbyprivateequitygroupsApaxandPermirain2004,whoarenowtryingtooffloadthecompany。

TheykickedoffthesalesprocessinMarchthisyear,expectingtoraise£2bn,saysTheTimes。

ThreebiddersgottolookatthebooksinJune,butbiddingapparentlydraggedonwithonesourcetellingthepaperthat“bidderswereunwillingtopaymuchmorethan£1。

5bn。

Now,there’snoneedtofeelsorryforApaxandPermirathey’vealreadydoubledthe£150meachtheyputintotheoriginalpurchase“throughtworefinancingssincetheyboughtthecompany。

”Butthisfailuretoselldoesn’tbodewellforthesector’sfuture。

Therewereseveralreasonsbehindthecollapse。

First,andmostobviously,there’sthebeginningsofthecreditcrunch,whichisgettingintoitsstridefollowingtheproblemsatBearStearns’hedgefunds。

Withmoneygettingtighterandlendersbecomingmorecarefulwiththetermstheygive,buyersnolongerhaveunlimitedlinesofcredittospendonanyoldretailchainthattakestheirfancy。

Forexample,PermiraandMacquariehavehadtopulloutofbiddingforAustralianretailerColesdueto“problemswithraisingdebt。



Butit’snotjustabouttheworseningbackdropinthecreditmarkets。

There’salsothequestionofwhointheirrightmindwouldwanttobuyaUK-basedfashionretailerjustasinterestratesarerapidlyclimbing,andconsumersarecarryingmoredebtthanever?

NewLook’sbusiness“isthoughttohavebeenaffectedbytoughtradingconditions”saysTheTimes。

Well,theyaren’tgoingtogetanyeasier–withinterestratessettorisethisThursdayandfortheforeseeablefuture,disposableincomeisgoingtobesqueezedmuchharderbeforeconsumersgetanyrelief。

Bidderswerealsoapparentlyunconvincedbythecompany’splanstoexpandoverseas,whichareat“arelativelyearlystage。



AndNewLookishardlyatrophyassetyoucouldmakeanargumentforsnappingupMSormaybeevenTopShopforpurebrandingreasons,butNewLookjustdoesn’thavethesamecachet。

Potentialbuyersarejustcomingaroundtowhatwe‘vebeensayingforawhilebuyingintotheretailsectoraheadofaconsumerdownturnjustdoesn‘tmakealotofsense。

OursharetipsterPaulHillhasbeengrowingincreasinglyconcernedaboutconsumer-relatedstocksinrecentmonths。

Infact,justlastmonthhewrotealongpiececontainingallthereasonswhyhereckonswe’reheadingforaseriouscorrection。

Oneofhiskeyfearswasthattheprivateequityboomwouldendintears–anditlookslikethatmaybeexactlywhat’shappeningnow。

Subscriberscanreadthepiecehere:Howtoprepareforamarketcrash


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