Who Will Benefit from the Demise of Bhs?

SEPTEMBER 2, 2016

WHO WILL BENEFIT FROM THE DEMISE OF BHS?

• BHS, a lower-midmarket department-store retailer, closed the last of its stores on Sunday, August 28. It closed 163 stores in total after filing for bankruptcy in April 2016. In 2015, the company held a 0.5% share of the UK apparel market. • The BHS closure removes some capacity from the UK apparel sector. Rival department stores and specialty apparel and homewares retailers in the lower-to- middle market stand to benefit most from the closure. • Department-store retailer Marks & Spencer (M&S) will likely emerge as a key beneficiary, given that its target customer profile is similar to BHS’s and that it already has a strong high-street presence.

BHS, a UK department-store retailer positioned in the lower midmarket, closed its last batch of stores on Sunday, August 28. The company closed 163 stores in total after filing for bankruptcy in April 2016. BHS sold mainly apparel, footwear, accessories and homewares, including lighting, and beauty products. According to Euromonitor International, BHS held a 0.5% share of the UK apparel market in 2015. In its fiscal year 2014 (ended August 2014 and the latest available), BHS reported revenue of £668 million. This is equivalent to approximately 6.3% of M&S’s fiscal year 2016 revenue of £10.6 billion, and to approximately 28.8% of Debenhams’s fiscal year 2015 revenue of £2.3 billion.

Figure 1. BHS Annual Revenues (GBP Mil.)

CAGR (4.3)%

795 740 700 676 668

2010 2011 2012 2013 2014

For fiscal years ended August Source: S&P Capital IQ/Fung Global Retail & Technology

SEPTEMBER 2, 2016

The BHS demise removes some capacity from the UK apparel sector. Department stores and specialty apparel and homewares retailers in the lower-to-middle market will benefit most from the BHS store closures. However, direct department-store competitors M&S and Debenhams are especially likely to benefit, given the target customer overlap between the three. According to Verdict Retail, the BHS core customer was a woman age 45+; M&S’s target customer is a woman over age 50 and Debenhams’s average customer is a 41-year-old woman. M&S’s strong high-street presence will also allow it to benefit from the BHS closure; the retailer operated 343 general merchandise stores as of the end of its latest fiscal year (March 2016). Furthermore, according to 2016 data from Verdict Retail, BHS customers’ most-used alternative stores were M&S, Debenhams and Next, as well as the more price- competitive Primark, Asda and Matalan, so these retailers are all likely to benefit to some extent from BHS’s closure.

Figure 2. Top Five Retailers Where BHS Clothing Shoppers Say They Also Shop for Clothing, March 2016 (%)

M&S 54.4

Debenhams 40.9

Next 34.6

Primark 34.1

Asda 33.6

Source: Verdict Retail

We believe other chains that are likely to mop up market share in apparel or homewares include T.K. Maxx, Dunelm and Argos. Grocery retailers Tesco, Sainsbury’s and Asda should also benefit, given that their apparel and homewares offerings are similar to what BHS’s were in terms of design and price point.

SEPTEMBER 2, 2016

Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

Eva K. Senior Research Associate

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