Go Outdoors rent day pre-pack – is JD Sports right to shaft landlords?

A brazen, but warranted, move

There’s no denying this is a pretty brazen move from JD Sports.

There are many businesses that have been kneecapped by the impact of coronavirus on their cost base and forced to make some tough choices, often exacerbated by testy landlord relationships.

But a retailer with consistently soaring sales overall – as JD is – and a £6bn market cap claiming a pre-pack administration was the only solution to make one of their businesses sustainable is a tough sell.

The decision, though, is also very timely. It coincides with a quarterly rent day on which it is widely expected that retail landlords might collect just 10% of rent owed.

It is therefore representative of the impasse retailers feel they have reached in their negotiations (or lack thereof) with landlords.

Is it not an indication that even the most resilient of businesses are finding the current retail property model untenable?

JD executive chair Peter Cowgill isn’t the first retail boss to express frustration about the lack of flexibility shown by landlords, who have enjoyed years of upwards-only rent reviews, in the most extraordinary of circumstances for retail. And he’s unlikely to be the last.

Rather than looking at what’s happened to Go as an instance of a retailer gaming the system to put landlords over the barrel, is it not an indication that even the most resilient of businesses are finding the current retail property model untenable?

JD Sports has, after all, agreed to pay off Go Outdoors’ outstanding debts in full, transferred all impacted employees to new contracts to avoid job losses and taken 12-month licences of all 67 of the stores while rental contracts are renegotiated.

The retailer says that “subject to realism and flexibility in the future leases, it is the group’s intention to retain the majority of Go’s retail estate and preserve as many jobs as possible”. Is it not in the best interests of all involved – yes, including landlords – that this objective is achieved?

This is not a retailer looking for a way to shirk its responsibilities. But it is one unable to move past the logjam of the current retail property model, and it has grown tired of throwing good money after bad – particularly when leases that are actually representative of a store’s market value and the realities of footfall declines post-pandemic could be negotiated.

If JD Sports has to resort to measures this extreme to get landlords to acknowledge that, what hope do less resilient retailers have?

Brazen though it may be, it’s a warning shot that the retail property sector would be foolish to ignore.

Grace Bowden is head of content at Retail Week

JD Sports’ pre-pack smacks of vindictiveness

Many retailers will tell you that landlords have had it far too good for far too long – upwards-only rent reviews, decade-plus leases without breaks and an attitude that when sales start dropping off ‘it’s not my problem’.

For all that, this pre-pack proposal smacks of vindictiveness. For one thing, to announce it on the eve of a quarterly rent day when landlords are staring at historically low rent returns – as low as 10% – seems a targeted kick to an industry that’s already more than down.

In its restructuring note, JD Sports says that the coronavirus crisis has brought “into sharp focus the operating costs” of running Go Outdoors, and complains that the average rent lengths of 10 years with upwards-only reviews are too “inflexible”.

That argument rings incredibly hollow. It invites the conclusion that JD Sports spent £116m on a business without doing sufficient due diligence on its store estate. Could that be possible? In the words of one source, “Do me a favour.”

JD Sports bought Go Outdoors four years ago. While many of the stores it took over may have been locked into the kind of long leases it claims, there will have been opportunities over that time to renegotiate.

Successful retailers such as JD will already have seen the way the wind was blowing in retail generally as they considered the future of stores and online. It completely beggars belief that it wouldn’t have been doing anything to right that imbalance until now.

While it doesn’t say so explicitly, JD is clearly angling to renegotiate rents on stores on a turnover-based model. Now, in honesty, many landlords realise that is the way the world is going.

Yet you can bet that JD wouldn’t be sharing the kind of information on a store-by-store basis with landlords needed to make turnover-based rents work from a valuation perspective.

JD is one of the few true success stories of the last few years. The idea it couldn’t have eaten £50m in debt to get the business back on its feet without a pre-pack administration is nonsense 

As one landlord wrote for Retail Week recently: “Turnover-based rents need to be built on the profitability and the performance of the store, not what tenants think that they can get away with paying at the time.”

Another aspect that will stick in the craw of landlords is JD’s attempt to paint its debt repayments back to the parent company as some sort of noble deed.

JD is one of the few true retail high street success stories of the last few years. The idea it couldn’t have eaten £50m in debt to get the business back on its feet without having to go into a pre-pack administration is nonsense – shareholders take risks when deals are done; those risks should not be shouldered by others later.

It is to be applauded that Go Outdoors is being saved with minimal job losses and without disruption to branded stock suppliers.

But, ultimately, landlords are part of a retailer’s supply chain, too. If, as is highly likely, more retailers follow JD’s lead with pre-pack administrations on top of refusing to pay rent, that supply base may disappear. And is that really in the retail industry’s long-term interests?

Hugh Radojev is senior reporter at Retail Week