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TM Lewin loses its shirt with 600 jobs lost

Shirt maker TM Lewin fell into administration last week, with the immediate loss of 600 jobs. Alastair Barlow picks apart the 100-year old firm's downfall.
8th Jul 2020
Founder & Chief Dreamer flinder
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TM Lewin
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TM Lewin grew on the back of the “four shirts for £100” offer that most readers will have seen at some point or taken advantage of, perhaps from the discounted flyers from professional bodies that were always floating around big firm offices.

The shirtmaker’s collapse is just the tip of the iceberg for what we will see in the months to come. While I’ve written about the high street before, it’s certainly not stopping there. Shopping malls (property) are taking a hit too with Intu (Trafford Centre, Lakeside and 15 other shopping centres) plunging into administration recently.

The businesses that can get through this short-term turbulence will soon realise the debt they’ve put themselves into to trade through it with CBILs and so on will need to be repaid. When HMRC’s Time to Pay arrangements kick in, cashflow will hurt even more.

Some companies are choosing the administration route, which of course, has its advantages. But equally, it can alienate a lot of suppliers if not done right. I’m not an insolvency practitioner so I’m not going to preach about the best route for a business to take, but I am going to take a look at the TM Lewin business and see what new phoenix can rise from the ashes.

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History of TM Lewin

TM Lewin is a historic British brand, started by Thomas Mayes Lewin, who opened his first shop in London in 1898. An online retailer that concentrated on making shirts, it later moved into suits, outerwear, knitwear, jackets, chinos, ties and accessories for men. 

The company went through a few owners in its 120 years but wasn’t sustainable in its current guise. Interest on debt from the 2015 transaction (Bain Capital and management bought the equity stake owned by Caird Capital) was too much to maintain when shackled by the lockdown.

The group had managed to stay reasonably cashflow neutral(ish). However, that’s mainly because the high-interest costs (up to 10%) were being rolled up into the debt. And with debt due for repayment next year, it was a sizeable amount relative to revenue (and definitely relative to EBITDA) that would need to be recapitalised:

Loans and borrowings

Source: TM Lewin (TML Topco Limited) 2019 financial statements

That’s effectively £72m of debt on a business that’s turning over £125m and making an operating loss. Does that sound like a sound business to you? To be fair, the company was EBITDA-positive, but it had high depreciation and amortisation costs that didn’t leave enough to cover the interest and nowhere near enough to accumulate funds to repay the debt, rather than kick it down the road.

The company had a clean audit opinion each year, so despite the underwhelming financial health of the business, the auditors were confident the business could continue as a going concern, so they must have had a good outlook on their recapitalisation plans.

The following chart shows the interest cover ratio for TM Lewin. While there are many factors to take into account, generally, an interest cover ratio of at least two is considered the minimum acceptable ratio whereas analysts prefer to see a coverage ratio of three. In TM Lewin’s case, the ratio far below one means it cannot meet its current interest payment obligations. In 2019, the interest charge of £7m far exceeded EBITDA of £4m, resulting in an interest cover ratio less than one (ie 0.59) as we can see below.

Interest cover
interest_cover

Source: TM Lewin (TML Topco Limited) financial statements (2016–2019)

The chart above also shows the increasing level of debt as the interest was rolling up. In 2019, this totalled £72m.

That was 2019 when the principal risk was Brexit. Now we’re in a period where the whole country has been locked down, and more concerning for TM Lewin, office workers are not heading to the office so have little need for a new suit, a new shirt or a new tie.

The company furloughed 650 of its 700 UK workforce, and presumably applied all the measures I’ve highlighted previously (see Primark story). However, losing a significant chunk of revenue from three months of lockdown isn’t an easy thing to swallow when you’re debt-laden and there is no reasonable return to normality in the foreseeable future for office workers.

In May this year Stonebridge Capital (via Torque Brands) acquired the TM Lewin brand and just last week announced, via a pre-pack administration, the closure of all 66 UK stores together with redundancy of 600 staff. Probably not what Rishi Sunak had in mind when he set up the furlough scheme back in March.

Despite consumer changes in tastes and preferences from a likely continued shift to home-working, the future looks reasonably bright for the clothing outfit.

Business model overhaul

Torque Brands cleaned the slate with the pre-pack move. While currently unknown the new owners will likely have wiped some of the debt from the business and wiped out the lease commitments with the stores. They’ve taken the opportunity to change the business model from omnichannel to an exclusively online brand.

Torque Brands refers to itself as “a data-driven company, and we mean it”. To me, it reads it was always going to clean out the stores rather than coming to the realisation a few weeks after the acquisition.

Torque comes to the party with an interesting executive team covering all the bases you would want to focus on if you mean to transform a business:

  • Transformation CEO
  • Restructuring director
  • Chief digital officer
  • Chief people officer
  • Brand advisor
  • Corporate development officer.

These are the roles I would want to be filled if I was to drive aggressive change into a data-driven business model fit for growth. However, the one role that’s missing from here is the CFO. An oversight or have they just not yet filled it? Sure, there are a couple of executives with a financial background, but they are focused on restructuring and investment, not the core finances. Hopefully, they are bringing someone into this role soon as it’s a gap otherwise.

Torque Brands boasts on its website about “world-class data infrastructure” that allows it to react to changes in behaviour quicker than the competition: “Data from marketing systems, user activity systems, payment systems and CRM systems is utilised, via the creation of a single customer view, to both understand historical insights and predict future outcomes.”

This is utopia for a retailer and easier for an online brand to get to, but it’s by no means easy! I would be seriously impressed if they have this up and operational already given the acquisition only took place a month ago. That’s setting aside the transition from TM Lewin’s systems to Torque’s systems.

I would expect the majority of TM Lewin’s revenue came from the store, so it’s unlikely they will have very good digital records on customers. Tagging transactions to a unique customer and understanding their buying behaviour is absolutely key in making informed decisions. In ecommerce, it’s all about average order value, customer lifetime value and customer acquisition costs. Understanding these, and how they change over time, enables the business to perform and grow optimally.

Torque Brands SSC model

Torque Brands is the SPV (special purpose vehicle) set up by Stonebridge and has ambitions to build up a portfolio of five to eight brands over the next 12-18 months by acquiring complementary British brands. I fear there will likely be plenty to choose from, unfortunately. The portfolio brands will be integrated into one common shared services platform - leveraging group and platform efficiencies across the portfolio.

I find this the most exciting and interesting part of the strategy. This is the first of a number of acquisitions that Torque Brands will make and while it’s certainly not a new model for a PE House to own a portfolio in the same industry, Torque Brands is looking for synergies across its portfolio by implementing a shared business services model.

Multi-nationals have saved millions decentralising activities to functional shared service centres. The movement has matured into a global business services (GBS) model over the last two decades. It looks to me like Torque Brands is going to apply the same approach where it provides multi-functional business service solutions to the portfolio by centralising technology and data expertise in centres of excellence.

Quite frankly, any business that’s not considered some of the above, is missing a trick.

In this model, there aren’t just the savings from synergies in processes, technology and know-how, but also the power of data. The data is what other GBS models probably lack and don’t take advantage of.

When you’re moving your front office technology into a centre of excellence, you aren’t just able to deploy great technology on understanding CAC, LTV and so on, you can also leverage the data from one brand to another and potentially increase your customer lifetime value significantly. This is a really exciting part of the business model.

Conclusion

To be honest, there will be a lot of bargains to be had and building a shared services concept across other functions is where the GBS model is going.

Despite past transformation projects, this looks to me like a business that was struggling prior to coronavirus and would have needed to go through yet further operating model revisions anyway. It’s another example of a highly geared high-street retailer that’s been through PE hands with an out-of-date business model. The brand would have struggled to continue and need to be recapitalised anyway – lockdown was only the straw that broke the camel’s back.

TM Lewin does have a short-term ace up its sleeves; the fact that half its customers will have put on weight and need a new suit, and the other half are likely to have lost weight and need a new suit.

However, my view is the brand will come out of this transition much leaner, with a more focused business model than before and more powerful technology and data modelling to better understand unit economics without the burden of rents and rates. Complementing this will be the addition of new brands to the Torque portfolio that will exploit its power in data to increase customer lifetime value.

Replies (5)

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By pauljohnston
09th Jul 2020 10:05

Very interesting in how the transformation will take place. I agree with Alastair that selling shirts on line is very different from selling on the high street. For me the two top brands were Charles Tyrwhitt and TM Levin but because I have an odd shaped body very long and a little fatter trying a shirt on is very important because it is what the client sees first.

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Replying to pauljohnston:
Alastair Barlow
By Alastair Barlow
09th Jul 2020 13:36

Thanks pauljohnston, I've bought the exact same shirt size and style there in the past with 2 very different actual shirt sizes! If their sizing continues like this, they will see a high level of returns.

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By ireallyshouldknowthisbut
09th Jul 2020 11:40

As a regular online customer I was surprised to see them emerge on the high street in one of my rare forays to out local city centre for clothes shopping (about once every 18 months when I am out of trousers), not least as the stock was poor compared to online, so having been in once i didn't bother a second time. Men don't try on shirts, so shopping in store is pointless. Its only trousers and shoes that gets me out to the shops.

Back to online only seems to be a sensible move, especially if they loose all the "fluff" and stick with what they are good at. £25 shirts you would pay £60+ for on the high street is a nice sweet spot.

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By pmt1pff
09th Jul 2020 12:09

i always liked TM Lewin, mainly because they had different sleeve lengths and shirt cuts so you could find the perfect fit - and the fit was generally consistent across different shirts which, bizarrely, seems to be quite rare. But the first time i went they measured me to find the right fit, not sure how this would work online, i wouldnt trust my own measurements!

feel like their underlying product is fundamentally good though, even the non-shirt stuff. I bought a few blazers from them which are all really well made. Hope TML will be OK. Feel sometimes like society has lost touch with how much things should actually cost, rubbish from Primark and China via Amazon has made everyone think you should be able to buy a t shirt for £3 and no-one wants to invest in quality that will last.

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By C.Y.Nical
10th Jul 2020 17:17

So is this another reasonably good business where Private Equity has bought in, squeezed all the cash and asset value out and replaced it with debt, then continued to suck as much out as possible, and pulled the plug when they have drained every bit of value except the brand name which they then sell as a finale? And all the employees get the boot?
When I first started investing that sort of behaviour was called asset stripping, and whenever it happens there's a few more people who look at capitalism, ask "What's in it for me?", get a hollow echoing silence as a reply, and are utterly alienated from the system and society.

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