Deal focus: LionRock finishes polishing Clarks

LionRock Capital, an Asian private equity investor that targets global consumer brands with a China growth angle, is not a fund manager in the conventional sense. There is a pool of committed capital, but the largest contributions to the firm’s USD 100m-USD 300m equity cheques are a handful of family offices that mobilise on a deal-by-deal basis.

British shoe brand Clarks was the first investment from LionRock’s latest fund. Having agreed to exit the business after a successful two-year turnaround effort at “a very attractive return given the current market conditions,” LionRock founder Daniel Tseung describes it as an exact demonstration of the type of investment the firm is trying to do.

“We are looking to close our second and third deals shortly,” he said. “COVID has extended longer than expected, and many companies still face tremendous headwinds. They realise they may not have the ability or capital depth to make the kinds of investments necessary, and this has created tremendous opportunities for us in Europe and the US with heritage brands.”

LionRock looks to work in partnership with founders and brand owners. Clarks was no exception. On investing GBP 100m (USD 119m) in the company in February 2021, LionRock agreed a 51-49 ownership structure with the Clark family, which had until then, controlled C&J Clark since its establishment nearly 200 years ago as a single store in a village in southwest England.

“Their interests are aligned with ours and they are active in everything we do,” Tseung added. “We don’t come in and lay off thousands of employees. We try to maintain what we can and take a long-term view, which makes us more of a partner of choice rather than a pure restructuring firm.”

Restructuring remit

Not long after LionRock’s arrival, another partner entered the mix. Viva China, is a Hong Kong-listed company controlled by Li Ning, founder of the eponymous Chinese sporting goods brand, that has interests in numerous apparel and footwear businesses. It provided a loan in support of LionRock’s initial investment and then took a 51% equity interest in Clarks, squeezing down the other investors.

Tseung has a close working relationship with Li, who serves as non-executive chairman of LionRock. Meanwhile, Li-Ning the company is an anchor LP in the firm’s fund. Tseung credits Li as a turnaround specialist in his own right. After Li-Ning ran into difficulty in the mid-2010s, he returned to the helm and oversaw a near fourfold increase in revenue over the course of eight years.

Clarks needed all the help it could get. Net turnover collapsed from GBP 1.37bn for the 12 months ended January 2020 to GBP 775m a year later as COVID-19 severely curtailed brick-and-mortar retailers. Over the same period, a net profit of GBP 17.2m became a net a loss of GBP 181.8m.

LionRock’s investment was contingent on creditors approving a company voluntary arrangement (CVA) regarding Clarks’ 320-store network in the UK and Ireland, which involved converting 60 outlets to nil rent, with landlords getting a share of turnover rather than fixed payments. Then there was the matter of addressing GBP 195m in bank debt and over GBP 400m owed to other creditors.

“It helped that we were working with a heritage brand that people knew had seen better results in other times. There were longstanding relationships with different institutions, and we had to preserve those to the best of our ability, which allowed us to get through this period,” said Tseung.

“At the same time, the company had a lot of fixed overheads. It’s hard for a family that has owned a company for so long to make decisions around certain counterparties. But in a situation like COVID, relationships had to be adjusted quickly, and we could take an objective view of the situation.”

He claims it took about 12 months to stabilise Clarks, during which the entire c-suite management was replaced and LionRock oversaw the continuation of a store reduction programme.

As of January 2019, the company had 1,377 outlets globally, of which 784 were directly owned. The UK accounted for 410 directly owned total, compared to 276 in North America, 26 in Europe, and 72 in rest of world. The turnover split – out of GBP 1.47bn group-wide – across these four geographies was GBP 549m, GBP 607m, GBP 128m, and GBP 186m. There were 11,760 employees globally.

Clarks closed 103 stores over the next 12 months, 121 the year after that, and 27 in the 12 months ended January 2022. Despite conversions to nil rent, there were still 52 stores with onerous lease provisions, down from 98 a year earlier, and 325 outlets were being held at impaired value.

Of product, format

These rationalisation efforts, coupled with the easing of pandemic conditions, helped the company post GBP 920.3m in revenue and GBP 55.4m in net profit for the 2021-2022 financial year. Clarks also upgraded store designs, improved its direct-to-consumer e-commerce platform, optimised its logistics and distribution network, and shifted much of its supply chain to different locations in Asia.

In addition, the company introduced product localisation and cross-over collaboration strategies, coming up with versions of its classic desert boot and Wallabee lines that would appeal to younger consumers in different markets. Collaborators included Supreme, Levi’s, and Moncler, while Chinese actor Xu Kai and English footballer Raheem Sterling were recruited as brand ambassadors.

“We want to make Clarks cool again,” said Tseung. “The bold designs and aggressive colours in the Supreme and Moncler collaborations have inspired a lot more interest from Gen Z consumers.”

Clarks remains a global operation, claiming to operate in 100 markets with a portfolio of more than 22,000 pairs of shoes. However, the business model varies by geography. While the UK is very much a retail-driven market, the US is primarily wholesale. Management wants to create a unified strategy comprising the best of both without undermining the brand ethos.

“In the UK, back-to-school is a big part of the business. Parents take their kids for in-store fittings, and we want to maintain that heritage. This is also popular in India, but not in the US,” Tseung said. “Meanwhile, more contemporary consumers are buying shoes through e-commerce. In the right markets, we will complement e-commerce with the physical experience of larger flagship stores.”

Once Clarks figures out the right mix for China, it will make a more concerted effort in that market, which currently accounts for less than 10% of turnover compared to 20-30% for major competitors. Viva China will be instrumental in these efforts, but COVID-19 remains a significant obstacle.

“We are willing and able to make a large commitment to China growth, but we need to do it an environment where we know that investment will be well-received,” said Tseung. “We are doing our best to get through zero-COVID. We know that China will still become the largest consumer market globally over the next 3-5 years.”

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• Topics
• Greater China
• Europe
• Trade sale
• Consumer
• Hong Kong (China)
• United Kingdom
• Lion Rock Capital