Kids are us
Michael Hobbs of children's wear company Adams explains how his company's multi-channel, multi-brand approach will deliver a future that means a float or acquisitions are not necessary yet.
Four years after leading the buyout of childrenswear retailer Adams, and a year after a major recapitalisation, Michael Hobbs plots his next move with Jim Pendrill.
OWe all know the customer is king, and nowhere more so than in retailing. Just as well then that Michael Hobbs's number one customer lives under the same roof as him.
His eight-year-old daughter Camilla, or rather "Millie", as he affectionately calls her, already appears to be putting a marker in the sand to take over from daddy one day.
"She is definitely my most challenging customer. She tells me exactly what she thinks and has extremely strong views about what I'm selling, both good and bad. She acts as a very good check for me."
Switch back 30 years or so and the young Mr Hobbs was doing precisely the same thing to his own dad as he spent his formative years in Nottinghamshire stacking shelves, driving forklift trucks and eventually running supermarkets owned by his father's wholesale business.
Strange then, I suggest to Hobbs as we take our seats in the lobby of a hotel off the M1 near his Leicestershire home, that he once went on record as saying his biggest wish was that his four children never followed him into retailing.
"Oh yes, I remember that. I suppose I said it because I was thinking of the relentless working environment that comes with the turf. However, if my children are as driven as I am then I am sure they will excel at whatever they do."
Hobbs is most certainly driven. Still a frighteningly youthful 43, he has achieved much for his years already, so much so that he has afforded himself the time to calm down a bit of late.
He keeps reminding me during the interview that he really must get away on time to make his son's swimming gala. "Ten years ago I would never even have considered asking myself the question of whether I was going along. I do make a conscious effort to make time for my children nowadays. Ten years ago I wasn't making the time I should have done for my children who are now older."
But then again turn back the clock back 10 years and the younger Hobbs was certainly going to let nothing get in the way of him making a name for himself in the retail world.
Having learnt the fashion trade in the 1980s with Swedish business Hennes & Mauritz in London, Hobbs would subsequently have spells with Burtons and Laura Ashley (where he became vice-president of retail in the US) before returning to the UK and the top job at Nuneaton-based Adams in 1996, a time when it was still part of the sprawling Sears conglomerate.
By his own admission his introduction to managing a business was a steep learning curve, in part caused by the ownership issue of Adams.
"To be frank by the late 1990s the company wasn't really going anywhere. It was still part of the Sears group and was under-invested in, yet operating in an increasingly competitive marketplace where supermarkets, sports retailers and discounters alike had all began selling childrens clothing."
Enter one Philip Green, the fabled retail entrepreneur who was to transform not only Hobbs's life but his way of thinking.
As Green proceeded to buy Sears he subsequently encouraged Hobbs and his fellow directors to then buy Adams themselves.
Remembers Hobbs: "For me it was a big opportunity because I like to be in control of things and I liked the idea of being able to influence the direction in which the business was going." And never one to shirk from saying what he thinks, Hobbs adds with a wry smile: "I also liked the idea that it might make me very rich."
As he continues: "I ended up spending six months working for Green and in that time I learnt how to trade and learnt how to think as an entrepreneur. It helped me simplify the whole process and focus on the key drivers of the business. Without his influence I would not have been as well equipped to run the business as I am today."
To get backing for the buyout Hobbs knew he would effectively have to reinvent the company and took a big step back to analyse its core strengths.
"In 1999 we were a single format, single brand business with limited growth. To get investors excited we had to come up with something pretty compelling and had to ask ourselves what it was that made Adams unique.
"I focused on the people, product and profit. Our core competency was our product and the fact that we were the only specialist childrenswear retailer with a full in-house design service. We really pushed that hard while also beginning to look at turning the company into a multi-brand, multi-channel business.
"In 1999 the business was just our own high street stores. Since then we have been true to our word and taken the brand into supermarkets and department stores and developed an international franchise business, not to mention launched new brands."
Focusing on profit and cash was all the more important after private equity group Bridgepoint Capital backed the £387m buyout along with a banking syndicate led by Barclays.
"Following the buyout we were highly leveraged so cash naturally became extremely important," adds Hobbs.
He is naturally keen to stress that the investors have since been instrumental to the company's success.
"I'm sure I could have got a better deal on my own equity stake if I had gone with other private equity players but the key for me was finding the right people for us to work with over a long period of time and that was absolutely paramount to our success.
"The same applies to our banking syndicate. We are a heavily leveraged business which owes a lot of money, so we have got to have people who can go with the punches and the good times. In fact we have a rule within the company of no surprises. We keep our investors involved and up to date. Not everything runs smoothly and we have slipped up on some banana skins since, but it is important our stakeholders are kept informed."
In the months following the buyout the success of Hobbs and his management team's strategy soon began to show as profits took a nice upward curve. Such was the confidence in the company that by the end of 2001 the board began looking at its next move, employing Andersens to look at its options.
Annual trading profits would in fact soar from £37.8m at the time of the buyout to almost double that by 2002.
Furthermore, it was profit that wasn't just coming out of high street stores.
"In 1999 all our profit was off the high street. By 2002, 80 per cent of it was. By 2005
I expect £320m-plus profits and 40 per cent of it coming from non-core," adds Hobbs.
Identifying that the company still had massive growth potential, the question posed at the end of 2001 was quite simply what was the best way to achieve it. Flotation, merger and acquisition, a trade sale, or some kind of recapitalisation?
Hobbs says the biggest issue was simply that none of the original investors wanted to get out.
"What was quite clear was that there was so much additional opportunity in the business that no-one wanted to get out. Bridgepoint were very supportive and the banking syndicate was fine. There was no pressure. If we were to pursue an exit it would be difficult to justify why to do it."
What was clear was that the company needed more finance having outgrown the original buyout terms, whether it be for major investments in its distribution centre, IT infrastructure, stores or new partnerships.
As Hobbs adds: "If you just took capital investment at the time we were spending £33.3m a year. Now we are spending £311m a year."
The recapitalisation soon became the most logical choice, not least given the interest of other private equity houses in the company.
In the event equity house Lloyds Development Capital came in with a £315m investment, a new banking syndicate led by Barclays Leveraged Finance and Royal Bank of Scotland provided a £377.5m package of senior debt and working capital facilities, and Bridgepoint - while having some of its investment repaid - remained majority shareholder with 60 per cent of the business. "The deal unlocked potential for everyone," recalls Hobbs. Hobbs and his management retained a 25 per cent stake.
Furthermore, in an intensely difficult M&A arena, the deal - signed almost 12 months ago - was a welcome fillip for the starved Midlands corporate finance community. "I've never had to look outside the Midlands for the advice I need," proudly states Hobbs.
Looking ahead it would be churlish for Hobbs to discount for good any other options for the company. He says that an exit via a trade route is "possible", as is another buyout.
He won't rule out a flotation one day either, but it does appear further away than it has done for some time.
"We are a small business in the context of the market and I don't want to take the business into the public environment under current circumstances if we have not got the scale and credibility to do it."
For scale Hobbs sees a required turnover of at least £3500m and Adams is still some way off that, presently standing at £3275m with its international business thrown in. "It's only at the £3500million level and up to £31bn that you get on the right radar screens."
Instead Hobbs hints that another recapitalisation could be on the cards sooner than you think.
"I would not be surprised, unless there was a clear and compelling route out, if we didn't consider recapitalisation as an ongoing opportunity, as long as we continue to grow, make money and repay our debt as we are doing so.
"Private equity players recognise the cash-developing ability you get with a well-run retail business."
One way of getting bigger and getting nearer that £3500m benchmark would of course be to buy others. Someone Adams might try is rival Mothercare, especially since the company has recently seen its share price plummet following horrendous problems with its warehousing and distribution operations.
Hobbs admits that he himself has "looked at it" but is lukewarm. "In all truth Mothercare is of great interest to us as a business. As a great business and competitor we have had to look at it to see if there was anything to pursue. As of today there is no interest in buying it."
The caution may in part be historical as back in the mid-1990s Adams tried to take on Mothercare in the hardware market. Hobbs describes the venture as "an unmitigated disaster".
But, I probe Hobbs, how can he grow the business if he just limits himself to childrenswear?
Here we return to the multi-brand, multi-channel philosophy. "We will work with people to develop an alternative solution to Mothercare. We might achieve market leadership as a business rather than as a pure brand."
Hobbs also puts great store for future growth by the Nectar loyalty programme which Adams joins next month and which will enable customers with a Nectar card to collect points on all purchases in Adams stores.
However, I still get the feeling that there are more than a few unanswered questions about exactly how Adams will reach Hobbs's ambition to make it the number-one global childrenswear player. What is clear though is that we should expect to see a number of key strategic partnerships in the near future.
But, like the rest of us, his thoughts for the moment are taken up with the economic and political backdrop closer to home.
The day we meet the UN is in the throes of finding a way to avoid a war in Iraq, a war which will more than likely have begun by the time you read this.
Adds Hobbs: "The economic climate is tough. Like everyone else we have had to reposition our expectations this year. Regarding the war, I hope there isn't one as the uncertainty needs to disappear. But we either need to put up or shut up. If there was a short, sharp war that could have a positive effect on the economic climate."
As well as repositioning expectations, Hobbs has also had to swallow a rare bad business decision in recent months, a misguided entry into the mail order market.
"It hasn't worked for us at all. There is a high crossover between those people shopping in catalogues and those shopping in our stores. It led to the over-distribution of the brand. Mail order has been a distraction for us and we have pulled out of many catalogues."
But the odd bad business decision aside, Hobbs insists that his investors are happy, his banks are happy, and although the future is a tough one it should be a good one for Adams too.
"We have to keep reinventing ourselves and thinking about how we are going to run the business more effectively. To do that, drive and energy is crucial and I don't think I'll be taking my foot off the gas pedal for a while yet."
I thought as much.
Mini Mode
A joint venture with boots could be the first of a series of strategic partnerships for Adams.
An Adams joint venture with Boots encapsulates Hobbs's drive to reposition the company on a multi-brand, multi-channel strategy - a strategy which he sees as helping turn Adams into a truly global retail player.
Adams started talking to Boots 18 months ago about how it could help the chain improve its childrenswear. The result was the creation of a new brand and mini mode baby and toddler ranges designed and produced especially for Boots.
It was Adams' first venture in developing a separate brand. The range has three collections - newborn, baby and toddler - and also includes soft toys. With Boots, Adams has invested more than £35m in developing the new brand and putting in place the design, retail and marketing infrastructure. The range was launched earlier this year and the agreement runs until 2006.
The life of Adams
founded in 1933, adams now has 340 stores. Founded in 1933 Adams is now one of the world's largest designers and producers of childrenswear for the under 8s. The story began when Amy Adams set up a small baby clothes business in her terraced house in Kings Heath, Birmingham. The company was subsequently acquired by Foster Brothers in 1973 which then became part of Sears in 1985 until its disposal in 1999 and the MBO.
As of today Adams has 340 high street stores, 126 stores inside Sainsburys, 30 concessions and 60 international franchises. Hobbs has plans to open 40 new high street stores by 2004 and spend £32.5m on refurbishing 86 existing stores.
The company's head office and distribution centre are based in Nuneaton and employ 350. The group employs 4,000.
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