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LK Bennett Bankruptcy Case Study

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LK Bennett Bankruptcy Case Study

Bankruptcy Summary

Founded in 1990, L.K. Bennett Limited (L.K. Bennett) is renowned for signature kitten heels, women’s ready-to-wear clothing collections, handbags and accessories, and being a favored brand of celebrities and stylish women throughout the world. The company, headquartered in London, England, offers its products through company-owned and other retail stores, as well as online.

On March 7, 2019, while operating 39 stores and 37 concessions, L.K. Bennett entered into administration as it sought the sale of the business, which eventually occurred on April 11, 2019.1 When using S&P Global Market Intelligence’s Probability of Default Model Fundamentals to analyze the company’s probability of default (PD) during the period before administration, we found an 11-fold increase between fiscal year (FY) 2015 and 2016. During which, the PD rose from 1.462% (an implied credit score of ‘bb-’),2 a level that was marginally better than the median benchmark for the UK Apparel Retailers and Footwear industry, to 15.71% (an implied credit score of ‘ccc+’). This increase is akin to a credit score weakening by four notches. Between FY 2016 and FY 2017, the PD then increased by more than 81%, rising from 15.71% to 28.47% (an implied credit score of ‘ccc-’, or two notches worse).

Following its financial statement filings for the period ending July 30, 2016, L.K. Bennett fell into ‘ccc’ implied credit score territory, and since then has not shown signs of improvement. The firm’s struggles may point more generally to the wider problems faced in the UK Retail sector, which is experiencing a prolonged consumer downturn. Bennett’s failure to recover was due to systematic as well as company-specific issues that saw rising costs, increased leverage, and decreased profitability. These issues included:

  • A perceived high price point for its products and increasing competition from lower or similarly-priced rivals.
  • An increase in the UK living wage, necessitating that higher salaries be paid to their employees.
  • Significant corporate restructuring costs.
  • A fall in the value of sterling, impacting the cost of materials.
  • Rising business and property rates,3 with Bennett having around 60% of its business in bricks and mortar.

Exhibit 1: Fundamental PD Escalation

Source: S&P Global Market Intelligence as of April 25, 2019. For Illustrative purposes only.
https://www.capitaliq.com/ciqdotnet/company.aspx?leftlink=true&companyId=12617411

PD Fundamental Analysis

S&P Global Market Intelligence’s one-year Fundamental PD for L.K. Bennett highlights the company’s implied credit scores in the ‘ccc’ range for the final two reporting periods from 2016 to 2017. Credit risk heightened after the reporting period for FY 2015 compared to the six prior reporting periods, when the implied credit score was consistently in the ‘bb’ range. This change from ‘bb+’ to an eventual ‘ccc –’ was partially due to a dramatic fall in Bennett’s net income from positive, albeit modest, figures in the 10 reporting periods prior to 2016 to approximately -£48M in 2017.

As of FY 2015, L.K. Bennett had a PD of 1.46% (an implied credit score of ‘bb-’) and was in the top half of UK Apparel Retailers and Footwear manufacturers. In FY 2016, however, the company fell into the worst performing 25% of its UK peers, with a PD of 15.71% (an implied credit score of ‘ccc+’), more than two years before filing for administration. Following this, in FY 2017 L.K. Bennett’s probability of default was higher than 10% of its UK peers, with a PD of 28.47% (an implied credit score of ‘ccc-’). This reveals a significant increase in risk on both an absolute basis and in comparison to its peers.

Credit Analytics’ PD Model Fundamental provides an innovative credit risk methodology that separates model inputs into Business Risk (systemic and company specific indicators) and Financial Risk (financial ratios) drivers, and highlights how both these risks presented challenges for L.K. Bennett, with vulnerable and highly-leveraged scores, respectively as seen in Exhibit 2. The most impactful factors driving the worsening of the PD were:

  • Total revenue.
  • Profit margin (net income to total revenue); a ratio of how much of every pound earned remains within the business.
  • The firm’s capacity to service debt (net income to total liabilities); the ability of the company to meet its financial obligations.

L.K. Bennett last experienced a positive revenue growth rate in FY 2014 (15.16% over the previous year), while revenue growth fell from -1% to -12.44% from FY 2015 to 2016, ultimately ending with a profit margin of -41.8% by FY 2017. With this revenue decline, the company was trying to curtail diminishing profit margins until they eventually became negative, with an average profit margin of -10.85% between FY 2013 and FY 2017. The falling profit margins led to L.K. Bennett becoming increasingly leveraged, while exhibiting a diminishing ability to service its debt. The net income to total liabilities ratio for FY 2017 was -116.45% compared to a positive average of 21.78% from FY 2012 to FY 2015, indicating that the company was unable to manage the debt obligations that were due. The company’s lack of liquidity also compounded the burden of other operating expenses, which totaled approximately £42M in FY 2017, contributing to its eventual insolvency.

Exhibit 2: PD Fundamental Contribution Analysis

Source: S&P Global Market Intelligence as of April 25, 2019. For Illustrative purposes only.

Exhibit 3: Key Developments

Source: S&P Global Market Intelligence as of April 25, 2019. For Illustrative purposes only.

Uncover counterparty default risk with PD Fundamentals

S&P Global Market Intelligence’s Credit Analytics suite of statistical models includes data, analytics and workflow tools that can be used to assess and monitor the creditworthiness and loss profile for millions of companies and exposures. To find out more about our solutions contact us here.

1 Unless otherwise noted, all information sourced from the S&P Capital IQ platform as of April 25, 2019.
2 S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings.
3 Source: Financial Times, LK Bennett poised to enter administration, March 1, 2019,
https://www.ft.com/content/c0c8c0fe-3c0d-11e9-b72b-2c7f526ca5d0.

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