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Restructuring and Redundancies at Paul Smith

Can the British brand known for its quirkiness and smart tailoring make good on its turnaround plan?
Paul Smith | Source: Paul Smith
By
  • Sarah Shannon

LONDON, United Kingdom — It's been a tough time for Paul Smith, the namesake fashion label of the 71-year-old godfather of British style, known for its sharp suits and eccentric English touch. Operating profit at the company has declined for five consecutive years.

Smith has been in business since 1970, when he started a store in his hometown of Nottingham with Pauline Denyer, now his wife. He has dressed cultural heavyweights, from David Bowie to REM’s Michael Stipe. In 2000, he was awarded a British knighthood for services to fashion and London’s Design Museum staged a retrospective of his work in 2013.

But a slowdown in luxury spending across Europe and Japan, a heavy reliance on wholesale clients that have struggled to compete with fast fashion and the rise of e-commerce have hurt sales and profits. Earlier in 2017, the privately held business, which is majority owned by the founder, said operating profit before exceptional items slumped 63 percent to £3.96 million (about $5.4 million) in the year ended June 2016. Sales fell 6.7 percent to £178.6 million, the second consecutive year of declines driven by “weak demand in core markets,” according to its annual report.

The brand kicked off a restructuring in 2016, reducing its seven labels down to just two: the main catwalk collection Paul Smith, and PS by Paul Smith, a younger, sportier range sold at more affordable price points. That meant axing lines like Paul Smith Jeans and Paul Smith London, and combining its women’s and men’s collections.

However, sources close to the business say that despite the shifts and a global revival in luxury spending (the personal luxury good market climbed 5 percent last year), senior designers have left the brand and Paul Smith has offered more voluntary redundancies to senior staff, to keep costs down. It is a worrying sign. One of its stores in London’s Notting Hill, albeit a smaller secondary location, is also closing, while the brand’s first-ever store in Byard Lane, Nottingham, shuttered in August. This comes amid a global menswear market that is growing faster than womenswear and is expected to reach $438 billion by 2020, according to Euromonitor.

Having a business that relies on suits is something of a risk, as men's fashion shifts towards more casual looks.

So what is going on?

“2017 has been a turning point for Paul Smith. Growth has returned in our own stores and to our forward order wholesale business,” said Jonathan Towle, Paul Smith’s director of marketing. “2017 fiscal year turnover has increased,” he added, while declining to reveal details. Nor did he comment on senior level staff redundancies except to say that overall staff levels were marginally up to 1,147. Towle confirmed the planned closure of the Notting Hill store, adding that the brand also opened new outposts in Manchester and Copenhagen Airport last year.

One clear issue is Paul Smith's continued reliance on wholesale while other brands are increasingly adopting direct-to-consumer strategies where margins are higher, control over brand image is greater and discounting can be better managed. At Burberry, for instance, wholesale is down to 22 percent of total sales. At Paul Smith, the number still hovers around 50 percent. Wholesale revenues for Autumn/Winter 2017 were down 6 percent, though figures for Spring/Summer 2018 increased by 7.1 percent, indicating positive momentum, according to Towle. Retail, which accounts for around 40 percent of total sales, is ahead by 5.8 percent on a like-for-like basis.

The Japanese business, where there are over 200 stores and a near cult-like reverence for Paul Smith, has propped up the brand in the past. Licensing is about 10 percent of the label's revenues and Japanese licensee Itochu Corporation bought a large stake in the business back in 2006. But Japan’s luxury market has been suffering since the global financial crisis and the Tōhoku and Fukushima catastrophes, and Paul Smith’s licensing income from the country has been flat for the last three fiscal years. Tellingly, Paul Smith also bought back a 10 percent stake from Itochu for 3.218 billion yen according to its last annual report, valuing the business at £210 million, or less than 1.5 times its revenue.

Having a business that relies on suits for around 80 percent of sales is also something of a risk, as men’s fashion shifts towards more casual looks. “Men style and wardrobing is getting more casual,” said Justin Berkowitz, men’s fashion director at Bloomingdale’s, which stocks PS by Paul Smith in twice as many stores as the brand’s mainline collection. “There is a boldness to what the PS brand does that is really fun. I also like the attention to the twisted detail. Whereas a lot of the other brands are maybe a little quieter, PS is not afraid to take a bolder stance on colour.”

But not all are as sanguine. “It should better define the difference between the Paul Smith and PS lines,” said Mario Ortelli, senior research analyst of luxury goods at Stanford C. Bernstein. “The brand should work in better defining and communicating its identity to the consumer to justify its premium price positioning.”

The performance of Paul Smith’s turnaround efforts will be made more clear when the business files its next annual statement in March.

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