Financing

When you have completed this chapter you will understand that:

businesses must fund long-term requirements in a balanced and appropriate manner;

there are a number of different sources of long-term funding;

these can be classified, essentially, into “debt” and “equity”;

there is significant interplay between long-term solvency and short-term liquidity issues;

ratios have been developed that enable the relationship between debt and equity to be captured;

new forms of funding such as derivatives are constantly being devised, posing particular challenges for accounting regulators.

Fat Face “Ski Bums” Understood the Bottom Line, by Lina Saigol and Andrea Felsted

Being a ski bum is not always a slippery slope. For Tim Slade and Jules Leaver, it led them to establish an active casual wear clothing company recognisable across the globe.

It all began in 1988 in the French ski resort of Méribel, where the two self-confessed ski bums were hanging around on the slopes and avoiding real work. But, finding themselves in need of cash, the pair started printing sweatshirts and fleeces with the slogan “Méribel ‘88”, which they planned to sell out of their rucksacks, allowing them to fund their winter hobby.

Taking the Le Face Olympic ski run at Val d’Isère as the inspiration for a name, the two friends founded Fat Face in 1988. The pair then travelled the world for five years, adapting their designs to each new location. Their lifestyle-orientated outdoor clothing line aimed to epitomise the brand’s philosophy: life is out there.

As their ranges expanded, they swapped the pistes of Europe for London, setting up their first shop on Fulham Road in 1993 with £12,000 raised from the sale of their VW camper van and a few shares. Seven years later, Fat Face had 30 shops, £7m in turnover and profits of almost £800,000. At that point, Mr Leaver and Mr Slade were ready to sell out.

In 2000, private equity group ISIS Equity Partners injected £3.5m of funding in exchange for a 41 per cent stake, allowing Fat Face to accelerate its international expansion and move into casual wear, footwear and accessories.

Five years later, private equity group Advent International acquired Fat Face, before selling it to rival Bridgepoint for £360m in 2007, at the height of the leveraged buyout market. The deal netted Mr Slade and Ms Leaver about £90m.

Hit by the financial crisis and a sharp decline in consumer spending, the Fat Face brand started to lose some of its sparkle and analysts warned that quality had begun to slide. In 2010, Fat Face sold more discounted clothing than full-price items for the first time in its history and Bridgepoint injected £4.6m fresh capital to ensure it did not breach its banking covenants.

A year later, the private equity group brought in Anthony Thompson, the former head of Asda’s clothing division, as chief executive and charged him with turning round Fat Face by moving it away from discounting. In February last year, Fat Face appointed Sir Stuart Rose, the former boss of Marks and Spencer, as chairman, to help boost its credibility with investors.

But the driving force for the company’s transformation has been Mr Thompson, who got to grips with the constant discounting, which he likened to a drug that store groups can find difficult to kick. “You need a higher dose each time you do it,” he said last year, “and you need a shorter period of time [in between]”.

Unlike other retail bosses, Mr Thompson has held back on launching a sale before Boxing day for each of the past four years, which has boosted the reputation of the brand and its price integrity. This year, Fat Face sales were up 5 per cent, year on year, in the five weeks to January 4. Boxing day was the biggest single sales day in the company’s history.

Now, the chain is eyeing international expansion once more. It plans to open a handful of stores around Boston in the next 18–24 months, as well as a dedicated US website. While Britain’s biggest retailer Tesco failed to crack the US, Fat Face is hopeful its brand will resonate with American shoppers. “There is an opportunity for us based on the research we have done,” Mr Thompson said. However, he pointed out: “We are going to be quite measured about how we go about it.”

(Financial Times, 21 January 2014)