Rapha undergoes refinancing operation to write off debt but says it “far outperformed” rivals in 2022

Premium cycle clothing firm Rapha has told road.cc that it outperformed the market in terms of sales during 2022 and that a recent refinancing of the business involved existing shareholders is aimed at reducing its cost of borrowing.

Documents filed at Companies House last week reveal that Carpegna Limited, the holding company of the north London-based business, underwent a debt-for-equity swap on 16 January this year, a process through which debt owed by a company is converted into shares, thereby reducing its total borrowings. 

While such transactions are often triggered by financial institutions that are owed money by a business and can result in a change of ownership, as happened last month when a group of lenders took over the retailer Matalan, Rapha stressed to road.cc that its own debt-for-equity swap had been initiated by its largest shareholder, which road.cc understands to be Delaware-registered Lawrence Classics, LLC, which is in  turn linked to US firm RZC Investments.

The refinancing was approved earlier this month by the company’s shareholders, including Rapha founder Simon Mottram, who sold a majority stake in the business in August 2017 to US-based RZC Investments, which is controlled by Steaurt and Tom Walton, grandsons of the founder of the Walmart grocery empire.

Loans from shareholders converted into equity

Around 90 per cent of the total £3.3 million that the company paid in interest in the 2021/22 financial year related to loan notes from shareholders totalling £39.9 million, redeemable on 30 June 2024, and which attracted annual interest at a rate of 8 per cent. That debt has now been extinguished as a result of the refinancing operation.

Francois Convercey, who was appointed co-managing director of the business in November, told road.cc: “Rapha confirms that it has recently concluded a debt-for-equity swap.

“Loans from Rapha shareholders were converted into equity and this transaction reflects the long-term commitment from our existing shareholders, and their belief in Rapha’s long-term potential. This transaction will better position Rapha to unlock our next phase of growth.”

He emphasised that there had been no change in shareholders – although that is not to say that individual shareholdings will remain the same as had been before the transaction – and that it had been initiated by the company’s largest shareholder and not an external creditor.

Convercey said that the debt-for-equity swap would reduce Rapha’s overall borrowing costs, clearly an important consideration for any business given sharp rise in interest rates in recent months following a decade and a half when they had remained at historically low levels.

Like many businesses, Rapha has access to a revolving credit facility to help fund its working capital, in its case with HSBC. As of the end of the 2020/21 financial year, the amount drawn down against the £8 million facility stood at £2.3 million, but 12 months later, when the 2021/22 financial year closed, it had risen to £7.9 million.

According to Rapha’s annual report and accounts for 2020/21, interest on amounts drawn down via that revolving credit facility is calculated at LIBOR plus 2.35 per cent, resulting in a charge for that year of £147,000.

In spring last year, the company negotiated an additional £8 million 12-month revolving credit facility with the bank.

While the amount outstanding of the £16 million available as at the close of its latest financial year on 30 January will not be known until the report and accounts are filed later this year, it seems likely that interest payable for amounts drawn down during the period will be significantly higher than they were during the preceding year.

In terms of trading, Convercey highlighted that 2020/21 and 2021/22 had both been record-breaking years for the business in terms of turnover, “helped by the market tailwinds experienced by the broader cycling industry during that period.”

Cycling industry battles economic headwinds in UK and beyond

In common with many other businesses operating at the premium end of the market, however, in its latest financial year it has faced more challenging conditions.

In part, that is due to the rising cost of living which has led many consumers to rein in discretionary purchases.

While clearly on a tiny scale compared to Rapha, within the UK cycle clothing market recent weeks have seen the closure of Milltag as well as women’s brand VeloVixen. Meanwhile in the United States, Specialized pulled the plug on the inclusive women’s clothing brand Machines for Freedom.

As well as those, road.cc understands that certain other relatively small UK-based players operating at the premium end of the cycle clothing market have been affected by the economic downturn and have made some employees redundant in the past month or two.  

Beyond the UK Specialized, which last year terminated its brand ambassador programme, also made one in eight employees worldwide redundant last month, which coming on top of reports of job losses at Wahoo and Strava provides further evidence of hard times for the cycling industry.

“The overall trading environment has undoubtedly been tougher in 2022 than we have experienced in the previous couple of years,” Convercey said. “The recent trends and an industry-wide softening of demand has been widely publicised.

“We’ve all seen high levels of discounting in the apparel sector, which Rapha hasn’t been immune to, but in that tougher market context, we’ve been very pleased with our 2022 results.”

During the 2021/22 financial year, 169,000 people shopped with Rapha for the first time, and according to Convercey, “a good proportion” of those customers had bought from it again during the past year, when the company also “continued to acquire new customers at scale.”

He said that Rapha’s international spread – 28.5 per cent of sales come from USA/Canada, 26 per cent from Europe, 24.0 per cent from Asia Pacific, 19.9 per cent from the UK and 1.6 per cent from the rest of the world – helped insulate the company from some of the problems others with a tighter geographical focus may face.

“As a globally diversified business, we are also fortunate that we have revenue from markets where cost of living pressures are not being felt so keenly at this time,” he said. 

During the year to 30 January 2022, Rapha’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 18.3 per cent to £10.7 million, with its pre-tax loss worsening from £7.1 million to £10.5, on sales of £131.7 million, a 34.4 per cent rise on the previous year.

Rapha “far outperformed” industry trends in past year

Convercey acknowledged that the strong sales growth experienced that year had not carried over into 2022/23, saying that total revenue “was down marginally vs the previous year, but by far outperformed total industry trends year-on-year.

“As a brand, we remain focused on bringing our purpose of ‘inspiring the world to live life by bike’ to the fore. And we will continue to do that through Rapha’s unique blend of content and inspiration, innovative and high quality performance apparel, and unique community-centric omni-channel retail model,” he added.

Convercey, who was previously Rapha’s chief brand and marketing officer, was appointed joint managing director of the business in November, alongside Daniel Blumire, who was its chief commercial and product officer, following the departure of chief executive William Kim who returned to his native Korea, citing personal reasons.

> Rapha boss steps down, joint managing directors appointed

The previous month the company, which last year moved into its current headquarters in a former warehouse in Upper Holloway, north London, appointed Sean Clarke as chief finance officer.

> Rapha to move to new headquarters in north London