Archive for month: February, 2017

By Sasha Planting   for Moneyweb

At the end of February private equity firm Bain Capital walked away from its acquisition of Edcon with nothing to show for its decade-long investment.

As a result roughly 48 000 staff breathed a monumental sigh of relief. Without the R27 billion debt load and annual interest bill of R4.1 billion, the retail group has a fighting chance of survival. Debt is now reduced to about R7 billion and the annual interest bill is R500 000 – small change in the scheme of things.

However while the group’s turnaround strategy is showing ‘green shoots’, the executive team and the new board, which replaces the previous Bain-heavy board, have their work cut out for them.

The new board became necessary following the capital restructure whereby debt-holders swapped their debt for equity, in the process acquiring a majority shareholding in the group. The new shareholders include SA’s major banks as well as international investment firms such as Franklin Templeton. A BEE consortium owns the remaining 20%.

None of these institutions are represented on the new board, opting instead to help select an independent board. From an initial list of 30 candidates, the selection panel selected six new board members, with the seventh, Keith Warburton, the only person from the previous board. According to Edcon CEO Bernie Brookes no one declined the invitation to join the board.

“We have what we wanted – a strong chairman, strong financial skills, good retail knowledge, an understanding of debt (which we needed to retain once Bain walked away), as well as a recognition of diversity,” he says.

One criterion for the board members was that they could not have big workloads outside of Edcon. “We were not interested in people with four or more directorships,” says Brookes, “we will be calling on the board extensively, far more so than in a publically-listed firm.”

The board has three vital roles: to oversee the execution of strategy; to ensure a good exit for shareholders, and to manage shareholders, who, lets face it, have had a tough time.

This support will free the CEO to ‘walk the floor’. Edcon’s debt troubles meant that Brookes (pictured left) and his team spent most of the past year engaged in ‘financial gymnastics’ rather than driving the operational changes necessary.

The turnaround strategy, which Brookes says he is ‘warming to’ as it starts to prove itself, has not yet made its mark on the bottom line. In the three-month period ending December 24 2016, Edcon sales declined by about 3% compared to the same three-month period the year before, while gross and Ebitda margins declined by about 3% and 2%, respectively.

This was to be expected. Edgars alone has closed about 140 stores. The retailer has also abandoned its expensive adventure with international brands, cutting brands represented from 37 to about 8 as it focuses on homegrown favourites like Kelso, Stone Harbour and Penny C. In the process Edgars has had to write off about R300 million in old stock, which “cost us dearly,” says Brookes.

Margins have also come under pressure as Edgars and Jet management have had a hard look at what it takes to compete and have dropped prices accordingly. “International players in this market are forcing apparel retailers to relook their speed to market, their quality and their price points,” he says.

“They [international players] will continue to grow in this market, which is a global phenomenon, and local retailers will have to learn to compete – next will come supermarkets like Aldi and Lidl.”

While the new strategy is not in all stores yet, it is resonating with customers. For instance trading at Edgars Canal Walk has increased from R7 000 per m²/month to R24 000 m²/month. Across the group sales have increased for each of the last three quarters – though not enough to generate positive growth yet.

The fall in credit sales, which was precipitous following the sale of the book to Absa, has also been steadied. That’s because Edcon is now funding the lower LSM customer off its own book – which the retailer can now afford to do.

Brookes is confident that the department store model, which has not fared well in South Africa over the last 20 years, has a place. “The likes of John Lewis, Selfridges, Takashimaya in Singapore or Galeries Lafayette in France show that if you can put customer service first, provide customers with a one-stop solution, differentiate yourself and create a sense of ‘theatre’ in store, you can succeed.”

This is no small task. However an elephant is not eaten in one bite. The first breakthrough will come with positive sales growth which Brookes expects in six to nine months time. “It took a long time to break this business, it will take time to repair.”

Author: Sasha Planting