Edcon returns to profit as debt costs ease after Bain cedes control
Edcon returned to profit in the second quarter after debt repayment costs eased following the exit of US private equity firm Bain Capital, while the biggest clothing retailer cleared unwanted stock to boost sales during the busy festive period.
Net income for the three months to September was R163 million, the owner of the Edgars and Jet chains said this week. This compares with a R2.1 billion loss a year earlier.
Cash sales increased by 0.8%, although a slump in purchases on credit meant total revenue declined by 6.8%.
CEO Bernie Brookes said: “Within each of the Edgars, Jet and speciality divisions, there is significant momentum under way regarding internal changes. While we still have some way to go, progress is pleasing.”
Under Brookes, Edcon has embarked on a fouryear plan to turn around the business, after Bain pulled out from its investment in September.
This eased the debt burden from the US firm’s 2007 takeover to R6 billion from R26.7 billion.
The company needs to boost sales and profit at the same time as South African consumer confidence is struggling amid the weakest economic growth since 2009 and a 27% unemployment rate.
Credit sales, which have plunged since Edcon sold its store-card business to Barclays Africa Group in 2012, declined 18% in the quarter.
Tougher South African regulations regarding whether borrowers should be extended credit has “exacerbated this trend over the past 12 months”, the company said.
Rival clothing retailers Foschini, Truworths International and Mr Price have started legal action against the national credit regulator and the department of trade and industry over the new rules.
“The difficult consumer environment, led largely by challenging macroeconomic factors, continued to weigh on the group’s share of profits,” Brookes said.
“To improve the aged stock profile ahead of the third quarter, we undertook increased and focused clearance during the quarter, specifically in the Edgars division.”
Some of Edcon’s stock in September was two years old, Brookes said at the time, and getting rid of it had already cost the company more than R300 million. A range of new clothing was needed for the third quarter to December as almost a third of Edcon’s annual sales is generated in that period.
Cutting clothing prices exacerbated a drop in second-quarter profit margin to 31.8% from 35.4%, Edcon said.
Franklin Templeton, a fund based in San Mateo in California, became Edcon’s largest shareholder after Bain’s exit in September, Brookes said.