A long, hard road lies ahead

Debt restructuring has bought the group time, but consolidation is also planned and the size of shops will be trimmed

Restoring Edcon, SA’S only remaining department store, to at least a semblance of its former glory is a daunting prospect. But former Massmart boss Grant Pattison believes it is possible.

His challenge is to reverse the devastation of Edcon that followed its acquisition by US private equity firm Bain Capital for R25bn in 2007.

From that year, when the retailer had a dominant 31% share of SA’S clothing and footwear market, it was downhill all the way.

In typical private equity fashion Bain pumped debt into Edcon, pushing up its interest bill to R2.53bn in its year to March 2008 from virtually zero in previous years. The interest bill rose to R4.54bn in its year to March 2016, dwarfing its R987m trading profit.

The investment firm ultimately walked away from Edcon in late 2016 with not a cent to show for its investment.

Pattison shrugs off Edcon’s troubled past and says: “Despite outside scepticism, Edcon is now a very stable company.”

Pattison, who served as Massmart CEO between 2007 and 2014, became Edcon CEO on February 1, having succeeded Australian Bernie Brookes, who had led Edcon since September 2015.

Despite Pattison’s upbeat view, Edcon is still far from out of the woods, even though radical debt restructuring was undertaken in 2016. The complex exercise was completed in February 2017 and involved Edcon bond holders accepting about 40% of the face value of their bonds in exchange for an equity stake.

This cut Edcon’s debt burden in its year to March 2017 to R2.18bn from R26.5bn a year earlier, and lifted its total equity to R559m from a negative R25.7bn.

It has bought Edcon time, but what has yet to be seen is a revival of its trading fortunes.

In the 13 weeks to December 23, when most retailers reported buoyant conditions, Edcon turned in a 4.9% like-for-like fall in sales to R7.71bn and a trading loss of R127m.

A key element of Pattison’s turnaround strategy for the 1,292-store Edcon is to cull trading space aggressively.

“He has no other choice but to cut space,” says independent retail analyst Syd Vianello. “Edcon has run out of money. It can’t turn to shareholders, and banks are likely to be reluctant to extend further credit until the group shows it can make a profit from what it has.”

Pattison has set a two- to three-year time frame for retail space cuts. It is not good news for retail landlords, as Redefine Properties CEO David Rice spelt out recently when he predicted that Edcon would slash its retail space footprint by a third, from 1.5m m² to about 1m m².

“He is accurate about the direction, but we will not be reducing retail space by anywhere near 500,000 m²,” says Pattison, who declined to provide an exact target.

The strategy, explains Pattison, is to consolidate, and focus on Edcon’s three core brands: Edgars, Jet and CNA. In part this will entail closing the stores of home decor brand Boardmans and cosmetics specialist Red Square, and shifting their staff and stock to Edgars stores. This alone will ensure a big retail space reduction; Boardmans’ 33 stores occupy 30,000 m² and Red Square’s 42 stores 6,500 m².

But the really big cuts will be across the 203 Edgars stores, which occupy retail space totalling 740,000 m² and generate half of group retail sales.

Many Edgars stores are too big and will be scaled back, says Pattison. This could, for example, involve reducing a store now covering three storeys in a mall so that it occupied just one.

Outright closure of many Edgars stores appears likely.

Change is also coming to the Jet chain, which has 737 stores spanning 648,000 m² of retail space and contributes just over 40% of group retail sales. Jet serves consumers predominantly in the LSM 4-7 segments, and competes with the likes of Steinhoff Africa Retail’s Pep and Ackermans.

The strategy with Jet is to get closer to its customers by exiting some existing stores and opening more small-format stores.

“Jet has missed out by not serving its target market adequately,” says Pattison.

A strategy is also in place for the 196-store CNA, a brand showing many signs of being in terminal decline. In the 13 weeks to December 23, CNA’S retail sales slumped almost 10% to about R450m.

“We will take CNA back to its roots as a stationery go-to store and instil a positive mind-set about the brand among its customers and employees,” says Pattison. “We also see a big opportunity in providing education solutions.”

The strategy does not excite Alec Abraham of Sasfin Securities. “I am not too hopeful that it will work,” he says.

The ultimate goal must be to relist Edcon, but if that happens it will not be for many years.

For now the reputations of both Pattison and Edcon are on the line.

Edcon has run out of money. It can’t turn to shareholders, and banks are likely to be reluctant to extend further credit Syd Vianello