Edcon has tough issues to iron out
Just 10 years ago, the Edcon group was making R1.3bn in net profits. But for the year to March, net loss came in at R2bn on the back of R29.4bn in revenues. The only piece of good news, strictly for eternal optimists, is that net loss has narrowed from last year’s R2.4bn. So where did the group go wrong?
With brands like Edgars, Boardmans and Jet spanning 1 500 stores in SA, and over 200 other stores in seven neighbouring countries, Edcon’s chains rank f irst or second in most of its product lines. This, as well as enviable brands and foothold, used to translate into massive profits. But for the past few years Edcon’s income statements have been splashed in red ink. How did this happen?
Edcon simply “lost focus”. That is according to Argon analyst Junaid Bray.
“Overburdening the balance sheet by gearing the business up at the peak of the previous cycle, just prior to the global f inancial crisis, constrained Edcon’s ability to reinvest in its business and maintain its core credit offering,” says Bray.
Hence, he says, Edcon, which is owned by US company Bain Capital, could not invest to grow and defend its market share in the face of intensifying competition from both local peers and “from the increasing presence of foreign retailers like Zara and Cotton On”.
When Bernard Brookes takes over as Edcon CEO at the end of September, his legacy will be defined by how he tackles such matters.
With predecessor Jürgen Schreiber gone to pursue an opportunity i n Canada, l ong- ser v i ng COO Urin Ferndale and Roanne Daniels, a Bain representative, are joint interim CEOs until the end of September.
Brookes joins Edcon after nine years in charge of Myer, Australia’s premier department store chain. Edcon noted that, under Brookes, Myer’s market cap grew from AU$1.3bn (when it f loated on the Australian Stock Exchange in 2009) to over AU$2.3bn now. However, Myer’s prof its, and stock, suffered during the second half of his tenure.
Edcon chairman Dwight Poler r ega r ds Brookes high l y. Edcon, according to Poler, is “very pleased” to have Brookes on board.
In contrast, in an interview with Business Day, Sydney-based Impact Retailing consultant Stuart Bennie offered anything but a pleasing preview. “Somehow he seemed to lose focus,” said Bennie of Brookes’s other activities. “It beggars belief that a CEO who was fired – put it how you will – in Australia can be hired to join an ailing Edcon.”
TOUGH TIMES Edcon, which has laid off an unspecified number of employees in recent years, discussed “selling assets or ceasing operations to improve [its] short-term liquidity and service [its] cash payments” and thus “depress” and “impair” its abilities, it said in July, when it also disclosed that its overdraft had quintupled to R25m.
June quarterlies show a drop in store sales at the Edgars division, the main source of income, whose base now extends to 549 outlets. At the lower end, including Jet, sales softened. Sales and margins weakened at stationer CNA as it “right-sized” trading space and added five branches during the quarter. Modest growth from neighbouring countries had a minor effect on Edcon’s losing streak.
Spokesperson Debbie Millar dismisses assertions that things are looking bleak. Instead, she singles out EBITDA, which has risen over the last four quarters (but is far off its best).
REGAINING MARKET SHARE For Bray, regaining lost market share is long overdue. But it won’t be easy as rivals – mainly Mr Price and Pepkor, who have made gains from its losses – f ight on. Critically, it may be difficult to win back lost clientele, he adds. Redefining the market and product mix is another top priority. “The high-end branded goods strategy has lowered the affordability of Edcon’s offering, which has become more reliant on credit, while Edcon doesn’t have the ability to significantly offer credit,” asserts Bray.