Can it arrest decline with new brands but minus debtors book?

Absa turns off the tap

high at the time of its acquisition by US private equity firm Bain Capital in 2007 for R25bn. Since then it has been downhill for SA’s largest clothing retailer, a decline that Jürgen Schreiber, its CE since May 2012, is intent on reversing.

Schreiber’s challenge has been further complicated by Edcon’s sale of its R10bn debtors book to Absa in June 2012. “Absa has tightened up on credit granting,” says Schreiber. “It is now our biggest challenge.”

The result has been a sharp fall in credit sales, especially through Edcon’s key Edgars division. In Edcon’s six months to September, credit sales fell 4,3% year on year. Credit sales in the second quarter generated 47% of total sales, down from a peak of about 60%.

“We have to fix credit supply,” says Schreiber. “We are looking intensely at bringing a second bank into our credit granting loop.”

Credit availability is not the only challenge Schreiber faces. “Edcon is technically insolvent,” says Syd Vianello, an independent retail analyst.

Vianello refers to Edcon’s highly geared balance sheet, which sports negative equity of R2,77bn and interest-bearing debt of R22,2bn. A huge drain on profit, interest costs in Edcon’s latest reporting period were an annualised R1,3bn. The retailer’s pretax loss was an annualised R1,88bn.

“Edcon can’t service its debt burden,” says Vianello. Rating agency Moody’s concern is evident in the Caa2 rating it has assigned Edcon’s €425m note issue on the eurobond market. Moody’s defines a Caa2 rating as reflecting “a very high credit risk”.

Proceeds from the note issue due in 2019 will be used to redeem a €378m note issue due in 2015. “It is the last piece of our significant refinancing,” says Schreiber.

Refinancing buys time for Edcon. But it is not the solution to its woes, says Daniel Isaacs, an analyst at 36One Asset Management. The door to one possible solution, a relisting aimed at raising fresh equity capital, has also closed, believes Isaacs.

“Edcon missed the window of opportunity when retail shares were trading at very high ratings,” says Isaacs. “Retail will still come under more stress. Edcon won’t get the rating it needs to buy itself out of debt.”

The only solution left to Edcon, it would seem, is to grow itself out of debt. Despite its credit availability problem, Schreiber believes Edcon is in a position to reverse a seven-year decline in market share.

Key drivers of Edcon’s strategy include a R1,2bn upgrade of 72 of its 186 Edgars stores and the launch of 10 up-market foreign brands. “We see a strong sales uplift