Edcon banks on simple fixes after South Africa's largest buyout flops

Tasked with turning around South African retailer Edcon, which had been on the verge of collapse just a few months ago, its management thinks it can apply simple fixes after Bain Capital walked away with nothing from its African venture.

The team led by Bernie Brookes, an Australian appointed in September last year, have much working to their advantage at Edcon, whose owner Bain Capital handed control to creditors in this week's $1.5 billion debt to equity swap deal that slashed its heavy debt-load by nearly 80 percent to 6 billion rand ($450 million).

In South Africa's largest ever private equity deal at the time, Bain took Edcon private in a 25 billion rand, (then $3.5 billion) highly leveraged buyout in 2007 but slower earnings growth and a weaker rand made the euro-denominated bond repayments unaffordable.

Under Brookes the company has trimmed its head office and plans to grow profit by boosting in-store credit sales and pushing its own clothing brands, while cutting back on pricy international labels.

"At least now they have the cash flow to enable them to do something because up until now they have been so starved of cash they couldn't do anything," Wayne McCurrie, a portfolio manager at Momentum Asset Management.

Edcon, which vies for market share with The Foschini Group , Truworths and international chains such as Inditex's Zara, H&M and Cotton On, suspended interest payments on two euro and dollar-denominated bonds in April to boost liquidity.

A 425 million euro bond - originally pitched in late 2013 as a bridge to an initial public offering - was written down last year in a distressed exchange offer.

'A LOT TO FIX'

For Brookes, who spent nearly a decade at Australia's biggest department store chain Myer taking it from a buyout to a listing, overhauling Edcon's capital structure would free him up to focus on dressing up the 87-year-old company for a stock market floatation in three to four years.

"The interest burden of the company went as high as 4.2 billion rand a year, now our interest payment is roughly half a billion rand," Brookes said.

And importantly, around 70 percent of Edcon's debt is now in the local currency, compared to only 30 percent before the swap, making the retailer much less vulnerable to the volatile rand, and no debt repayments are due until 2019.

Speaking at Edcon's headquarters, whose foyer was displaying stacks of discounted duvets and sets of cheese knives, Brookes said a three to four years of hard work lay ahead.

"There is a lot to fix," said Brookes, pointing at Edcon's waning credit sales.

Getting customers to buy on in-store credit is vital for Brookes' stated goal of growing the company's annual sales by at least 2 percent until its heads back to the Johannesburg Stock Exchange.

Up to two thirds of South African fashion retailers' sales are on in-store credit cards, but tighter lending criteria by Barclays Africa, which bought Edcon's debtors book for $1 billion in 2012, choked off growth.

Barclays declined to comment, but Brookes said Edcon would now grant credit to customers who might have been too risky for the bank.

"Our credit book has declined by nearly 30 percent over the last four to five years," he said. He declined to give the size of the book but said it was "only a few hundred million (rand)".

PRIVATE LABELS

Another key area for Brookes will be building up sales of labels owned by Edcon, which had taken a back seat under former chief executive Jurgen Schreiber, who brought in a range of global brands such as Tom Tailor to fend off competition from international retailers such as Gap and Zara

With the rand falling by about 60 percent since 2013, imported brands have become too expensive for Edcon to pass on costs to consumers in a fiercely competitive market.

Brookes said his company would cut imported labels to 12 from 37, replacing them with its own private brands such as Kelso and J-Exchange.

"We are moving our own labels like Kelso to the front of the store," said Brookes. The company will keep River Island, TopShop, Accessorize and TM Lewin.

COST CUTS

An immediate focus area has been to clear old stock after suppliers in recent months became reluctant to do business with Edcon on grounds that it might not be in a position to pay, Brookes said.

Edcon, which sold its fast fashion Legit chain for 637 million rand, also plans to cut the number of advertising agencies it uses from to three from 192. It has already reduced head office staff by 35 percent.

But the owner of the Edgars, Jet and Boardmans stores needs to arrest a decline in sales - down 1.3 percent to 27 billion rand last year.

"Trading should be incrementally better as a result of this restructure, but there is no magic bullet and they will have to fix multiple issues," said Investec Asset Management's analyst Unathi Loos. "All things that the competition has had a head start on."

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