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Signs of a turnaround at Edgars?

Sales are up in most core categories, but one big problem persists….

Much of the (really) hard work has been done by Edcon chief executive Bernie Brookes, who prevented an outright collapse of the massive retailer labouring under a mountain of private equity debt by convincing creditors to convert to equity. The Aussie also tempered predecessor Jürgen Schreiber’s costly foray – in more ways than one – into licensing and launching international brands. Underperforming brands were ruthlessly exited. As part of this dramatic change of course, Edcon doubled down on its well-known, but largely neglected (in favour of the imported stuff) private label brands. On the whole, range and fashion is looking better and is selling better. 

These interventions solved two of the “burning platforms” articulated by Brookes (the debt pile and its appeal to customers). I’ve argued on Moneyweb before that there was a third, equally-pressing burning platform to solve: supplying credit to its customers. Absa tightened the supply of store credit almost immediately after it bought the retailer’s book, and sales have suffered ever since. After the collapse of African Bank Investments (with whom it had been negotiating to be a so-called second-look provider) it was left with only one choice: go back to lending to customers itself.

This strategy is starting to pay off, with the in-house trade receivables book at R660 million as at September 23, effectively triple what it was prior to the implementation of the revised agreement with Absa in November 2016.

Source: Company results

Credit sales have stablised at around the 35% to 36% of group retail sales level, which is an important step. In Q2 (to September), credit sales were 36.3%. Another encouraging sign is that the rate of decline in credit sales has slowed.

Credit sales

YTD2018

FY2017

FY2016

FY2015

Edcon

-5.7%

-13.4%

-10.2%

-8.0%

Edgars

-3% (Q2)

-13.3%

-8.5%

-8.2%

Jet/discount division

+2.7% (Q2)

-13.5%

-15.2%

-8.5%

Specialty division

-13.7% (Q2)

-12.6%

n/a

n/a

But this is Edcon. What of Edgars?

Six months into the 2018 fiscal year, retail sales in the Edgars division (Edgars, Boardmans, Red Square) are down by ‘only’ 1.9%. Consider the broader macro environment, and you’ll realise then that this is a huge achievement, more so given that the year-to-date figure in FY2017 was -7.2%!

For two quarters in a row, sales of ladieswear, childrenswear, footwear and cosmetics are up, while menswear, homeware, cellular and active remain a drag on performance.

The group makes the point that “whilst cellular decreased, the decrease compared to the second quarter of 2017 was marginal following improvement initiatives implemented”. Presumably, this will plop into the growth category, with ‘only’ menswear, homeware and ‘active’ the problems. Homeware (Boardmans) will likely continue to be a drag on performance of this division, given far bigger problems plaguing that business (another topic for another time). It only trades out of 37 stores, however, versus the 48 (standalone) of Red Square and 206 Edgars stores. It is notable, that between July and September, Edgars closed three Boardmans stores.

The trick is for Edgars to fix menswear and keep the other segments growing. Active and homeware have some structural problems which the group is addressing, but these are far smaller than the other categories. Margins are stable, and higher than the year-ago periods.

It is tempting, therefore, to wonder if Edgars (and the broader group) has already hit the bottom and turned the corner?

One major problem remains.

The number of active accountholders has slipped further in the three months between July and September. Certainly not another 500 000 customers – that big knock happened between March and June (see Edcon hemorrhages another 500 000 credit customers). But, group accountholders are down another 98 000 in the most recent quarter, to end at 2.577 million. This is one million (net) lower than the point at which it did the Absa deal.

Source: Company results

Credit sales are up in the Jet division and in Edgars, these are stablising. This after a horrid period in all divisions, since the book was sold to Absa. Edcon says, “The revised new account acquisition strategy along with the reintroduction of automated credit limit increases continues to positively drive credit sales.” It will, at some point, exhaust its ability to fund this lending book itself and it says it is considering “various funding options” for it.

In its update to the market this month, Edcon says sales (excluding exited/sold operations) decreased by approximately 1.9% in October, while gross margins increased by 40bps. Probably not the exact result executives would’ve wanted, but no great cause for concern.

An enormous amount hinges on the peak festive season. If Edcon – and its two engines Edgars and Jet – produce a solid result for this quarter, incoming CEO Grant Pattison will surely be more than a little optimistic about his odds of restoring the group to its former glory.

* Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za.

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Hilton: I’m not surprised they are doing badly if Bernie convinced debtors to convert to equity, as you state. It would have been far better to convert the creditors.

Subtly fixed now, leaving my comment sadly uncredited.

Or is that undebited?

Wonder what the effect of Black Friday was. Stores were overflowing.

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