Edcon, with R2bn in sales lost, files for business rescue
It’s the end of an era as what was once SA’s largest clothing retailer files for business rescue
Edcon, until recently SA’s largest clothing retailer, is filing for business rescue to allow it to continue trading.
Typically, putting a company into business rescue allows it to continue trading while its affairs are restructed to avoid liquidation. A moratorium is placed on payments to creditors, giving the company breathing space while a rescue plan is worked out.
Edcon will become the second high-profile SA business to be placed in business rescue in recent months, following SAA, which took this route at the end of 2019 after racking up huge debts.
On Wednesday morning, Edcon confirmed that its board has passed a resolution authorising it to file for business rescue. It said that between March 15th and today, Edcon “has lost R2bn in sales”, and had problems collecting what it was owed from customers.
“Edcon is unable to pay its suppliers for both the March and April month-ends. Paying April salaries will require assistance from the Unemployment Insurance Fund’s (Covid-19 assistance) program. Edcon also anticipates that the sales will be depressed for some time during the ‘Covid-19 risk-adjusted strategy’ phase, which may last several months,” it said.
The coronavirus hit SA at the worst possible time for the company, which was preparing to unveil its first full-revamped store in winter 2020.
Contacted by the FM earlier this week, CEO Grant Pattison confirmed that it was still the company’s plan to open stores again on Friday. (Retailers will be confined, for now, to selling winter clothes and children’s clothes.)
On Wednesday, Pattison said that Edcon will work closely with the business rescue practitioners — Piers Marsden and Lance Schapiro — to plug the financial hole. “It is my hope that some version of the business will emerge to continue to serve customers,” he said.
Business rescue seemed a likely scenario, once the coronavirus hit SA, and president Cyril Ramaphosa announced that non-essential retailers would be closed.
On March 26, the day before lockdown started, Pattison broke down during a call with suppliers, telling them Edcon would pay salaries but may be “unable to honour any other accounts payable during this period”.
“[We] will continue to look at all options — and there may be some really tough recommendations to be made to the board after the lockdown period, including having to consider business rescue,” he said.
Back then, Pattison said the lockdown could result in the group losing R800m over the initial 21 days. Now it appears it has lost more than double that in lost sales.
More than a decade of struggle
It is yet another blow to a company that has struggled every since 2007, when it was bought by private equity company Bain for a then-record R25bn. A decade of underinvestment meant Edcon lost market share and fell far behind its rivals.
A year ago, Edcon got a lifeline when the Public Investment Corp, landlords and creditors funded a R2.7bn recapitalisation deal that enabled it to keep operating, in exchange for a stake in the company. It was part of a plan by various stakeholders, including trade union Cosatu, to keep the company afloat and prevent the loss of 140,000 direct and indirect jobs.
For a while, it looked as if it might succeed. The number of stores dropped from 1,500 to 750, as it cut 500,000m² of retail space.
In the process, the 90-year-old group shed the mantle of SA’s largest apparel retailer and now trails TFG, Truworths, Woolworths and Pepkor. But the drop in sales due to Covid-19 proved to be the final straw.
In recent months, “noncore brands” including CNA, Edgars Active and Legit have been sold. Though the plan is ultimately to revive the retailer, under business rescue, it’s possible that Edcon’s last remaining assets — Edgars and Jet — may even be sold. At the moment, Edcon’s biggest asset is believed to be the R3.2bn in stock it has in its shops.
However, Edcon said on Wednesday that the R2,7bn it got during the recapitalisation “has been substantially utilised” and the crash in sales due to Covid-19 “consumed the group’s remaining cash”.
The business rescue may be a blow to property companies too. Stanlib’s Keilen Ndlovu says Edcon provides about 1% of the income for all the JSE’s property companies, though this has roughly halved since last year’s overhaul. Landlords may now struggle to fill this space, as the coronavirus is snuffing out retail sales.
NOTE: This article was updated at 13.45 on April 29th, to include Edcon’s confirmation of the business rescue application