Johannesburg – Ailing retailer Edcon on Tuesday said that
it had shed nearly 400 000 customers during the three months ended in December
as its aggressive discount strategy failed to lift its profit margins.
The group said it lost 382 000 clients during the period,
blaming the National Credit Regulator’s affordability regulations implemented
last year for the sharp decline and the increasing credit limits on customers.
The company said it now pinned its growth hopes on a new
credit initiative with banking giant Absa to lure back the lost customers.
New credit
accounts
Absa is to book approximately 20 percent of new credit
accounts with the balance of new credit accounts being funded by the group.
Edcon’s in-house trade receivables book at December 24,
2016 was R330 million, up R153 million compared to the R177 million as at September
24, 2016, and up R185 million from R145 million as at December 26, 2015, the
company said.
Edcon reported that its gross profit declined 11 percent
to R2.9 billion during the period, while trading profit plummeted by 67 percent
to R253 million.
It said adjusted earnings before interest, tax,
depreciation and amortisation (EBITDA) nosedived by 16.3 percent to R963 million.
The albatross for the company was its retail credit sales that decreased by 8.7
percent in the period while its retail cash sales went up by a marginal
0.7 percent. Edcon’s CEO Bernie Brookes said the company’s overall gross
profit margin declined by 310 basis points from 37.5 percent during the
comparative period last year to 34.4 percent due to the discounting strategy it
undertook.
“The margin decline was due to planned better entry price
points introduced across all divisions as well as additional discounts offered
to Edgars’ customers during the quarter for which the full retail sales benefit
will only be realised during the fourth quarter of 2017,” Brookes said.
“Additionally, the margin was negatively affected by
aggressive markdown and clearance activity in the Specialty division with the
goal to clear international brands for exit in line with the group’s strategy
as well as providing for the international brands aged inventor.”
The company had been lumbered with debt since Bain
Capital bought the group in 2007 for R25 billion in a leveraged buyout. But
last year Bain left the business after its creditors entered into a $1.5
billion (R19.6 billion) debt-to-equity swop deal with the American company.
“As a result, the debt in the operational company Edcon
Limited within the group post the transaction has reduced to approximately R7 billion,”
the company said. The company had in recent years lost market share to its
competitors Truworths, Mr Price and Foschini.
Earlier this month the retailer’s credit rating was
downgraded by Standard and Poor's after the agency brought into question the
company’s ability to repay its debt.
"Our rating actions follow the announcement that
Edcon has finalised its planned debt restructuring on substantially all of its
debt obligations, which effectively results in creditors taking over control of
the group.”
S&P added the group’s restructuring had shown
frailties.
“We view the debt restructuring as distressed, as
investors receive less than the promise of the original securities, which is
tantamount to a default,” S&P said.
36One Asset Management fund manager Evan Walker said,
while Edcon results were disappointing, the group had made headway on its debt
repayments.
“I think they are ok for now, according to our model the
company has probably 12 to 18 months of low interest charge for them, but the
market is tough out there due to a period of big discounting,” Walker said.