Cape Town. The launch of the new clothing store in the V&A Waterfront called The Topshop. picture : Neil Baynes Reporter : Wendyl Martin

Edcon Holdings is turning to international brands such as Topshop and Tom Tailor as South Africa’s biggest clothing retailer seeks to restore profit seven years after being acquired in a leveraged buyout.

Edcon, controlled by US private equity firm Bain Capital Partners, planned to bring in more of the labels through its flagship Edgars stores, chief executive Jürgen Schreiber said in an interview yesterday. The strategy is intended to fend off local and foreign competition from Inditex’s Zara and Hennes & Mauritz, which are both carving out footholds in the country.

“We realised we needed something that was long-term, sustainable and different from our competition and brands could do that,” he said.

International labels available in Edgars outlets include Dune London, Mango and TM Lewin.

Edcon has struggled since its R25 billion purchase by Bain in May 2007, failing to make a profit in at least three years. The deal saddled the retailer with debt, hampering its ability to invest in stores at the same pace as local rivals Truworths and Mr Price. The arrival of Zara in 2011 also caused shoppers to defect.

“The debt has been a huge distraction and management took its eye off the ball,” independent retail analyst Roger Tejwani said.

Total debt rose 16 percent to R22.7bn as of the end of June, the company said last week as it reported a first-quarter loss of R499 million, down from R712m the previous year.

The yield on Edcon’s e425m (R6bn) of 13.375 percent bonds due in June 2019 fell 250 basis points in the two days after the company reported its narrower loss last week to 19.01 percent.

Bain was not planning an initial public offering of Edcon until it had reported multiple quarters of profitability, Schreiber said.

Clothing and footwear sales in South Africa are dominated by a small number of home-grown chains. Eight South African retailers accounted for almost half of the value of apparel sales in the country in 2012, according to data from Euromonitor. That compares with about a quarter of sales by the top eight retailers in Brazil.

“There is an opinion in the market that it takes a long, long, long time for brands to have any type of deep penetration,” Schreiber said. “That’s a myth.”

For years, South Africans who wanted clothes from Zara or Topshop could only get them from abroad. Local malls stocked labels such as Edgars’ Kelso or Truworths brand OBR – fashion that had limited brand recognition or prestige in Europe or the US. Edcon has built up about 50 international brands in 18 months, with more to be introduced.

Edcon, which operates chains including Red Square and low- cost Jet as well as Edgars, has been revamping outlets in an effort to claw back market share that fell to 17 percent in 2012 from 22 percent a year after the Bain buyout, narrowing the gap with competitors Truworths and Foschini.

Sales growth was a combined 65 percent in the eight years to this year, compared with a 163 percent gain at Truworths.

The turnaround plan is taking place as South African retailers struggle with more than 25 percent unemployment and annual inflation that was 6.3 percent last month. Retail sales were unchanged in June, the worst performance since December 2009, while the Reserve Bank raised its benchmark interest rate for the second time this year on July 17, cutting disposable income for borrowers.

“Edcon’s international brands strategy is risky in that it could sideline some of its core customers at a time the group desperately needs a turnaround from its revamped Edgars stores,” Alec Abraham, an analyst at Sasfin Securities, said.

The drive to attract customers with overseas fashion labels could also be held back by falling credit sales. Approvals for shoppers wanting to buy on credit at Edcon stores have halved since Absa took over Edcon’s book in 2012, while a potential second provider of credit, African Bank, has been put into curatorship, a form of protection from creditors.

Sales made on credit account for almost half of Edcon’s total retail revenue.

The collapse of African Bank had set Edcon’s credit sales back “a couple of months”, Schreiber said last week.

While Edcon would continue discussions with the lender, it was also in talks with other potential partners, he said.

Edcon has signed exclusive trading agreements with brands such as Topman, UK tailor and shirt maker TM Lewin, US denim-dominated Lucky Brand, and British womenswear chain Lipsy as part of the revamp.

Some are sold in concessions in Edgars shops and others in stand-alone stores under a local partnership agreement.

At Edgars, international brands still accounted for less than 20 percent of revenue, Schreiber said. Edcon would open another 30 to 40 more stand-alone foreign-brand stores this fiscal year, he said. The rights for Topshop were acquired in July 2012, with the first store opened in November that year. The first stand-alone Tom Tailor and Dune stores opened in August last year.

Absorbing new brands came with inherent risks, Schreiber said. Some brands worked from the get-go while others did not. Even so, there was a benefit in trying out these “wild cards” in the search for one that took off.

“One Green Elephant – hardly anybody knows the brand, it’s Japanese,” Schreiber said. “It’s a little out there, the colour palettes are a bit crazy. So with some of them we take a risk.” – Bloomberg