While the media spotlight has been on the Dick Smith debacle this month, another private equity retail project is also struggling to meet its sales and earnings projections since listing on the Australian Stock Exchange. The Godfreys vacuum cleaner chain listed on the Australian Stock Exchange in December 2014 at $2.75 a share, a somewhat surprising price given the difficulties experienced by the retailer when it was under private equity ownership. While not suffering quite as badly as Dick Smit
th on the share market, the investors who paid the issue price are currently digesting a significant paper loss, with Godfreys’ scrip now hovering around $1.00. The Godfreys story is quite different to Dick Smith, where private equity owners, Anchorage Capital Partners, had a windfall gain as a result of listing on the Australian Stock Exchange after just 15 months in control of the computer and electrical chain. Godfreys’ private equity owners, Pacific Equity Partners (PEP) and Unitas, were forced to virtually walk away with empty pockets after a consortium of banks completed a debt for equity swap in January 2012 that cut debt levels from $210 million to around $20 million. PEP and Unitas had paid around $300 million for the Godfreys chain in 2006, buying it from the founders with plans to expand the store network in Australasia and to export the retail concept overseas, particularly in Asian markets. On current share prices, Godfreys’ market capitalisation is barely $40 million. The business was headed for administration before the debt for equity deal. Sales and earnings had plummeted for the retailer, which operated on a hybrid corporate and franchise store model. PEP tried to leverage more value from its franchisees during its period of ownership, triggering a serious dispute that further impacted on sales. The 2006 exit of the founders for the $300 million payday appeared to be a clever bit of timing as, despite the expansion ambitions of PEP, the chain had arguably reached maturity in terms of its store network, especially with increasing competition in the market from internet retailers and major electrical chains that were focusing more keenly on the vacuum cleaning category. Godfreys had 151 stores when it was acquired by the private equity firms in 2006, before the deteriorating financial performance of the chain resulted in store closures. Business revival plan The consortium of financial backers to Godfreys involved in the 2012 debt for equity deal were Nomura, AMP, SC Lowy, Orchard Capital and Challenger. Tom Krulis, who was CEO of Godfreys when it was sold to the private equity firms, returned to the key management role as part of the deal. Krulis had mapped out a business plan to revive the fortunes of the ailing retailer that included the share market listing as an exit strategy for financiers. Since 2012, Krulis has rebuilt the chain, which now has 213 branded stores, 130 company-owned and 83 franchised. Store formats have been tweaked, marketing has been revamped and product ranges restructured and, in the first full financial year following the Stock Exchange listing in 2014, financial returns looked promising. Sales for the 2015 financial year at $182.6 million missed prospectus forecasts by 1.3 per cent, but had bettered FY2014 revenues by 5.2 per cent. Sales were boosted by new store openings and conversion of some franchise stores to company ownership and net earnings for FY2015 were $12.89 million, up 5.2 per cent on the prospectus forecast and a lively 18.8 per cent on FY2014. Krulis warned in August 2015 that like for like store sales were flat, but he was comfortable with the result because of the “overall softness” in retail sales and changes being effected in the business in product mix to drive greater sales volume and floor value while lowering the average selling price. At the retailer’s annual meeting in October 2015, Krulis told shareholders the retail environment remained volatile and highly competitive, conceding that sales had been weaker in the early months of the current financial year than in the comparable period the previous year. He warned shareholders that earnings for the first half would likely be lower than previous forecasts but initiatives in the business to improve growth were expected to bolster second half profits and produce a full year net earnings result in line with the $12.89 million booked in FY2015. Godfreys’ share price has fallen from a high in the past year of $3.64 to as low as 98 cents, reflecting the rollercoaster conditions of the share market – but, more significantly, falling confidence from investors in the retailer’s prospects, notwithstanding initiatives Krulis has taken to rebuild the business. The initiatives have included the introduction of more products designed and developed in-house and a substantial revamp of merchandise ranges and the development of an online sales channel, which is now the retailer’s biggest “single store” with 2.2 million unique users in FY2015. Krulis has also established a new distribution centre and expansion of a China support office that sources products while pursuing a store development strategy that would add at least 20 new stores and refurbish 25 existing outlets this calendar year. However, with its share price already under pressure and the sales and earnings results for the first half of this financial year, Godfreys is set to review the Krulis business plan and will more than likely mothball some new store openings and exit some existing locations. The future balance of the company-owned and franchise stores will also be under the microscope as Godfreys tries to lift productivity and sales in its existing outlets. New CEO to head business review The review process and implementation of any changes in the business plan will be led by a new CEO, Kathy Cocovski, who took over from Krulis on January 27. Krulis, who started as a salesman with Godfreys 30 years ago and is married to the granddaughter of Godfrey Cohen, founder of the business in Melbourne during the 1930s depression, will continue in a key role with the retailer. As an executive director, Krulis will focus on international relations and business and product development, leveraging his strong relationships with key manufacturing partners and suppliers to the chain. Cocovski, who has had 30 years retail experience with Myer, Woolworths and Just Jeans, is unlikely to make dramatic changes to the Godfreys business model. But she will be focused on lifting comparative store sales, which have been declining. Like for like sales in the latest half were down 5.2 per cent. For the first half of FY2016, Godfreys posted sales of $90.5 million, narrowly down on the $90.6 million for the comparative period in the previous financial year, but with more stores and a stronger online contribution. Net earnings for the first half of FY2016 are expected to be less than $4.5 million, compared to $6.4 million the previous year. Rod Walker, Godfreys’ chairman, believes the retailer could eclipse its $183 million sales of FY2015 this financial year, but the gain, at best, is expected to only be about $2 million. Walker has indicated last year’s $12.9 million net profit will certainly not be matched with current market guidance for the full 2016 financial year of between $8.5 million and $9.2 million. Walker has blamed the recent poor sales and earnings performance on poor execution by the retailer in responding to market trends, especially the late arrival of stock to satisfy the enthusiasm of consumers for stick vacuum cleaners. In a statement issued to the Australian Stock Exchange, Walker described the first half result for FY2016 as disappointing and reflecting execution challenges at the operational level. “While the market for stickvacs grew by more than 60 per cent year on year, the late arrival of our product range meant the company was not positioned to capitalise on this major trend. “Fundamentally, the Godfreys business is extremely robust and the board is confident that with new leadership and a refreshed approach, we can restore Godfreys financial performance and re-position the company for future growth,” Walker said. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.