y Partners and CCMP Capital Asia for $350 million in 2006, but it struggled with heavy debt commitments and franchisee disputes over retail support and operational changes. In 2012, Godfreys was reclaimed by its original owners in a major debt for equity restructure that effectively wrote off what remained of the private equity investment funds. Tom Krulis, who had been CEO of the chain in 2006 when it had 151 stores, returned to the helm in 2012, replacing Stephen Heath, and worked on a plan to list the retailer on the Australian Securities Exchange (ASX). After listing on the ASX in September 2014, Godfreys initially started buying out franchisees under a corporate store strategy, but then decided to return to a hybrid business model with franchise outlets in regional markets. Now Godfreys is betting its future on a return to a hybrid corporate and franchise business model with most of its stores run by store owners. Results for the 2016 financial year indicated a 0.9 per cent dip in sales despite opening a net 10 new stores. Comparable sales were down 9.7 per cent for the year while earnings slid from $11.5 million in FY2015 to $9.2 million for FY2016. In the release to the ASX detailing FY2016 results, Godfreys’ chairman Rod Walker assured investors that the company’s balance sheet remained sound with gearing consistent with prior years. Walker said the Godfreys business was fundamentally sound with a solid financial position, a strong brand and a business operating in a market that “continues to demonstrate solid growth fundamentals”. However, Godfreys’ past travails and debt problems may well have come back to haunt the retailer with financiers wary of the fall in sales and profits for the latest financial year and pressing for assurances on the group’s future prospects in a fiercely competitive marketplace that includes Harvey Norman, The Good Guys, JB Hi-Fi, Kmart and other bricks and mortar groups and e-tailers. Godfreys’ announcement about the three-year target for a majority franchise model store network specifically said it would use funds generated from the corporate store conversions and greenfield site franchise deals to reduce debt and to pay dividends. Perhaps the wording was clumsy in the media release and was meant to say capital returns to investors. One would hope so because paying dividends from the franchise program, as distinct from trading results, suggests that the future is not as robust as investors were told when the retailer floated two years ago. Indeed, the restructure process is expected to cost up to $2 million this financial year as Godfreys attempts to offload corporate stores in shopping malls that are subject to more aggressive rent and outgoings charges and outlets in smaller markets. Godfreys plans to retain the plum sites in key metropolitan and large regional city locations as corporate stores while most new store openings are expected to be franchised. The plan begs the question of whether the sudden and unexplained departure of CEO Kathy Cocovski was related to her reluctance to captain a franchise retailer rather than a corporate chain. Cocovski resigned in July, just six months into her role, for what was described by Godfreys as “personal reasons” and her departure may well have been another amber light for financiers. She was replaced by John Hardy as interim managing director. He’s an experienced retail executive who had previously been an executive team member at Godfreys during its pre-private equity ownership days. He has also held senior positions at Barbeques Galore and Super Amart and, more recently, Fusion Brands (the latest incarnation of the Colorado footwear group). Hardy established the original franchise network at Godfreys so his appointment in July as interim MD after joining the retailer’s board as a non-executive director in March this year was no doubt aligned to the complete reversal of the strategy to abandon corporate store expansion and franchisee conversions to company stores. Godfreys plans to convert 18 company stores to franchise outlets in the current financial year and has a somewhat ambitious three-year target to have up to 140 franchises from the current total store portfolio of 224. The strategy depends, of course, on the availability of investors prepared to stump up the cash to buy a retail franchise with the long hours and the escalating costs of wages, rents, outgoings and inventory, let alone competition from the franchisor’s bigger destination stores as well as a host of other retail competitors with strong brands and discount prices. If those factors aren’t enough to make investors wary, they might consider that Godfreys’ rationale for the move is to improve its profitability and balance sheet position and to enable “greater management focus on our more profitable larger format stores”. Wouldn’t you feel loved as an investor in a franchise from the outset, knowing that Godfreys has decided to offload its less profitable stores to “address continued weak performance in the business”? The retailer claims franchise stores have had a record of outperformance, particularly in regional areas where local knowledge and relationships are important, but the franchisees will be expected to pay for the privilege of bringing their skills, contacts and hard work to boost revenues in stores that are currently a drag on Godfreys’ performance. The franchising decision has provided an initial fillip to Godfreys’ share price which climbed above 90 cents for the first time since August and was decidedly better than its 68 cents nadir in September. Still, this was less than a third of its $2.75 price per share when it floated in 2014. Investors may have been encouraged by the longer term prospects of the group under the proposed new model as the Godfreys board’s underlying earnings guidance for FY 2017 of sales of between $180 million and $182 million were only a tad better than the $179.3 million for the latest financial year. Net earnings for FY2017 are forecast to be between $6 million and $6.6 million, down from $9.2 million in FY2016 and indicative of why the board plans to bolster dividends by distributing some of the franchise conversion fees to shareholders. Last week, Hardy said Godfreys has a long and successful history operating the franchise model having implemented the first franchise store in the mid-1980s. “Our franchise stores have a track record of outperformance, underpinned by the fundamental driver of small business ownership. “Refocusing the business on a franchise concept will enable Godfreys to accelerate the current business improvement program.” Hardy noted that the retailer expects strong interest from its existing team to become franchisees. He added that the conversion of approximately 18 company stores to franchise stores in FY17 would deliver immediate cash flow benefits by lowering the overall cost of doing business as well as additional franchise fees, a reduced requirement for stock and reduced capital expenditure requirements. “The balance sheet will be strengthened through a reduction in inventory and fixtures and fittings. “The board will also conduct an assessment of the carrying value of intangible assets as a result of the strategic review. The positive financial impacts of this strategy will increase as more stores are converted, allowing additional benefits to flow through,” Hardy said. Godfreys informed the ASX that an internal implementation team, led by current chief financial officer, Bernie Bicknell, has already started working on the restructuring strategy and that this will be subject to a quarterly review by the retailer’s board. It said Bicknell, a former CEO of the Mitre 10 hardware group, will transition from the role of chief financial officer to lead the implementation project on a full-time basis from March, 2017. “The implementation team is focused on improving franchisee recruitment and induction processes, upgrading the marketing program to attract franchisees and improving support functions, including dedicated customer service lines for franchisees,” Walker said. The board has full confidence in the operational improvement plan led by Hardy, with Walker noting that Hardy and his team will continue to focus on delivering the core operational turnaround in the areas of marketing and customer service. Godfreys was started with a single store in Prahran, Melbourne, in 1937 by the late Godfrey Cohen and John Johnson, who is still a major shareholder in the business and is a financial backer of the Fusion Brands. Godfreys has opened 30 stores in the past five years, including a net 16 stores since it was floated on the ASX. Of its current network of 222 stores, 192 are in Australia and the remainder are in New Zealand.