Sink or swim

Godfreys-WyndamYou have to wonder whether John Johnston’s rescue of the Godfreys vacuum cleaning chain is more sentiment than sense.

At 100 years of age in July, Johnston has taken control of the struggling retail chain for the third time.

Although the cost of two buybacks is much less than the $300 million he realised in selling out to Pacific Equity Partners and CCMP Capital Asia in 2006 and a further gain on a $78 million float on the Australian Stock Exchange in 2014, Johnston must see a value in Godfreys that few others would.

Johnston’s life and significant wealth is directly attributable to the retail business he co-founded with Godfrey Cohen in 1931 during the Great Depression.

Over more than seven decades, the business expanded nationally to become one the largest vacuum cleaner specialist retail chains in the world, with 151 stores across Australia and New Zealand when it was sold to the private equity firms 12 years ago.

The private equity firms planned to take the Godfreys business model into Asia and other overseas markets but struck trouble early with the acquisition, as franchisees railed against management decisions and sales and earnings declined as competitors eroded the company’s market share.

The private equity firms surrendered their investment in Godfreys in 2011 in a debt for equity deal to a syndicate led by investment banks Nomura and Investec, and Johnston.

The public float of the company was driven by an exit strategy imperative for the investment banks as well as a recognition of Johnston’s advancing age, although he initially retained a shareholding of around 20 percent when Godfreys listed on the Australian Stock Exchange.

A series of management changes and shifts in business strategies, including indecision on the retention of franchise outlets as part of the business model, undermined trading performances and led to a sharp drop in the share price.

Johnston actually increased his shareholding in a bid to maintain investor confidence but sales and earnings kept falling with Godfreys unable to regain the customer franchise it had before the 2006 private equity acquisition.

With Godfreys languishing and facing the prospect of significant writedowns and losses, Johnston launched a takeover bid for the retail chain in April of this year through his investment company, Arcade Finance.

Johnston’s initial offer to shareholders was worth $13.1 million but was subsequently increased to $13.7m in May.

Acceptances of the takeover bid formally closed on June 21 and Johnston secured the 90 percent threshold he needed to for the compulsory acquisition of remaining shares.

Johnston now plans to de-list Godfreys from the Australian Stock Exchange and to operate as a private company.

While the retailer has struggled financially, the store network has continued to expand and now has around 200 stores throughout Australia and New Zealand.

However, a proposed rebuild of the business is likely to involve a culling of underperforming stores and will require upgrades to many tired and uninspiring existing stores.

Godfreys listed on the Australian Stock Exchange at $2.75 a share in December 2014 but investors were bidding just 21 cents in April before a rally on the takeover lifter the share price to around 33 cents this week.

Godfreys’ management blamed recent poor trading results on the chain missing key merchandise trends and on a failed advertising campaign.

Johnston has brought back John Hardy as interim CEO and David Lee as CFO.

Hardy was CEO of Godfreys between 1983 and 2010 and again from mid-2016 to December 2017 when Jason Gowie was appointed.

Hardy has not taken up the CEO role as a permanent appointment but had been charged by Johnston with the task of developing a turnaround strategy that will retain the confidence of financial backers.

Last month, Godfreys twice revised its full year earnings guidance and has warned that investors should not rely on previous forecasts ahead of a review of the retailer’s finances by the new executive team.   

Godfreys has already commenced discussions with its principle advisor, 1918 Finance, about an extension to the limit on its $30 million senior debt facility in a bid to avoid breaching loan covenants.

While 1918 Finance has agreed to consider the request, the financier doesn’t share the sentimental attachment that Johnston has to Godfreys and will be examining closing current trading results that included a reported 27 percent decline in year-on-year sales in the past fortnight.

Year on year, revenues for Godfreys are down around 8.5 percent.

The Godfreys board is currently seeking advice about all the options available to assure 1918 Finance on a debt repayment plan.

The latest earnings estimate for Godfreys for the current financial year is between zero and $1.5 million but the chain will book a loss as a result of restructuring costs initiated by former management.

The board has indicated it faces likely cash flow problems in July, a key factor in the request to 1918 Finance for an extension of its debt obligations.

1918 Finance is actually an entity controlled by Johnston but it requires assurances about debt deals and is likely to face further requests from Godfreys as a private company for funds to upgrade stores and continue restructuring initiatives.

Godfreys’ business model includes both large destination and shopping centre store formats and a mix of both corporate and franchise stores.

The chain has lost sales and market share to Harvey Norman, JB Hi-Fi and other retailers as well as an ever increasing challenge from online retailers such as Kogan.com and Amazon.

Like many bricks-and-mortar retailers, it arguably has expanded its store network too far and is unable to be as nimble as its competitors. The chain is obviously particularly susceptible to misjudgements or poor execution of advertising or merchandise decisions.

The retail market has changed dramatically since Johnston sold Godfreys to the private equity companies and there is less room for sentiment than ever before, even for brands like Myer and Target.

[SUBHEAD] Evolving or dying

Re-invention of retail business models is becoming a critical factor for survival as foreign competitors continue to expand their presence in Australia and as online retailers increase their sales and market penetration.

The danger of not re-inventing a business model is demonstrated by the failure of the global retailer, Toys ‘R’ Us.

Babies are still babies and kids are still kids yet the products that engage them and that parents believe will develop their skills and entertain them have changed markedly.

Toys ‘R’ Us has struggled for more than a decade, encumbered by an outdated  store network and even, arguably, a victim of its own branding.

In Australia, the chain never posted a profit and had accumulated losses over the past seven years of more than $100 million.

McGrathNicol, the administrators for the Australian subsidiary, were unable to find a buyer for the heavily indebted chain and the 44 stores will all be closed within weeks.

Toys ‘R’ Us had debts of $95 million to unsecured creditors when it was placed in the hands of administrators last month.

The collapse of the chain leaves landlords out of pocket by more than $140 million on lease commitments.

There are lessons for many retailers in the collapse of Toys ‘R’ Us but certainly lessons for Johnston and his new management team at Godfreys.

Sentiment is nice but sense is imperative.

 

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