Steinhoff still alive and kicking

Steinhoff’s supervisory board and hundreds of line managers appear to be cutting, coaxing, pushing and pulling the bloated organisation into something more closely resembling a productive company.

In the nine months from 1 October 2018 to 20 June 2019 Steinhoff grew its revenue from operations by 4% to €10.1-billion, supported by strong performances from Pepkor Europe (Pepco, Dealz and Poundland), which grew by 13%, and Pepkor Africa, which grew by 3% in euros.

Consolidated debt is sitting uncomfortably close to this figure, at €9.09-billion.

The good news is the group has completed the financial restructuring necessary to keep the business afloat. This staves off creditors until the end of 2021, when both debt and interest will be due.

This is a vital lifeline, and in this period management will continue to restructure the businesses and dispose of assets to reduce debt to more manageable levels.

If necessary it will restructure the debt, again.

The future looks bright for Pepkor Europe, the one business unit that is investing for growth. It built a new distribution centre in Hungary to support Pepco’s store expansion, and expanded its store footprint by 12% across the board, bringing the total number of stores up to 2,556.

But the picture at Conforama, which is almost the same size as Pepkor Europe, and delivered revenues of €2.5-billion, is less rosy. Sales in France, its biggest trading region were negative and flat elsewhere.

An operational restructure is underway, with the closure of 32 Conforama stores and 10 Maison Dépôt stores planned. Up to 1,900 jobs could be lost.

If the plan does not succeed, Conforama will find itself part-owned by the banks that provided the €316-million in new funding to see this plan through.

In the US, Steinhoff lost control of Mattress Firm to creditors after the company entered business rescue in 2018. It now holds 51% of the equity but this could be diluted down if management achieves the targets set out for them.

The giant retailer is mid-turnaround and managed to eke out a small growth in revenue to €1.9-billion. To give an example of how excess was tolerated across Steinhoff, Mattress Firm has reduced its store-base by 22% (718 stores) year on year, yet revenue (in USD) only decreased by 4% in the period under review.

Much-needed dividends will flow from Pepkor Africa in which Steinhoff has a 71% shareholding. The local retailer grew revenue by 3% to €3.3-billion in the period and will report full year results in November.

As much as Steinhoff may wish to divest itself of this particular asset, it has been temporarily prohibited from doing so by the Cape Town High Court.

Other smaller operations, such as the UK household goods brands Bensons and Harveys, and Abra and Lipo are not in good shape – the European economy is not helping – and saw revenue growth fall marginally.

The update does not reflect operational costs, or the cost of funding, or give any indication on whether the group is inching towards profitability.

There is a long way to go yet.

Three clear areas of management focus 

Source: Steinhoff quarterly update for nine months ended 30 June 2019

Management has sold Extreme Digital, Kika/Leiner and most of its European properties. It has sold the bulk of its manufacturing, sourcing and logistics operations, once a key pillar of Markus Jooste’s strategy to vertically integrate the group’s operations. In March 2019, Steinhoff sold Unitrans, one of South Africa’s largest automotive dealer networks.

It was profits from this company that helped kick-start Steinhoff’s global acquisition spree.

Other businesses may yet be sold.

“We must provide our strongest performing businesses with the opportunity to perform to their full potential and ensure that Steinhoff’s shareholding is not a hindrance to their growth,” the board said in the update.

“As part of our debt reduction strategy, all options will be considered.”

But, litigation remains a major headache. Little detail is provided, but the board, supported by a litigation committee and the group’s legal advisers have prioritised the resolution of outstanding claims against the group.

Steinhoff share price: Hope vs resignation 

In parallel, it is also evaluating potential claims against third parties and recently started proceedings against some people in the previous management team.

At current growth levels, it will take a lifetime to repay the debt owed to creditors and shareholders, as positive as they are trying to be. DM