We need to talk about Matalan… Or do we?
That is the question that has been eating away at many in both the retail and the property sectors since before Christmas – and for good reason too.
The fashion and homewares retailer’s two consecutive quarterly profit warnings, as well as comparable evidence that it is not trading anywhere near as well as rivals such as Primark and Dunelm, have raised questions about its overall health.
These become all the more pertinent when you consider that this is also a company carrying close to £500m in debt in two tranches of bonds.
The company first issued bonds in 2010, after a failed sales process, when it refinanced its debt and paid its founder, John Hargreaves, a £250m dividend. Four years later the bonds were refinanced again.
Today, Matalan’s bonds, which are due to mature in 2019 and 2020, are trading below their issue price by quite some margin and Standard & Poor’s was concerned enough that it downgraded its rating on the bonds from “weak” to “vulnerable” last November.
The rating agency warned that Matalan “faces a risk of its capital structure becoming unsustainable over the long term if the company is not on track to overcome the operational setbacks and restore its earnings to historical levels in the next 12 to 24 months”.
While Matalan’s third quarter trading over the vital Christmas period was an improvement on its dire first half (during which earnings plunged by 90% in the second quarter alone), it was nothing to write home about.
Last week, The Times revealed that Matalan had entered the special measures division of Lloyds Banking Group. The business support unit was set up to give focused attention to struggling companies in need of greater monitoring and support. Loved and hated in equal measure, Lloyds’ BSU has not always garnered the best sort of attention.
So what exactly is going on with a retailer founded by a Liverpudlian market stall trader turned retail millionaire?
Firstly, it is understood that it was Matalan itself that approached Lloyds asking to be placed into Lloyds BSU. The request was part of a wider process to relax the debt covenants on its £50m facility.
Matalan has not breached any debt covenants but asked for a relaxation of its covenants in order to have greater flexibility if, in the future, it should need to make a drawdown. The retailer’s cash balances on deposit with Lloyds as of 28 November 2015 were more than £60m, which is more than the credit facility.
However, while a company may enter the BSU for many reasons, some of which may well be procedural, it is not a decision taken lightly by Lloyds. It requires a board discussion across the senior parts of the bank and requires committee approval that it is the right decision for the customer. It could also potentially expose the company to the burden of greater scrutiny as well as business reviews. Not many companies would willingly enter a special measures division.
Secondly, it is important to note that some of Matalan’s recent trading issues relate to a one-off, but serious, operational mishap when its move to a new head office and distribution facility in Knowsley, Merseyside, went badly wrong. The poor control of this relocation has hit its stock availability, the lifeblood of retailers, and caused its profit warnings while affecting its targeted expansion online.
Matalan’s most recent update over Christmas showed that its online sales had nearly halved compared with the same time last year. It also expects its full-year profit to range between £54m and £56m, compared with its previous, more optimistic target of £60m to £65m.
In all, the picture around Matalan is a little blurry. There is no doubt it is still generating significant amounts of cash and is a large retailer with a significant presence in the UK.
However, its recent trading has been very poor and it is easily among the most indebted retailers in the sector.
Although Matalan believes it is already overcoming the impact of its fluffed move, market analysts question whether the retailer can sufficiently make up lost ground at a time when rivals, most notably the formidable Primark, are eating into its market share.
Deirdre Hipwell is retail mergers and acquisitions correspondent for The Times
