There’s speculation that a sale of embattled Poundland may be on the cards. But if partly self-inflicted problems can be addressed, why would owner Pepco let go of what has typically been a successful business, asks George MacDonald.
In the current trading environment, value specialist Poundland should be flying. It’s not.
Poundland, owned by Pepco, has taken such a hammering that, in the words of parent Pepco chief executive Stephan Borchert, “every strategic option” is being assessed.
Poundland’s problems are so pressing that advisers from AlixPartners have been brought in to consider its next steps, leading to speculation that a sale or radical restructuring – even a CVA – could be on the cards.
The future of the retailer is expected to become clear next Thursday (March 6) when Pepco holds a capital markets day for investors.
As bosses ponder the options for Poundland – which last year suffered a plunge in underlying EBITDA to €28m from €75m and booked a €775m non-cash impairment charge – they will take into account the extent to which its woes are self-inflicted or the result of wider market conditions, and the extent to which those can be addressed.
“In tough conditions, both Poundland and rival B&M are probably losing out to the mighty Home Bargains”
There has been a mea culpa on some big calls. For instance, they acknowledged the shift by Poundland into Pepco clothing lines – intended to bring scale efficiencies – was cack-handed. Their exact words were: “Both the planning and execution of this implementation had shortcomings.”
Customers could no longer find the range of adult clothing they were used to, for instance, as more space was devoted to kidswear, which typically sells at lower prices.
Similarly, the performance of a tranche of stores picked up from bust counterpart Wilko delivered “mixed” results and it has become clear that “larger stores are not where Poundland delivers the best performance”.
On the other hand, Poundland has been hit by the same issues facing the wider retail industry. Rising costs – of staff, in particular – are a burden, especially when sales are down. Poundland tends to trade on high streets, many of which have lost out as customers have opted for retail parks. In tough conditions, both Poundland and rival B&M, which this week warned on profits, are probably losing out to the mighty Home Bargains, whose upward trajectory shows no sign of slowing, while The Range, which bought the Wilko brand, also seems confident.
Poundland’s challenges have continued into the new financial year. In the first quarter, reported in January, like-for-like sales slid 7.3%. Clarity on where the business goes next is urgent.
“Poundland still turns over €2bn a year and draws 7 million shoppers a week. It’s not ready for the ferry across the Styx yet”
Borchert and Pepco chief financial officer Neil Galloway both came off the Poundland board in January, Companies House filings show. Their departure prompted some to speculate a sale looked likely, perhaps to Barry Williams who has just returned from a Pepco role to Poundland, which he previously ran successfully.
However, sources say the departure of the Pepco directors from Poundland was primarily a matter of governance. Some believe the mood music they have picked up indicates Pepco is more minded to back Poundland for recovery, though some serious surgery may be required.
Pepco has said it believes “the toughest comparative quarter for Poundland is now behind us [and] we expect the negative sales performance to moderate as we move through the year”.
Pepco has already revealed there will be no net store openings this year as part of its efforts to keep a lid on costs and restore focus. Last month, it bulked up the number of products on sale for £1 or less from 1,500 to 2,400 – that’s almost half its entire range.
Some big changes will no doubt be necessary to restore Poundland’s fortunes but overall, it has done well more often than not since its foundation in 1990. It still turns over €2bn a year and draws 7 million shoppers a week. It’s not ready for the ferry across the Styx yet.
Having taken a hit – admittedly, a big one – on problems partly of its own making but gone on to invest more in competitive pricing, you might argue why should Pepco sell Poundland when, if it turns around, it would be the beneficiary of renewed success?
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