Matalan profits rebound despite supply disruption

Discount retailer Matalan said profits recovered strongly in its first full quarter of trading since the end of lockdown, raising the chances that it will be able to restructure its substantial debt next year without having to resort to an insolvency process.

The Liverpool-based group said on Monday that full-price sales were up 25 per cent in the second quarter to August 28, resulting in a £35m operating profit against a £36m loss in the same period last year and a £15.9m profit in the first quarter of the current year.

Executive chair Steve Johnson cautioned that, like its peers, the company had “been feeling the impact of disruption” in its supply chain, “delaying the flow of stock into the UK and adding extra costs”. Product availability could be “somewhat compromised” as a result.

However, he told investors on an earnings call that he did not expect the problems to persist for more than a few months.

Matalan had been regarded as the last leading UK retailer where a prepack administration or the issue of new equity was still a possibility.

As the company’s product offering is skewed towards clothing, it was deemed a non-essential retailer during the UK’s coronavirus lockdowns — unlike discount-sector rivals such as Wilko, B&M, Home Bargains and The Range.

With its 230 stores shut for long periods and a relatively immature online offering, sales in the year to February 2021 fell by a third and Matalan’s Guernsey-domiciled holding company reported a net loss of £115m.

It relied on government-backed loans and the financial support of founder John Hargreaves, who took the company private in 2006, to get through the pandemic.

The Monaco-based billionaire bought and leased back the company’s headquarters near Liverpool and the company exchanged £50m worth of its notes for payment-in-kind bonds, which allow it to roll up interest.

The financial support has come at a price. About £21m of interest has piled up on the Pik bonds, and roughly £44m of the group’s £532m of junk-rated debt will need to be refinanced or paid off in the coming year.

One fixed-income analyst said Hargreaves’ actions over the past year were reassuring. “I’m betting on the owner,” the analyst said. “He owns the bonds, both the senior and the subordinate. Unless the business isn’t worth saving, Hargreaves is going to save it.”

Johnson, who has extensive restructuring experience, was brought in last year and made executive chair to replace Hargreaves’ son Jason, who had been chief executive.

A restructuring expert who has looked at the company said that unlike Arcadia, which went into administration last year, Matalan did not have onerous pension liabilities while its customer base was loyal and “still likes shopping in stores”.

Its estate is heavily skewed towards retail parks, which have seen the strongest recoveries in footfall after each of the UK’s three lockdowns ended, and is not regarded as being over-rented.

Another bond analyst said there was plenty of investor appetite for high-yield debt. “There’s no shortage of people selling the idea of a UK economic recovery . . . Matalan just needs a few quarters of trading to see where its ebitda settles,” he said.

Matalan declined to comment on its debt position.


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