Pepco Group has confirmed that it was evaluating all strategic options to separate off its struggling Poundland unit in the UK, including a potential sale.
After making the statement ahead of the retail group’s Capital Markets Day, its Chief Executive Stephan Borchert told Reuters that it has already received interest from potential buyers of its 825-strong chain.
He declined to comment on the type of interest, what stage talks had reached, or what Poundland was worth but said he was confident its future would be decided by September this year.
Pepco Group stated that its ultimate ambition was to operate under a single Pepco format, focusing on its higher-margin clothing and general merchandise business and “white space” opportunities in Central, Eastern and Western Europe. It sees scope for a further 1,800 stores in Central and Eastern Europe.
In recent years, the company has sought to integrate the operations of its three brands (Pepco, Poundland, and Dealz) to create a simpler business model with one brand and product range. However, this integration has not delivered, with the company saying its FMCG-led businesses have been a drag on its financial performance. It noted that Poundland is also operating in an increasingly challenging UK retail landscape that is set to intensify due to impending tax hikes, which will add further pressure to the discounter’s cost base.
Despite efforts to return Poundland to its core £1 offering, the business suffered a slump in sales last year, prompting the recent departure of its Managing Director, Austin Cooke. It was confirmed today that the chain’s former MD, Barry Williams, will permanently return to position. He had rejoined the business in January in a supervisory role to help address its current underperformance.
In an update on current trading, Pepco Group said its like-for-like sales were up by 1.5% in the 8 weeks to 2 March, with a strong performance from Pepco and Dealz offset by “continued challenges” at Poundland.
Looking ahead, the group said the difficult trading conditions would continue to impact Poundland’s profitability, with a more difficult sales environment and consumer backdrop, alongside margin pressure and an increasingly higher operating cost environment. As a result, it now expects Poundland’s underlying annual EBITDA to come in at between €50m to €70m compared to €153m last year.
Borchert commented: “We are taking clear strategic action to focus on the Pepco brand as our single future format, to move away from FMCG and create a simpler business focused on higher margin clothing and general merchandise. Pepco will continue to be the engine of the Group’s earnings potential, and its strong customer offer and price leadership give it a compelling ‘white space’ opportunity to drive further profitable growth in its Central and Eastern European heartland, as well as select markets in Western Europe.
“The Board and I are actively exploring separation options for Poundland, including a potential sale, from the Group, with consideration also given to the separation of the well-performing Dealz Poland over the medium term. Barry Williams did a great job as Managing Director of Pepco, returning it to like-for-like sales growth, and I am confident he will play a pivotal role in getting Poundland back on track, given his previous success there.
“Our latest trading period – with continued positive Pepco like-for-like sales – reflects the brand’s momentum and underpins our focus on the business that accounts for the vast majority of the Group’s earnings and our highest returns on capital. In addition, the authorisation of a share buyback capability of up to €200m, which the Board can make use of from time to time, reflects the confidence over the strong current and future cash generation of the Group, and desire to drive shareholder returns.”
NAM Implications:
- A decision on Poundland’s future status by September…
- …means six months of uncertainty for the current team.
- Resulting in the good guys leaving…
- …and possible morale issues for those that remain.
