Private equity backed retail group – PILOTpartners replaces the board

PILOTpartners client, a mid-market private equity firm, had invested in this £75m specialist retail business in 2007 as it had demonstrated solid, above average historic growth and needed an injection of capital to pay out the retiring founder and to invest in an exciting, not to say ground breaking, new online business which eventually was expected to replace its high street presence.

The management team had been retained and a new non executive chairman was appointed by the investor who “had done a good job” in another investee business outside the sector.

Eighteen months later the business had burned its online development budget, had made no impact in terms of market share and shareholder value had been decimated, admittedly in the face of the severity of the recession impacting in a niche segment of the retail sector involved in products which were luxury and/or “not must have” items. And the bank covenants were about to breach on a number of fronts.

One would have expected most experienced retailers to have seen this coming, more or less, and made a good stab at making whatever operational changes were necessary. In this case, in retrospect, having achieved the buy-out and the capital injection required to achieve their business dream, the management seems to have gone to sleep and waited for the market to come to them. Retail never works like that. Customers voted with their feet.

First of all, their patience exhausted and, in common with some other investments they had made in 2006-2007 with hefty debt multiples, the investor decided that the root cause of decline was that their choice of chairman was responsible for not focusing the team hard on the agreed buy-out strategy and in particular the phasing of the new online service. In short, he simply had not managed the board properly, relying on management and technical reports as received without the requisite analysis and scrutiny…without asking the difficult questions.

So the appointment of a new Chairman was seen as the catalyst for significant change and for the restoration of value over an extended investment timetable. James Wheeler of PILOTpartners was engaged to source a shortlist of three sector specific, interim turnaround chairmen – first to advise the investor on the art of the possible, how to handle the bank and then to look at the options for a realistic recovery. The interviews were held and the preferred interim chairman started work straight away.

Within three days the extent of the management team’s failure had become all too clear. The chairman reported:

• The technology platform for the online project was clearly flawed but could be resolved quickly. The project had been outsourced and no director was prepared to stand up and be counted for its failure.
• The CEO had been in the business for many years, was seen as an industry guru whose word was gospel and was therefore rarely challenged. Questions were now being asked.
• The finance director appointed at the LBO was technically gifted but had little experience of cash & currency management and his forecasts were always going to be some distance from reality. He needed to be replaced. The controller was competent.
• Merchandising was universally from the Far East. The buying team had been paying over the odds for years, there was no currency hedging policy (see CEO & FD above). The relevant director (with a fancy job title) responsible was bright enough but needed turning round.
• Margins arising from the online business should have been much higher than its high street equivalent; the reverse was the case. The sales director needed to go.
• There had been no investment in the warehouse to cope with customers converting to online purchasing.
• Staff morale was becoming a real issue, their working environment almost 19th century.

That was in June 2009. The chairman’s recovery plan was quickly agreed with the investor:

• The bank agreed to covenant relaxation – at a price.
• The chairman hired PILOTpartners to replace the finance director and sales director in week 3 with proven retail sector expertise. These appointments are working out very well.
• An interim buying specialist and a supply chain/operations manager were hired to support the merchandising director with the fancy title.
• The CEO was given some time to redeem himself and to take responsibility for the implementation of the recovery plan changes under the chairman’s eagle eye. Sad to report that this hasn’t worked out well and he is now being replaced by one of the sector’s best known interim executives until a permanent post holder can be hired some time after the Christmas/New Year period on which the business relies for some 45% of annual sales.
• An interim warehouse manager has just started to take responsibility for getting goods out to customers in time for Christmas…
• The business is back on track.