Blacks Leisure has been given a two-month deadline to come up with a convincing restructuring plan as it warned earlier this week that it could breach one of its bank covenants at the end of September. The leading British outdoor retailer has already tipped Sandcity, a retail business in its boardwear unit, into administration as part of the negotiations with its bankers.
Blacks admitted on Tuesday that its performance had been worse than expected in the first six months of the financial year ended on August 31, chiefly due to the poor results of its board sports division. The company therefore warned that it was about to breach a financial covenant with its bank, Lloyds Banking Group, at the end of this month.
It said it had entered talks with Lloyds.The next day, the group confirmed that the negotiations had led to a formal standstill agreement with Lloyds until the end of November. Among the conditions set by Lloyds was that Blacks should come forward with a satisfactory plan to get rid of its loss-making stores and units.
Sandcity is the unit that previously acted as a wholesaler for O’Neill in the United Kingdom, and ran 13 mono-brand stores for the board sports company. Last year it was agreed that Sandcity would quit wholesaling O’Neill, but 11 remaining O’Neill stores were still haemorrhaging cash.
Blacks stated that Sandcity made up about one third of its board sports business, which further comprises about 30 multi-brand stores under the Freespirit banner. The company’s board sports division has suffered heavy setbacks in the last months, encouraging Blacks to convert some of its board sports stores to outdoor stores, and to reduce costs by integrating Sandcity’s management with that of Freespirit. At the same time it started looking at strategic alternatives for the rest of the business, but had to admit earlier this week that serious interest in the unit had been low and that structural issues made it hard to sell discreetly.
Two executives from KPMG were appointed as administrators of Sandcity. About ninety jobs are at stake, chiefly consisting of staff at the O’Neill stores. KPMG was quoted as saying in the British press that the stores would stay open while the administrators looked for a buyer.
Blacks said it had taken the decision to place Sandcity under administration after a review concluded that there was no reasonable prospect of restoring profitability at Sandcity in the medium to long term, and it was no longer in a position to trade as a going concern.
With Sandcity in administration, Blacks said its directors believed that current market expectations could still be met, excluding the costs of restructuring measures. However, this implied that Lloyds would have to waive the group’s expected covenant breach and that it would be able to trade during the Christmas season. Interim results are due to be published at the end of October.
Sandcity has been causing headaches for the management of Blacks in the last few years, which were punctuated by a spate of profit warnings. One of them was issued in March last year, after Blacks discovered a hole of about £2 million in the accounts of Sandcity. Although cash had not left the company, and no-one appeared to have benefited from the incorrect financial statements, Sandcity’s margins had been substantially over-stated in the past two years. The hole was spotted as part of an in-depth review of the company launched by Neil Gillis, who became chief executive at Blacks at the end of 2007, with as yet unfulfilled hopes of redressing the retailer.
Blacks’ shares took a hit on the London stock exchange this week and analysts were left wondering how the situation of the board sports stores could have deteriorated so quickly, since Blacks renegotiated its debts with Lloyds in July. Another element of uncertainty is that Sports Direct International, the leading British sports retailer, majority-controlled by Mike Ashley, still has a stake of 29.9 percent in Blacks and has repeatedly shown interest in tightening its grip on the company.