Managerial gaffes in key business strategies have proved too costly for once-thriving fashion retailer Deacons East Africa, exposing shareholders and creditors to a potential loss of Sh1.9 billion.
This has forced the founder chief executive, with a stake in the same company, to jump out of the heeling ship, a little too late to put on a life jacket even as lenders deny the firm new lines of credit.
On Tuesday last week, Wahome Muchiri, who was in charge of the now under-administration Deacons faced creditors for the first time since the company appointed PKF partners as joint overseers.
He stayed in a pensive mood as creditors posed questions on how the company ran into debt that Atul Shah, one of the joint administrators, say may require 15 years to repay if the company is to depend on internally generated revenues to service it.
And Mr Muchiri, with a stake of 3.49 per cent in the company, knows too well where his team of directors lost the way.
“The Two Rivers shenanigans was possibly one of the biggest triggers to all these problems,” said Mr Muchiri.
Deacons wanted to put up four stores at Two Rivers Mall and so it deployed assets worth Sh400 million and stocked the shops. But Mr Muchiri says postponement of the opening date for over six months meant Deacons was stuck with excess stock.
“All it meant was that we were sitting on a higher inventory than we should and that created a cash flow lock on, effectively driving us into a financial breach with Mr Price,” he said.
Revenues remained static despite the firm having doubled inventory level. The breach saw Mr Price, a key franchisee, exit the business.
To try and steady the business, Mr Muchiri-led board made another move that would later backfire.
“Management felt they needed to save the brand and, therefore, used operating cash from other branches and debt financing facilities,” says the administrators who were given the business in September last year.
This led to a significant cash flow crisis in the business, which resulted in breach of supplier contracts with existing branches as most of the payments were being channelled to Mr Price.
Deacons was unable to make payments on time, prompting suppliers to stop providing goods. Tenants also started throwing Deacons out of their premises, leaving it with no room for recovery.
“Mr Price stops sending inventory to you, your revenues nose-dive, you go into a loss-making position, you are not a going concern and therefore, they insist on leaving,” Mr Wahome sums up the fall.
Mr Price offered themselves out of Deacons at Sh133.3 million, being a net book value cost with accelerated depreciation, according to Mr Wahome, who will exit the firm soon.
Consequently, the group’s revenues declined by Sh303 million compared with the prior year.
The Mr Price brand alone contributed a decline of Sh324 million, with a margin loss of Sh154 million as a result of discontinued supply of stock by the company. The fashion retailer’s net loss then widened three times to Sh841.4 million.
The deal proved too costly for the company unlike the 2015 pact with Woolworths Holding (SA) which bought back its franchise from Deacons at Sh405.8 million. Deacons had signed a distribution agreement with them in 1994.
The firm will be battling to know if Truworths, another franchise it acquired in 1999, will be willing to extend its stay when their agreement ends in April this year.
Deacons’ assets are now valued at Sh606 million but the administrators estimate that realisable value will be Sh63 million, if it is to be liquidated to pay off debts. And liquidation will expose creditors and shareholders to Sh1.9 billion in losses.
From three years in profits, the business sunk into losses in 2016 and has not recovered.
Administrators have had to cut staff size from 153 to 60 and remained with eight stores as losses hit Sh628 million loss at end of November. Revenues have dropped to Sh646 million per year as opposed to prior years’ average of Sh2.3 billion.
Focus is now on shareholders to inject Sh450 million and hope that administrators’ projections to get the business back into profit in 2020 will be realised.
Its shares remain suspended on Nairobi Securities Exchange, having dipped from the listing price of Sh15 apiece in August 2016 to Sh0.45 on the day of suspension. That translates to an unrealised loss of Sh1.29 billion.