A story of M, a failed retailer: We'll give you a clue – it rhymes with Charlie Chaplin

You got to give credit – but critically, only where it is due...

Snap of London Waterloo Maplin store closing sale

Comment Gather round, those who think you could make a go of it in tech retail or are currently working in the sector. Let's hear the tale of all that went wrong – and right – for Maplin Electronics Ltd, a once engaging and highly profitable business that smacked headfirst into a brick wall in 2018.

Much has been written about its core strengths and weaknesses, but not enough has been made of the nitty-gritty stuff: performance and debt and the cycle of business sale, investment and resale. It is indeed this cycle that precipitated its collapse.

Statistics show that a large percentage of failed retail businesses were backed by private equity or venture capital and the technology industry is no exception. Quite simply, with outrageous valuations and prices paid comes the saddling of huge business debt at an often punitive interest rate which pretty quickly or immediately wipes out profit generation. Maplin Electronics is a classic case.

Credit: It's a risky business

It was in the early part of the 1997 when I was approached by sales at a distributor that I worked at to see what I could do in terms of increasing open credit terms offered to Maplin. We had at that time possibly one of the best retail salesmen I've ever come across; he not only got right up close to the client but worked extremely hard with vendors in terms of support. He had a terrific sense of responsibility in fully understanding credit risk. The salesman had worked closely with me on many earlier occasions with different clients and in those days, sales remuneration was commission-based, with claw-backs on slow payment or total default.

Credit insurance, even back in the '90s, was sparse and restricted; Maplin's balance sheet was already bearing the weight of an initial investment by Brown Shipley Development Capital in 1990 when turnover was £12.3m and gross profit was £3.2m (PDFs). The investment came in to fund growth and expansion, and the popular high street electronics retailer relocated a distribution centre.

It was in 1997 that I first visited, my aim being to find out all that I could about the business and its performance. From a gross profit perspective, Maplin was incredibly profitable (the full accounts made up to 28 December 1996 show gross profit of £15.6m on turnover of £32.6m), a result, perhaps, of its broad appeal to a mix of different clients and its range of products, sourced and supplied via separate operations in the Far East.

It had the right attitude in terms of store locations, small but well-staffed and stocked retail premises in small towns and selective local borough shopping centres. The downside from a credit risk perspective was that given Maplin was a cash business, rarely offering credit to its own clients, it did not make sense to extend high-value credit when interest levels paid and debt were eating away at profit generation. Banking covenants were in place at the time, one of which demanded that gross profit should remain above 50 per cent.

Controls were excellent, however, costs and stock-holding were being managed, banking covenants were being met and above all else, growth was clearly evident with new store locations.

Buying in

In 1999, Compart Plc made an offer and acquired the shares of Saltire Plc, the then-holding company of Maplin Electronics. At this time, sales had increased to £45m with gross profit of £22m. Some 60 per cent of revenue was delivered through its store locations. It was at this point that Maplin Electronics (Holdings) Ltd came to being.

In 2001, Graphite Capital led a £41m management buyout.

The consolidated balance sheet was subsequently hit with intangible assets of £27.6m and long-term loans of £39m and by 2003, sales reached £99m with gross profit of £50m and operating profit of £15m, with stores accounting for over 80 PER CENT of sales. In that year, too, some £5m of equity dividends were paid along with £13m of preference dividends.

In 2004, Graphite sold 67 per cent of the business to Montague Private Equity for the quite stunning sum of £244m, generating a return multiple of 9.5 times cost and internal rate of return (IRR) over 120 per cent. Montague paid in excess of 16 times earnings, a quite astonishing valuation. Graphite, therefore, did exceptionally well, a quick in and out in three years with a nice wedge of money, but the rot for Maplin began thereafter with cripplingly unsustainable debt and accrued interest.

The year ended 1 January 2005 saw sales of £120m, gross profit of £58m and – given Montague's investment – a balance sheet now saddled with intangible assets of £235m and debt including bank loans, subordinated bank loans and accrued interest on shareholder loan notes of £262m. This quite frankly scared suppliers trading on open credit and insurers began to limit or reduce cover granted once more. I opted to offer early settlement discounts in order to keep exposure to manageable levels with a weekly cycle of payment.

While revenue increased each year, the growing burden of interest payment, especially those accruing and not payable till exit, began to take a heavy toll with increasing operating losses recorded.

  2011 2012
Sales £205m £214m
Gross profit £106m £106m
Operating profit £13m £5m
Interest paid £63m £71m
Loss for period £50m £73m
Intangible assets £152m £140m
Loan notes £137m £137m
Accrued interest    
on loan notes £292m £361m

Those who argue accrued interest on loan notes is only payable on exit fundamentally fail to see the damage done to business competitiveness, profitability and its effect, where exit does not arise over the expected period. This type of thing cripples business credit ratings, insurance cover and the provision of credit, all of which lead to certain failure.

Something had to give; the business could not sustain this level of debt and increasing losses decimating the balance sheet. Expansion of stores over time brought with it increased cost and certainly not all of the shops operated successfully.

Indeed, in the late '90s, Maplin had moved to opening some large out-of-town stores, quite out of sync with its traditional retail space. I noted a large store on the Bath Road in Reading in 2001. I visited it twice in a six-month spell and found it generally lacking in footfall and far too clinical.

Given a need to retain gross profit above 50 per cent and stay on the right side of banking covenants, it began in later years to be less competitive in both price and availability of product. Its online sales suffered even more.

It was, in essence, in a downward spiral or death spin and what happened in the extended 15-month year to March 2014 was temporary relief, a heavy dose of morphine to lessen the pain and window-dress the business to attract a buyer. The business was forced to address the parlous nature of the balance sheet.

2014 results showed the following  
   
Sales £269
Gross profit £135m
Operating loss £86m
Interest payments £92m
Loss for the year £181m
Intangible assets £40m
Shareholder loan notes £137m
Accrued interest on shareholder loan notes £10m

A large chunk of the loss in this year was a write down in impairment of goodwill (intangibles) of £85m.

Some £442.3m of accrued interest on shareholder loan notes at 16.5 per cent compound, were capitalised through the issuance of "C" preference shares.

The consolidated balance sheet still, however, reflected a carry-forward loss position of £500m. Interestingly, too, adjusted EBITDA fell by more than 50 per cent in the last three years of Montague's tenure.

The sale to Rutland Partners LLP was perhaps a last throw of the dice to limit the damage given the price paid for the business, loan restructure and amortisation of goodwill.

The deal was financed through loan notes of £72.2m and intra-group funding of £16.8m. The total enterprise value of the business was £89m. After settlement of debt, the consideration paid was just £14.7m.

In its first-year results, however, despite a bullish CEO statement, the cycle began to be repeated. Interest accruing on the £72.2m of acquired loan note debt began to take its toll once again as did a rising headcount and excessive increased cost.

Under Rutland's ownership, the following results were achieved (numbers rounded):

  2015 (46 weeks) 2016 2017
       
Sales £187m £235m £236m
Gross profit £91m £113m £113m
Operating profit/loss £6m (£2m) (£3m)
Interest payments £9m £13m £14m
Loss for the year £4m £12m £16m
Intangible assets £49m £45m £46m
Loan notes £72m £64m £64m
Accrued interest on loan notes £8m £17m £30m
Staff number 2,143 2,612 2,577
Wage costs £31m £39m £42m
Director emoluments £1m £1.7m £2m

What we see are losses in each successive year, considerable increase in cost and a repetition, albeit on a smaller scale, of debt and accrued interest shattering minimal operating profit: in just three years, the business racked up losses of £33m.

Maplin could and should have done better with online sales – which at their peak in 2017 were still only 15 per cent of total sales. But the onerous debt position and covenant demands eroded its earlier competitive enough edge. The electronics store, in its final years, was far too expensive to go to for product, had lost its mojo in terms of customer service and product range, faced rising costs and suffocated under punitive debt and interest.

It's quite something that a retail business with extremely high gross margins, successful in early years and knowing exactly where its strengths lay, should succumb in such an ignoble way. Much has been written about its early success, why this was and what went wrong, but the fact remains, where there is repeat private equity or venture capital interest, or when ridiculous valuations are met, ignominious failure is so often the result, especially in retail, where the likes of Toys "R" Us is another classic example.

It's not just retail, however. So many buy-and-build strategies, repeat managed buyouts and successive private equity or venture capital investments continue to saddle businesses with unsustainable debt levels. The zombies still walk among us. ®




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