McColl’s Retail Group (LON: MCLS) shares dropped 15% this morning on the news that the CEO, Jonathan Miller, had jumped ship. Or perhaps fallen on his sword. For the departure is immediate and he not only steps down as CEO he has also left the board.
As we’ve noted before McColl’s has considerable problems. Supply chain issues affected the last Q4 results for example. Much more recently, less than a month ago, McColl’s shares dropped 56% on financing worries.
Here’s what seems to be the basic problem at McColl’s. They’re a chain of retail convenience stores, OK, that’s fine. This is a market area where there’s a lot of competition and therefore margins are thin even in the good times. Which is fine, make it up in volume in a thin margin sector. But that’s not been happening. It’s what to do next which matters.
One way to gain better margin – and also turnover – is to be able to adopt some brand name which attracts the marginal shopper. McColl’s has done this alongside Morrisons and the most recent trading report tells us that this Morrisons Daily concept does boost per store revenue and also margin. Great, so, there’s the solution, convert the estate and things will be better.
Except that takes time and requires room to be allowed to work. Which is the one thing that McColl’s seems to have very little of. There was a fund raise which would have helped. But the varied problems around stock issues and the omicron variant meant that extra capital simply got swallowed up in working capital requirements. Investment in the estate would require more money.
This is not aided by bumping up against the very limits of what the banks will allow – it’s already necessary to talk to them about covenants on extant borrowing etc.
So, what’s the possible solution? The share price means that the market capitalisation is £6 million or so – that won’t support a rights issue. But there is that proof – OK, indication – that the Morrisons Daily concept works. The problem is, firstly, can McColl’s survive through stock issues, omicron, – we might add war here too – and inflation to convert the stores to the new format. And if it can, where is the capital going to come from?
One not good indication is that there was an indicated offer for McColl’s which was then withdrawn. A new owner, with capital, would be a solution after all. But the withdrawal rather indicates that having seen the books in detail they were no longer interested.
So, now the CEO, Miller leaves and leaves the board entirely. This could indicate that there’s no real solution available. Or, alternatively, if McColl’s can find a significant heavy hitter they might be able to pull off a capital infusion which would solve the problems.
The current problem at McColl’s, now the Morrisons Daily concept has been tested, seems to be the capital structure of the firm. How they solve that – if they can solve that – will determine the value of McColl’s shares.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.