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Conviviality Paying The Price For Expanding Too Fast?

By CMC Markets (Michael Hewson)Market OverviewMar 29, 2018 12:46
uk.investing.com/analysis/conviviality-pays-the-price-for-expanding-too-fast-200200715
Conviviality Paying The Price For Expanding Too Fast?
By CMC Markets (Michael Hewson)   |  Mar 29, 2018 12:46
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It’s been a torrid time for UK retailers in recent months, following on from headlines about Toys R Us, Maplins, along with profit warnings from firms like Mothercare (LON:MTC), Moss Bros (LON:MOSB) and even John Lewis (LON:JLH). These difficulties appear to be extending down the supply chain, with the collapse of Palmer and Harvey at the end of last year now being followed by Bargain Booze owner Conviviality (LON:CVRC) after the company failed to raise the necessary £125m to keep the business going.

In the case of Conviviality, who not only run a chain of off-licences and franchises, but are also a key supplier to J D Wetherspoon (LON:JDW), and other restaurant chains, they appear to have been hit by a perfect storm of different factors.

An over ambitious acquisition program, alongside a difficult retail environment, as margins got squeezed as a result of higher import prices, due to sterling weakness, higher costs in the form of the introduction of the living wage, and a reluctance on the part of the UK consumer to pay higher prices.

In 2015 the company had a market capitalisation of £96m, which rose to £524.8m in last year’s accounts. Debt levels also increased with long term debt rising to £81m, while short term borrowing rose to £24m. Net debt stood at £95m.

This rise in debt levels can be explained by a bit of an acquisition spree with management acquiring drinks wholesaler Matthew Clark, as well as wine specialist Bibendum. They also took on newsagent chain Central Convenience from Palmer and Harvey earlier this year for £25m, which in hindsight now appears a rather questionable decision.

The company had already issued two profit warnings as a result of this squeeze on margins, however it appears that a forgotten £30m tax bill was the final straw, and its ability to generate cash flow was limited.

In its most recent half year results the amount it owes to its suppliers grew to £322m from £256m a year ago, and it would appear that the company’s bankers and stakeholders ran out of patience.

While the difficult retail environment has undoubtedly been a factor in Conviviality’s collapse, some questionable management decisions also played a part, and could well have been the straw that broke the proverbial camel’s back.

DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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Conviviality Paying The Price For Expanding Too Fast?
 

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Conviviality Paying The Price For Expanding Too Fast?

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