AVCJ Awards 2021: Operational Value Add: Best & Less Group

Steinhoff International’s troubles were well known. Embroiled in a fraud scandal and needing to fill a hole in its balance sheet, the South Africa-based retail holding company was divesting assets and restructuring operations globally. Its portfolio of Australian brands, already underperforming at the local level, was unwanted. But who would want to buy the whole lot?

“Top line and profitability were declining, the balance sheet was bloated, and the parent was a motivated seller. At the time, retail was also on its nose and very few people were interested in that kind of business,” said Fay Bou, a partner at Australian turnround investor Allegro Funds.

“It was question of how we could look where others do not by virtue of our investment strategy, how we could provide a solution to the vendor, and how we assessed that operational underperformance and thought we had the capabilities to de-risk transformation over time.”

It was clear to Allegro that Best & Less, a baby and kids value retailer, was the most promising business held by Steinhoff-owned Greenlit Brands. However, in late 2019, it bought Harris Scarfe, Postie, and Debenhams Australia as well, dissolved the group structure, set up each brand as an independent entity, and executed separate transformation plans.

Greenlit’s financial challenges led to difficulties in securing debt financing for investment in the brands. While the group-level restructuring was underway, Allegro secured an asset-backed loan from Gordon Brothers – the first of its kind in Australian M&A – to provide certainty of funding. This was replaced by a standard working capital facility once the transformation was complete.

Parts of this process were painful. For years, Greenlit had sucked cash out of Best & Less to support the other loss-making brands. Allegro engaged individual landlords regarding compromise solutions on long-term store leases. When negotiations over Harris Scarfe and Debenhams proved fruitless, they went into administration, emerged with substantially smaller footprints, and were sold off.

Transformation plan

Allegro’s conviction around Best & Less was reinforced by teaming up with Jason Murray, a former managing director of Greenlit. Once the other brands were exited, they moved forward aggressively.

“There were ideas inside the business, but because it was within a group that sat within a group that sat within a group, it got little attention,” said Bou. “We wrapped it into a governance structure and identified five things we wanted to go hard on. Previously, they had been spread wide; we were clear on what we wanted to achieve.”

This governance structure equated to what would be expected of an ASX200-listed company, including the establishment of a new board, sub-committees, and reporting processes. Meanwhile, the balance sheet was optimised to position Best & Less for a growth strategy driven by an emphasis on the value segment with baby and kids as the core category and an omnichannel buildout.

In addition to creating new store formats and devising an expansion plan, the company added click-and-collect and fulfil-from-store functions, launched a mobile app, and improved digital marketing. New customer relationship management systems and loyalty programs were also introduced.

Digitisation extended into the back office as well, with the rollout or revamp of attendance and rostering software and employee engagement tools. These were complemented on the human resources side by new incentive schemes and a management equity plan.

Ten Allegro professionals, five from deal team and five from the operating partner team, were actively involved at Best & Less. The challenge they faced – turning around an unprofitable business in a struggling sector – was further complicated by COVID-19. Best & Less has around 185 stores in Australia and 60 in New Zealand. All were impacted by lockdowns relatively early in the investment.

“All our 13 portfolio companies went into liquidity protection mode when COVID hit,” said Bou. “We formed a steering committee under our investment committee to address key issues, in part so companies could learn from each other. We brought advisors – lawyers, bankers, restructuring professionals – onto the steering committee because we wanted to know what lever we could pull.”

Retail was hit especially hard. With New Zealand in complete lockdown, for a time Best & Less was running at zero revenue and 100% cost, and it was uncertain how long the situation would persist. Government stimulus effort averted a deep recession, and Best & Less has bolstered its focus on the baby and kids value segment, which stands up well against changes in discretionary demand.

The company continued to trade in Australia because it was designated an essential retailer, but online sales penetration rose from 3% to 10% during that initial six-month period of uncertainty. It laid the ground for a rapid turnaround, with EBITDA tripling to AUD 70m within the first 20 months of ownership. Revenue rose 9% to AUD 663m.

“You don’t underwrite for two-year turnarounds, but that’s the beauty of investing in retail businesses. When you change something, you get an answer the next day, and when it keeps working you double down and triple down,” said Bou.

“But things can go down as well. It depends on whether you have a valuable proposition, whether you can control your brand and your margins, and whether you have scale. Best & Less ticked all three boxes. However, if you don’t have just one of the three, it can go wrong very fast.”

Exit routes

About one year in, once the major pandemic-related challenges had been negotiated, Allegro could see its plans were working. A dual-track exit process was launched several months later, but an IPO was always more likely, especially as potential global buyers couldn’t travel to Australia.

Best & Less Group raised AUD 100m in July 2021: AUD 60m via a share offering and AUD 40m through a strategic investment by retail industry veteran Brett Blundy. Allegro realised AUD 91.3m and retained a 43.5% stake. As of October 2021, the stock was up 55% on the IPO price, giving Best & Less a market capitalisation of over AUD 400m. Allegro was sitting on an IRR of more than 500%.

The public markets are highly selective, particularly when it comes to private equity-backed retail businesses, with memories of the post-IPO meltdown of Dick Smith still lingering. Bou places Best & Less in the category of companies that have performed well because they have a unique commercial proposition and a growth story.

“We build the foundations, put in the plumbing and set the strategic pillars for the business, ensure we have a strong team, and then execute,” he said. “Best & Less has a great management team that demonstrated they could execute during a crazy time.”

Pictured: Fay Bou of Allegro (centre) with Best & Less Group's Jason Murray and Rodney Orrock

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• Topics
• Australasia
• Buyouts
• IPO
• Consumer
• Restructuring
• Australia
• Allegro Funds
• AVCJ Awards