David Jones, Country Road relief after coronavirus debt waiver and loan

Retailers backed with $75m loan from parent company after suffering a collapse in sales during coronavirus crisis.

David Jones’ flagship Sydney store remained open to the public during the virus crisis. Picture: Toby Zerna

Upmarket department store David Jones and its stable of Australian fashion stores under the Country Road Group have won a waiver from its lenders on its debt covenants and been handed a $75m loan from its parent company, South African’s Woolworths Holdings as it suffered a 35 per cent collapse in sales through the worst of the coronavirus pandemic.

Sales at Country Road Group, which includes popular retail brands such as Country Road, Mimco and Witchery, slumped by 50 per cent through the worst weeks of the coronavirus outbreak.

In a trading update provided to the Johannesburg Stock Exchange by Woolworths Holdings, it also announced a number of measures to bolster its Australian businesses in the wake of the health and economic crisis triggered by the pandemic, including restructuring its loans, discussions with landlords to lower rents and looking to sell off some of its properties.

The restructure and negotiations of its debts will remove the embarrassing event of David Jones breaching its debt covenants as the Australian economy crumbles under the weight of shutdowns and home isolation, with the department store like other retailers facing collapsing sales.

While David Jones stood apart in the retail sector and from arch rival Myer by keeping its department stores open during the coronavirus pandemic, it still suffered a large fall in sales as many customers stayed at home or decided to pull back from discretionary spending as they were put on JobKeeper or worried about keeping their jobs.

In a trading update, David Jones said while its stores continued to trade in its large format stores through the period, the impact of COVID-19 has had a significant impact on foot traffic and store sales.

It said sales and concession sales for the first nine weeks of the second half were up 0.5 per cent in local currency, but declined by 35.8 per cent in the subsequent eight weeks to end-April. David Jones´s online penetration continues to grow strongly, with sales in the second half to-date having doubled versus that of the prior comparable period.

Organic cotton logo duffle, from Country Road

“The easing of restrictions in Australasia has also commenced, and we are seeing a positive uplift in footfall and a commensurate, encouraging sales performance, across the DJ network of stores,’’ Woolworths Holdings said.

At Country Road Group, which owns Country Road, Politix, Trenery, Mimco and Witchery, overall turnover was more adversely impacted as a result of the decision to close all stores given the challenge of maintaining social distancing protocols across their smaller store formats.

Proactive and immediate action

This resulted in a 50.4 per cent drop in sales in local currency in the eight weeks to end-April, versus an increase of 1.7 per cent in the preceding nine weeks. Online sales remain strong, with growth of 19 per cent in the second half to date. Country Road stores began their planned re-opening as of May 22.

Meanwhile, to bolster the balance sheet for its Australian arm, Woolworths Holdings announced a number of initiatives. It announced the provision of funding support of $75m to the Australasian businesses in the form of a loan secured by a second lien. The funding support is conditional

It said it is also proactively seeking suspension of covenant testing for the Australasian funding. “The COVID-19 impact and the challenging trading environment is expected to reduce headroom for the June and December covenant periods.”

The lending banks have granted the requisite suspension of covenant testing and the process with the bondholders has commenced and is expected to be concluded by the end of the financial year, Woolworths Holdings said.

There will also be a review of the capital structure of the Australasian entities and will include the restructuring of its borrowings to ensure a more sustainable funding structure. UBS Australia has been appointed to support this process and will conduct a full review of options relating to the Australasian property portfolio.

As a first measure, with specific regard to the status of the sale of the Bourke Street Menswear building, contracts have been exchanged between David Jones and the preferred purchaser. The sale price achieved is in line with expectations and final settlement is anticipated before the end of July 2020 following the fulfilment of customary conditions precedent.

Landlord discussions

It said discussions with Australasian landlords are underway in relation to an accelerated restructure of the David Jones network of stores/locations and reduction in floor space.

Woolworths Holdings chief executive Roy Bagattini said this recent update reflects the tough and unprecedented trading conditions that have dramatically impacted performance across the retail sector globally.

“Throughout this period, our group has taken proactive and immediate action to ensure the safety of our customers and employees, while optimising trade across all our businesses.

“Notwithstanding the significant challenges we currently face as a business, we are well placed to respond rapidly and effectively to changing customer dynamics and capture the market opportunities that arise.”