A recent focus on mattresses has helped The Brick generate higher profits because they can be sold at a significant markup to their wholesale costs.Tim Fraser for The Globe and Mail
Three years after pleading for emergency funding, The Brick is on the verge of paying back its crippling debt load.
Buoyed by a focus on mattresses that offer up comfy margins, as well as a restructuring that better matches inventory with demand, the Western Canadian-based retailer is well on its way to recovery.
The dramatic rebound has served up solid returns, enabling The Brick to announce Monday that it intends to repay bondholders the $110-million it owes them two years ahead of schedule. Doing so will save it from shelling out 12 per cent in interest each year, an exorbitant cost the retailer was forced to accept when its stock plunged from more than $9 in 2008 to $1 in early 2009.
The chain, which touts itself with the ad slogan "nobody beats The Brick," was beat up by its own blunders during the recession. Struggling with a liquidity squeeze, it was also hit with inventory shortages and poor product-demand forecasting. To cut its losses, the retailer slashed ad spending and let go about 20 per cent of its sales staff – almost 450 members –only exacerbating its problems because shoppers need help when buying big-ticket items.
A recent focus on mattresses helped The Brick generate higher profits because they can be sold at a significant markup to their wholesale costs. Electronics, on the other hand, have been in a downward spiral, suffering from stiff pricing competition from the likes of Amazon and Best Buy Co. Inc.
The results have been impressive: The Brick's earnings before interest, taxes, depreciation and amortization during the first nine months of 2011 grew 19 per cent to $78-million, even though sales were down about 1 per cent.
The company has capitalized on mattress margins because it was quick to launch marketing aimed at persuading recession-wary consumers to start buying again – and it appears a good night's sleep was among the first on their list of pent-up purchases.
"Our research shows that consumers will pay substantially more for beds that improve the quality of their life," said David Perry, mattress editor for U.S. industry trade publication Furniture/Today. "If we can just market better sleep to consumers, we can sell better beds, consumers will get better sleep and retailers will enjoy increased profitability."
However, The Brick likely can't count on such strength forever. The mattress category is heating up, with archrival Sears Canada Inc. also focusing more on mattresses, reducing prices partly by introducing lower-priced lines but also offering more luxury and specialty products. "If everybody crowds the mattress business, it's going to become more and more difficult to carve out those profits," said Wendy Evans of Evans & Co. Consultants Co.
The company has other measures to fall back on. BMO Nesbitt Burns analyst Stephen MacLeod said fostering better communication between advertising staff and buyers has also contributed to its success. Often, for example, sales staff would run a promotion for leather couches, but the chain's buyers wouldn't have stocked enough product to meet demand. Now The Brick has "less cash tied up in inventory and they're beginning to operate the way a furniture retailer should operate," he said.
With the company back on solid footing, management was ready to tackle the next priority – reducing its crippling interest payments. "As we had started to build cash, we really felt that it would be important for us to undo some of that [restructuring]work that had to happen in 2009," said chief executive officer Vi Konkle, who took the reins from former CEO Bill Gregson in January.
The Brick originally announced its intention to repurchase the bonds last quarter, but first needed to get the biggest bondholders – Fairfax Financial Holdings Ltd. and The Brick's founder William Comrie, who collectively own more than 60 per cent of the debt – on board. In order to do so, it enticed them with a 14-per-cent premium to face value: For every $1,000 in principal they own, The Brick will pay them $1,140. These bondholders also own stock, and will thereby benefit from the company's interest savings, which may also allow a restoration of the dividend.
Fairfax gives much credit to The Brick's management team. "From our perspective the key to the success was – and always is in a turnaround – management, and hats off to Bill Gregson and now Vi Konkle, they've done an incredible job both reducing costs and also increasing market share," Fairfax spokesman Paul Rivett said.
With files from reporter Tara Perkins
Tim Kiladze