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Fast-Shrinking Matalan Profits Prompt S&p Warning Over Debt

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http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11981668/Fast-shrinking-Matalan-profits-prompt-SandP-warning-over-debt.html

The ratings agency Standard and Poor’s has raised concerns about Matalan’s excessive debt pile after the discount retailer posted a dramatic fall in profits.

S&P said that it was lowering its long-term credit-rating on Matalan after the chain’s announcement that earnings had plunged 90pc in the second quarter as a result of serious operational problems at its warehouse in Knowsley, Liverpool.

The dramatic slump from £21.9m in 2014 – its second consecutive quarterly profit warning – to just £2.3m means the company may now struggle with excessive borrowings, the ratings agency said.

“We are revising our assessment of Matalan’s risk profile to 'vulnerable’ from 'weak’ and its management and governance practices to 'weak’ from 'fair’”, S&P said.

“We consider that Matalan faces a risk of its capital structure becoming unsustainable over the long term if the company is not on track to overcome the operational setbacks and restore its earnings to historical levels in the next 12-24 months.”

So a company that specialises in selling low priced goods has taken on large debts and now the profits aren't sufficient enough to be able to service said debts? Still I'm sure maximum value has been extracted from all this debt and the staff will take the brunt of the job losses.

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http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11981668/Fast-shrinking-Matalan-profits-prompt-SandP-warning-over-debt.html

So a company that specialises in selling low priced goods has taken on large debts and now the profits aren't sufficient enough to be able to service said debts? Still I'm sure maximum value has been extracted from all this debt and the staff will take the brunt of the job losses.

I think this is a reflection that Matalan is a 'ponzi' business. By ponzi I do not mean fraudulent but that growth creates an increase in the value of the business which increases profit but operating margins are thin or even non-existent.

This growth is usually fuelled by debt although in the case of tech businesses it comes from investors. Now as long as the business is growing then everyone is happy as the management can reward themselves and the bank gets the loans repaid and further loans are issued with associated to finance further growth.

However, when the business stops growing then it becomes apparent that margins are non-existent, investments in productivity have not been made, and systems, controls and processes are weak. With retail businesses for some reason this often manifests itself as problems in the warehouse.

2016 is lining itself up to be an interesting year. Many zombie businesses in retail and leisure are about about to hit by a double whammy from tax credits and NMW of increased labour costs and reduced consumer disposable income.

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its clothes are not good value/quality and are overpriced

other cheapo retailers (primark, peacocks) are also poor quality but are 'pile them high' cheap

Edited by olliegog

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