Saving H&L - GK partnering with True Value on another makeover for Rapid True Value chain

GraceKennedy Limited is doubling down on its plan to refocus on its core food and financial services businesses but is still not ready to give up on its loss-making retail division which is about to get yet another makeover.

Simon Roberts, five months into the job as chief executive officer of Hardware & Lumber Ltd (H&L), the operating company for Rapid True Value, has crafted a "revised strategic plan" for the retail chain, which his immediate boss, Don Wehby, will take to the Grace-Kennedy board for approval this month.

The conglomerate appears set to retire at least some of the smaller stores in the Rapid True Value chain, while expanding or establishing large operations in heavily consumer trafficked town centres where, Wehby, group chief operation officer, said, big stores would more likely do well.

"Consumers are more attracted to larger stores", which offer "a wider variety of goods," Wehby said.

"There is a plan to add new stores to H&L, but in areas heavily trafficked," he said, touting May Pen as one of the prospects.

The model is already being tested from last year's amalgamation of Agro Grace retail stores with Rapid True Value, and, according to the GK second-in-command, is working.

GK will also be transforming the look and layout of the outlets, with the backing of American partner True Value Company, whose North American store design, Wehby said, is to be replicated here.

"They're helping us remodel," said Wehby.

The first of the remodelled operations will be the store at Lane Plaza in Kingston, which will sport the new look within a matter of months.

True Value and GraceKennedy are sharing the cost, which Wehby declined to disclose ahead of next week's board meeting, but which is likely to amount to millions of dollar per store; nor has he said whether the chain will contract or grow from the current 13 under the plan crafted by Roberts.

The move to restructure falls within a wider project by GK corporate to refine its business processes to create a more fluid operation.

"Cash is king," said Wehby. "We need to generate cash from operations."

massive inflows

GK in 2009 reported inflows that included J$12.3 billion of proceeds from sale of investments to close the year with a net J$8.8 billion of cash and equivalents, compared with J$6.7 billion in 2008 when the proceeds from sale of investments were only J$2.5 billion.

The proceeds from sale of investments last year covered the divestment of securities, including "the closing out of positions in US Treasuries," said Wehby, as well as J$350 million from the sale of its stake in Fidelity Motors and its 51 per cent of Versair In-Flite Services to partner Goddard Enterprises of Barbados.

GK, however, ended the year with 'negative operating cash' of J$2.26 billion, a significant reversal from its positive J$3.7 billion position the previous year.

Andrew Messado, GK's finance director, said the operating cash deficit was due to the group's use of operating funds to lend to clients of First Global, following that entity' losses from "irregular transactions" in US Treasuries that cost it US$19.9 million (J$1.768 billion); and to pay suppliers to reduce outstanding credit.

After the trades were detected, "we re-evaluated and closed out those positions," Messado said.

GraceKennedy is using the balanced score card approach to management under which its goal on the financial side of the operation is to "grow profits by focusing on new business and financial services," according to Wehby, who says a number of the businesses are doing well to improve profits and return on equity, including Jamaica International Insurance Company, but that others needed to improve performance.

He did not spell them out, but the list would include First Global Bank which made a J$168-million loss last year.

In its portfolio of some 66 companies - some of them holding entities - at least 28 fall within the financial services arena. Wehby said in its refocus on core, other companies were likely to be sold off, though not right now, but he would not be drawn on the specifics, citing the listed company's obligations to disclose certain information to the stock market first.

Still, the company's shipping entities seem likely prospects.

H&L definitely is not up for sale, Wehby said, in what now seems to be a yearly iteration by the conglomerate, which owns 58.1 per cent of the listed retailer. The retailer's shares are now trading at J$5, down from the 2009 high of J$10 and the previous year's J$17.

Hardware & Lumber has been a headache for GraceKennedy for four years and a disappointment for 20.8 per cent minority partner Pan Jamaican Investment Trust.

The retail company's losses in the last two have averaged J$255 million, or J$3.15 per share per annum.

"H&L reported a net loss of J$250 million, compared to a J$260 million net loss in 2008, of which our shares were J$52 million and J$58 million, respectively. We also recorded an impairment charge of J$27 million in 2009 and J$58 million in 2008 on this investment," said Pan Jam Chairman Maurice Facey and President Stephen Facey in a joint statement to shareholders in the company's annual report that was released to the market on April 30.

strategic alternatives

But in what has also become a refrain for Pan Jam: "We continue to engage with the company's board of directors and with management in reviewing strategic alternatives, and to turn around this underperforming investment," the father-son team said.

H&L's latest makeover started with a repositioning of the business inside the group's corporate structure. On January 1, H&L was transferred from the New Kingston-based GK Investments division, which encapsulates GraceKennedy's financial companies, to the group chief operating officer's portfolio.

"H&L is now being managed as an investment from corporate headquarters," said Wehby. "The short-term objective is to turn it around and make it profitable."

The retail division, which includes the Agro Grace chain, was the only segment closing out the year in the red - contributing operating losses of J$82 million to the group results.

CEO Roberts has already signalled that 2010 was unlikely to be the magic year, saying in a statement appended to the company's 2009 earnings report that actions taken by the Government are expected to dampen purchasing power and challenge H&L's operations - a likely reference to the J$21-billion tax package that took effect in January.

Last year, H&L cut operating expenses by J$230 million, a sign of progress in its drive to tighten costs, but not enough to cushion the fall in revenues and foreign-exchange losses, and turn around the company's performance.

H&L has struggled with the management of inventory, spending millions on a computerised system built on a just-in-time model that fixes on supplying the goods that are in demand by customers at the times they are most likely to buy, rather than having shelves stocked with items with low turnover volumes.

The first system that H&L tried in 2006 failed to deliver. It was replaced in 2008 with the S2K Enterprise, developed by Vormittag Associates of New York.

Now, H&L is taking another step - outsourcing.

Just this week, advertisements appeared in the press seeking a provider of warehousing and distribution services for which 'requests for quotations' close May 14.

business@gleanerjm.com