Davids battles Goliaths
David's, a prominent wholesaler on the East Coast has suffered over the last 2-3 years amidst increasing competition from the likes of Woolworths who are pushing to have more control on the prices they pay and entering into wholesale operations themselves.
David's have also had management problems. The board was completely restructured in May this year with Andrew Reitzer appointed CEO and external people hired to fill the positions of Finance Director and Merchandise Director. A new Chairman, Mr Carlos dos Santos, has been appointed, removing Mr John David. Mr dos Santos was previously the CEO of Metro Cash & Carry in South Africa. Metro, a company known for its strong wholesale operations, made a takeover offer for Davids earlier this year and have now secured 78% of the company. This removed the Davids family from management and subsequently broke the stranglehold of the board on the company. Davids isn't really Davids anymore and for shareholders this may be a good thing.
Source of problems
Problems in Davids stemmed from the purchase of Jewel's foodstores. This diversion from its core wholesaling activities into those of retail diverted vital financial and management resources. Davids then suffered declining margins and liquidity problems as their receivables and creditors position worsened. This led to a higher level of corporate debt and an escalating interest bill.
Since the departure of John David in August 1997 a recapitalisation of the balance sheet occurred through a placement of convertible preference shares from which funds were used to repay debt. Part of the property owned by David's was sold to raise $145m in cash to pay off more debt. From a level of $408m in June 1997, debt now stands at just below $100m.
In conjunction with Metro, the company developed a restructuring strategy but even when considering the most recent net loss of $5.6 million there is still plenty of work to be done. With Coles and Woolies dominating the food retail market, the wholesaling part of the business will remain challenging. For investors thinking that Davids may be a turnaround stock we'd take a cautious approach and wait for evidence of a turnaround of the company's fortunes. At the moment it's too early to tell. AVOID.