Steinhoff Shares in Free Fall Following CEO’s Prompt Exit

Steinhoff’s share price takes a tumble

News of Steinhoff International Holdings Ltd (“Steinhoff”) being placed under investigation by German authorities negatively impacted the company’s share price earlier this year. While no specific information has been released yet, the speedy resignation of Steinhoff CEO, Markus Jooste, as well as the company’s decision to appoint PWC for an independent investigation has resulted in the company’s share price taking a more than 60% overnight tumble on 6 December.

Robust growth fuelled by acquisitions

Steinhoff has performed impressively in recent years, surging from being the 39th ranked home and garden specialist retailer globally in 2009 to being ranked 6th in 2017. This ascent was due to an aggressive global expansion strategy, which resulted in Steinhoff acquiring several companies, including Pepkor in South Africa (2015), Poundland in the United Kingdom (2016) and Mattress Firm Holding Corp in the US (2016). The company has retail operations in several regions, including Australasia, Eastern Europe, Western Europe, North America and the Middle East and Africa. Steinhoff’s major home and garden retail brands include Conforama, Mattress Firm, Poco, Kika, Leiner and Freedom.

Jack of all trades, master of none?

On the surface, it appears that Steinhoff’s discount furniture retail strategy, demonstrated especially through its Poco brand, proved popular with consumers, with the company being dubbed “Africa’s Ikea”. Globally, the number of Poco outlets grew from 84 outlets in 2009 to 126 outlets in 2017 across Australasia and Western Europe.

Nonetheless, following the acquisition of Mattress Firm in the US, Steinhoff terminated an existing supply agreement with Tempur Sealy, in favour of a new partnership with Serta Simmons. Furthermore, all Sleepy’s and Sleep Train stores were rebranded to Mattress Firm stores. Steinhoff opted to complete the rebranding exercise quickly, rather than in phases over a number of years. The rebranding initiative led to the temporary store closures of more than 1,000 stores in the US.

Proof of a disconnect may be evident in the company’s decision to acquire brands across diverse industries. It appears as if Steinhoff did not have a cohesive global strategy, acquiring retail brands across apparel, furniture and appliances. This begs the question whether management expertise was spread too thin. Nonetheless, whether Steinhoff’s zealous expansion tactics amount to a winning or losing strategy really does depend on the outcome of the investigation.

Future outlook for Steinhoff

What does this all mean for Steinhoff’s global retail operations? If evidence of financial irregularities is eventually found, the Johannesburg and Frankfurt Stock Exchanges might suspend trade on Steinhoff shares. This or a further decline in share price will undoubtedly have an impact on Steinhoff’s global retail operations, however, to what extent remains to be seen.

Despite the fact that interim executive chairman, Christo Wiese, was also a proponent of Steinhoff’s aggressive global expansion, it is fair to assume that store expansion plans will be put on the back-burner as the audit investigation continues. Depending on the outcome of the investigation and if revenue figures are found to be severely enhanced, store closures for Steinhoff brands might be a medium-term possibility, as shareholders and Steinhoff’s bankers may potentially make moves to cut their losses. This may create an opportunity for Steinhoff’s competitors such as Ikea (Inter Ikea Systems BV) and Jysk (Jysk Holding A/S) who may fill the gap left by Steinhoff’s potential withdrawal.