MEC Files for Creditor Protection Amid Acquisition by US-Based Kingswood Capital

Craig Patterson
Craig Patterson
Now located in Toronto, Craig is a retail analyst and consultant at the Retail Council of Canada. He's also the Director of Applied Research at the University of Alberta School of Retailing in Edmonton. He has studied the Canadian retail landscape for the past 25 years and he holds Bachelor of Commerce and Bachelor of Laws Degrees. He is also President & CEO of Vancouver-based Retail Insider Media Ltd.

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Vancouver-based outdoor cooperative retailer MEC, formerly ‘Mountain Equipment Co-op’, won’t be a cooperative much longer following a filing for creditor protection and acquisition. Los Angeles-based Kingswood Capital Management was approved by MEC’s board to acquire substantially all of MEC’s assets through the Companies’ Creditors Arrangement Act (“CCAA”) to keep MEC a going concern in Canada. Several of MEC’s stores are expected to close according to one source familiar with the proceedings, and the retailer’s CEO will also be replaced.

MEC is a retail cooperative with a network of 22 large-format stores across Canada. The retailer also has a strong e-commerce site which will remain operational throughout the CCAA proceedings, according to a press release. MEC was established in 1971 and is Canada’s largest consumer co-operative with more than five million members in Canada, and has invested more than $44 million into non-profit organizations that support recreation and conservation.

MEC has been in financial trouble. In July, the retailer announced 200 frontline layoffs after stores were closed temporarily due to COVID-19. MEC lost more than $11 million for the year ending February 24 2019 on sales of about $462 million. The retailer restructured last year and continued to lose money as it tightened operations. MEC had been expanding its base of stores rapidly into markets across Canada. It currently has stores in British Columbia, Alberta, Manitoba, Ontario, Quebec and Nova Scotia.

(MASSIVE WOOD CANOPY IN THE KELOWNA STORE, BUILT BY VANCOUVER-BASED PEREGRINE.BUILD)

Los Angeles-based Kingswood Capital Management LP will acquire substantially all of MEC’s assets through the CCAA proceedings and will keep MEC a going concern. It appears to be the case that MEC’s status as a cooperative will be decommissioned as part of the process, which complicates things. While the board of directors at MEC unanimously support Kingswood’s acquisition, a percentage of members in theory would have to agree as well. One source noted that several members will be asked to speak at upcoming court hearings relating to the deal. The acquisition remains subject to Court and regulatory approvals and is expected to close in the fourth quarter of 2020.

Eric Claus, a longstanding MEC member based in Canada, will lead Kingswood's newly formed Canadian affiliate as Board Chair and CEO. He’ll take over from Phil Arata who became CEO of MEC in July of 2019 after the retirement of David Labistour. Claus was formerly CEO of US discount grocer Save-a-Lot and prior to that, Canadian discount apparel chain Red Apple. Analysts are hoping that Claus will recognize the importance of customer experience at MEC rather than simple looking at the bottom line.

In January of this year, Arrata provided statements on the company’s restructuring which included cost-cutting such as subletting the Vancouver head office which was about “three times the size that was required” and moved into a smaller location. Contracts with suppliers were renegotiated and competitive categories such as yoga wear and pet goods were reduced as MEC focused on sporting goods for snow, camping and climbing.

High staff turnover became an issue for MEC, which in January gave full or part-time employment positions to about 70% of its casual and non-permanent store staff, or about 950 employees. Since then, MEC has cut more than 900 jobs — in January the retailer had about 2,400 employees which has been reduced to about 1,500 people with 600 of those working in the 22 stores that are currently open.

Kingswood Capital is a private investment firm, “focused on businesses that are undergoing varying degrees of operational, financial or market-driven change,” according to its website. “In addition to access to capital, we bring relevant industry relationships and a broad network of internal and external operating resources that can strengthen the business and enhance value.” Kingswood’s portfolio includes companies such as AVAD, Versar, AutoAnything and WAVE Electronics.

Photos of the new Mountain Equipment Coop location in Kelowna. Photo: Robb Thompson

"MEC is an iconic brand founded on strong values and has a loyal following," said Kingswood's Managing Partner, Alex Wolf. "We have tremendous respect for those values and the loyal membership and are honored to be partnering with Canadian operating partners who will represent us on the ground in Canada working with MEC's management team following the closing to ensure a bright future for MEC. Upon completion of this transaction, we – together – can inspire and equip Canadians in leading an active outdoor lifestyle for years to come."

“After careful consideration of all viable options, the Board made this difficult decision," said MEC's Board Chair Judi Richardson. "Despite significant progress on a thoughtful turnaround strategy undertaken by new leadership, no strategy could have anticipated or overcome the impact of the global pandemic on our business. Today's announcement, including the transition from a co-operative structure, is creating a positive path forward for MEC. Kingswood's commitment to honouring the MEC ethos and the solid financial footing that this transaction will provide gives us tremendous confidence in the future. Since our founding in 1971, MEC's deeply loyal customers have been synonymous with who we are and what we do. That won't change.”

One source noted that talks had been ongoing to save MEC after the cooperative saw insurmountable financial struggles with costs growing substantially higher than revenues. A special committee of the Board spoke to multiple venture capital firms and Kingswood was ultimately chosen. The committee sought refinancing from potential lenders, looked for government support, and examined voluntary member assessments prior to striking a partnership with Kingswood.

Alvarez & Marsal Canada Inc. is the court-appointed monitor of MEC. Since February 2020, Alvarez & Marsal Canada Securities, an affiliated company, has been acting as financial advisor to MEC to get operations back on track.

Photos of the new Mountain Equipment Coop location in Kelowna. Photo: Robb Thompson

Sales forecasts for the 11 weeks ending November 29, 2020, are optimistic. The forecast period expects to see sales of $68,410,000 for the time period, with an additional $6,442,000 being paid to MEC from the Canada Emergency Wage Subsidy. Expenses are expected to surpass revenues however, with projected costs of $86,606,000 during the 11 week period resulting in a net operating cash flow loss of $11,753,000 over the same period. Adding in professional fees, debt service and contingency expenses, MEC will see a cash flow shortfall of $17,369,000 over the 11 week forecast time period. The company will also be indebted in the amount of $92,432,000 over the period, up from less than $80 million at present. 

The CCAA cash flow forecast indicates that MEC may require financing up to $89 million during the forecast period, provided by its incumbent senior lenders RBC, CIBC and TD Bank. Interim financing could be terminated early. 

MEC’s store fleet could shrink according to one source, with as many as five of the retailer’s 22 stores possibly closing as part of the acquisition. The future of a new MEC store at Midtown Plaza in Saskatoon, Saskatchewan, is now also in question.

Competition in the sporting goods space in Canada has grown substantially in recent years, particularly with the entry of French sporting goods behemoth Decathlon into Canada in the spring of 2018. Decathlon plans to open stores across Canada and is currently negotiating lease deals with brokerage Oberfeld Snowcap. Other competitors include Canadian Tire which owns the Sport Chek and Sports Experts retail operations. At the same time, Quebec-based competitor Sportium, owned by SAIL which filed in the spring, shut down operations as part of the restructuring. As of late, Canadians have been buying record-breaking quantities of outdoor goods following store shutdowns and an international travel ban. Bicycles, camping gear and other outdoor categories have seen strong sales since the spring.

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