OK Zimbabwe — Game Over
OK has run out of options. Here is what could happen next.
You know the feeling when your team is down 3-0 after 60 minutes, and then it gets a red card?
That is what it felt like reading OK Zimbabwe’s (OKZ’s) latest trading update - game over.
After covering OKZ over the last 18 months, this update is the final blow that signals that there will be massive changes at OK within the next few months.
Let’s unpack the results and what is likely to happen next.
Firstly, the biggest shocker was how dramatic the revenue fall was. Over the previous two quarters, OK looked like it was starting to show some signs of life, with volumes improving by 20% and 35%, albeit off a low base.
However, in Q3 (Oct-Dec 2024), volumes fell 36%. This is the biggest year-over-year volume decrease. What made it worse was this was already off a low base. The comparative period was FY24 Q3, during which volumes had already fallen 32%.
This means that if OKZ sold 100 units in 2022 between October and December, it sold 64 in 2023 and 44 in 2024.
One could also say that OKZ now only needs half of the stores it had in 2022.
This probably explains why it has been closing some branches. There is not enough activity.
However, it gets worse. OKZ has “outstanding and overdue creditors” balances “predominately denominated in US Dollars”.
This is bad. Really bad.
OKZ and all other retailers have historically generated 20 -30% of sales from USD. Why would OKZ have exposed itself to large USD credit when it knows it doesn’t generate USD revenue?
This suggests there must have been a level of desperation.
Just for context, how much USD does OKZ owe?
As of 30 September 2024, OKZ had trade payables (creditors) of $29.7m.
Their recent trading update says they have outstanding and overdue balances “predominantly” in USD. Based on that, I wouldn’t be surprised if the USD amount owed to creditors is close to $10m or more.
Not only does OKZ owe a lot to overdue creditors, but also to the banks.
In their FY2025 half-year results, which would have been up to September 2024, OKZ had $5 million in borrowings, with $3 million being an overdraft.
The other challenge with OKZ's borrowings is that the business is not generating much cash. For the 6 months to September 2024, which was one of their better periods, OKZ only generated $954k from operating activities.
So, if OKZ owes over $5 million to the banks and tens of millions to creditors, how can they settle this when core operations generated less than $1 million in cash in six months?
I don’t see a way to trade out of this situation. OKZ needs a bailout.
We discussed this before on Money & Moves in an article called “OK's Trading Update: A Stormy Outlook”, published on 7 November 2023. Here is the direct quote from the article.
“OK in the next 18 months could end up in a corner. Losing cash, falling market share maxed out borrowings.
When companies are such tight corners they usually call on a "Big Brother".
Most leading companies have a "Big Brother," which is essentially another company or major shareholder that can support or bail them out when things get tough”
OKZ now needs that "Big Brother,” but unfortunately, it doesn’t seem to have one. As disclosed in the last annual report released in Augst 2024, OKZ doesn’t seem to have one dominant shareholder, so it’s unclear where help will come from.
What could happen next? Where’s the Money, What’s the Move?
OKZ needs a significant cash injection. Without it, it seems unlikely to continue meeting all its obligations, as highlighted before.
These are the options. OKZ could either,
File for Corporate Rescue
Get more money from the banks
Get money from the public
Get money from current or new shareholders
Regarding the above, OKZ is too big and valuable to file for a corporate rescue, so it is not the most likely option. Regarding getting more money from the banks, I don’t see how much more they could get after already increasing their borrowings.
Typically, banks work to save a company not because they want to give it more money but because they want to get back the money they already lent.
It is also challenging to raise money from the public, for example, by issuing debentures like Econet once did. OK’s struggles are well known to the public, and people are unlikely to be keen to lend the business money or invest further.
This leaves getting money from either current or new shareholders. This could be via a rights issue or someone stepping up and taking on more shareholding.
Whatever the case, it will likely result in sweeping changes within the company.
Since we started with a football analogy, I will end with one.
OK is very similar to Manchester United. They are well-known and respected brands with significant legacies that have struggled recently and need a turnaround.
To turn around Manchester United, the following actions have recently been taken: changes in shareholding, changes to executive leadership, board reconstruction, the sale of certain players (assets), and cutting costs.
Whether the changes will work remains to be seen, but one thing is clear: You have to make changes at some point. Manchester United has started; is OKZ soon to follow?
In November 2023, we forecast that if performance didn't improve, significant changes would be needed within 18 months (by May 2025). I am curious to see how accurate that forecast was. Let’s see what happens next.
What do you think?
PS: I am working with publicly verifiable information, so my analysis could be incorrect or incomplete.
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Thanks for the comment.
Solid observations.
Also keen to see their 4th quarter results. I think by then they should have made some significant changes.
They also need to prepare for the grand challenge and with their situation hard to see how it can work without huge changes.
I found it curious that the OKZ trading update says both volumes and revenue fell by 36%. No reference made to the impact on revenue, of internal price inflation- a measure of how in-store prices changed during the trading period. A 36% volume decline should not necessarily result in same revenue decline, if OKZ management know what they are doing.
I eagerly await to read OKZ 4th quarter trading update-along with their year-end results for the year to March. If thier daily (stock) availability levels were 50% during the 3rd quarter, then definitely thier 4th quarter stock availability levels should turn out much worse. Retail is a volumes game, so I would expect OKZ to report on the impact of stock availability levels on their inventory or stock turnover ratios, rather than updating on daily stock availability levels only.
In the end, I agree with you Tinashe, its game over for OKZ. I don't see how closing just 5 locations will in any way help OKZ with the many challenges they are facing.
Mike Mandaza, Harare.