Outdoor recreation retailer MEC sold to U.S. private investment firm

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Struggling sports and outdoor recreation retailer MEC has obtained court protection from creditors and agreed to be sold to private investment firm Kingswood Capital Management LP, ending the retailer’s 49 years as a co-operative.

The retailer, formerly known as Mountain Equipment Co-op, had been losing money and was battered by the coronavirus pandemic this year. California-based Kingswood has created a B.C.-based affiliate to run the business, and appointed a new chief executive officer, Canadian retail veteran Eric Claus. Terms of the transaction were not disclosed.

MEC, which operates 22 stores across Canada, was struggling even before the COVID-19 pandemic forced widespread store closings and dealt a significant blow to retail sales. MEC reported a net loss of $11.5-million on $462.4-million in sales in the year ended Feb. 24, 2019. While the co-op has not yet reported financial results for the most recent fiscal year, it released an update in April saying it faced “significant cash pressure” because of the pandemic. MEC laid off store staff during the closings, and cut jobs at its head office and distribution centre, maintaining essential operations in what it called “a ‘keep the lights on’ model.”

MEC relied on financing from a syndicate of lenders led by Royal Bank of Canada that expired on Aug. 3. Leading up to that time, MEC’s board of directors launched a special committee review of the business to cope with the crisis, seek options for refinancing its debt, and to look for alternatives, including a possible sale.

“After the pandemic hit, it became apparent that we were going to have a difficult time finding any refinancing on acceptable terms. And that’s ultimately what happened,” MEC’s board chair, Judi Richardson, said in an interview. As part of the review, the board reached out to more than 65 lenders, and launched a process to explore a sale. Nine potential bidders signed letters of intent, and the board received a “handful” of offers, but chose Kingswood because it committed to keeping the largest number of stores open, Ms. Richardson said.

Kingswood plans to retain a minimum of 17 of the 22 stores.

“We have created a path forward for MEC,” Ms. Richardson said. “They gave us the greatest opportunity to have a very large presence across the country.”

While the retailer operates as a co-op – paying out “patronage returns” to members in years when it earns a surplus – it can seek creditor protection like a corporation. Ms. Richardson said co-op members will be unsecured creditors in the restructuring and sales process under the Companies' Creditors Arrangement Act (CCAA).

MEC stores and e-commerce will operate through the CCAA process.

Steven Jones, a co-op member who has run for election to MEC’s board in the past – including this year, when the election was halted due to a delay in MEC’s annual general meeting – said he is disappointed at the sale of “an incredible Canadian institution.”

“There was no communication with members,” he said. “Members feel very passionately about the purpose of the co-op and we should have the first right of refusal to provide the funding to save our co-op.”

Before the pandemic, MEC had been in the midst of a program designed to return it to financial health. MEC hired former Best Buy Canada chief financial officer Phil Arrata as its chief executive last summer. In January, Mr. Arrata announced his plan, which included cost-cutting initiatives such as subletting the Vancouver head office and moving to a smaller space, and renegotiating contracts with suppliers. The team also began reviewing MEC’s product assortment, with plans to scale back in areas where competition is stiff – such as pet accessories and yoga wear – while focusing on its core categories such as climbing, camping and snow sports.

MEC also aimed to address high staff turnover to improve customer service in its stores. The retailer gave full-time or part-time positions to 950 employees – or about 70 per cent of store staff – who had been in casual and non-permanent roles. In total, as of January, MEC employed roughly 2,400 people, about 1,400 of them in the stores, not including seasonal retail workers.

MEC has cut about 900 jobs since January, and now employs approximately 1,500 people, more than 600 in stores.

Mr. Claus, who will take over as CEO, has more than 30 years of experience in retail in the United States and Canada, including past roles as CEO of U.S. discount retailer Save-A-Lot and CEO of grocery chain Co-Op Atlantic.

Stay-at-home measures in the spring hurt retailers, and surges in e-commerce demand in most cases did not make up for lost sales in stores. Many Canadian retailers have sought creditor protection to restructure, including DavidsTea Inc., Comark Holdings Inc. – which owns Ricki’s, Cleo and Bootlegger stores – Reitmans Canada Ltd. and Aldo Group, among others. While travel restrictions during COVID-19 have led more people to pursue outdoor activities such as cycling, hiking and camping, retailers in these categories have not been immune to the industry’s woes. Laval, Que.-based Sail Outdoors Inc. filed for protection in June under the Bankruptcy and Insolvency Act.

Like many in the industry, MEC is facing competition especially from online giants such as Amazon.com Inc. and Walmart Inc. French sporting goods retailer Decathlon SA has been expanding into Canada as well, and MEC also competes with Canadian Tire Corp. and its Sport Chek stores, as well smaller local and regional players.

Editor’s note: MEC operates as a co-operative and isn't legally a corporation, as stated in a earlier version of this article.

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