MEC to be bought out after filing for creditor protection

The outdoor retailer will transition away from its co-op model after already-existing financial struggles were exacerbated by the pandemic.
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The “C” in “MEC” may stand for something else soon.

The outdoor retailer filed for creditor protection yesterday and is set to be acquired by a private company, no longer operating as a co-operative. It is the latest Canadian retailer to have the business hardships of the pandemic exacerbate existing financial struggles.

For the better part of the last decade, MEC has been pushing to expand. It currently has 22 stores across Canada, and has been trying to compete in a contemporary retail environment through expanding its assortment and opening highly experiential flagship stores. But in addition to not correcting its financial troubles, that has also come with a brand cost among its loyalists. Internal governance changes have resulted in some long-time members feeling like the decades-old store had lost its way as a co-operative. Despite this, MEC has consistently ranked highly as one of the most trusted retail brands in Canada, and has received high marks for efforts around CSR, sustainability and correcting its course when it comes to representing Canada’s diversity.

Now, U.S. private equity firm Kingswood will acquire MEC’s assets and the vast majority of its retail stores through the Companies’ Creditors Arrangement Act, which will allow the retailer to keep operating (within local health regulations) while the transaction is completed. The deal is expected to close before the end of the year.

The companies said in an announcement that the acquisition will strengthen MEC’s balance sheet and guarantee “continued access to authentic advice and high-quality products at competitive prices,” adding that transitioning away from a co-op model “is needed to ensure a stable future for MEC’s retail business.”

Eric Claus, who the companies say is a longstanding MEC member, will be the CEO and board chair of a Canadian subsidiary formed by Kingswood to operate the MEC business. Claus is a retail veteran who was previously CEO of U.S. discount grocer Save-A-Lot, as well as president and CEO of Metro (when it was still known as A&P).

Alvarez & Marshall has been appointed monitor under CCAA proceedings, after the company was first enlisted as an advisor in February to assist to the company in a new strategic plan. A special committee of MEC’s board and its advisors explored several options to address the financial challenge, including refinancing, government support programs and funding MEC through voluntary member assessments, before finally recommending its current path.

MEC is currently the largest co-operative in Canada, with over five million members. As a co-operative, MEC sells only to members who have purchased a share in the company, which it charges $5 for at its first purchase.

Financial details of the deal were not disclosed, and it is unclear whether Kingswood would be required to purchase the shares of the company held by MEC members. It is also unclear if or how those same members will need to approve the transaction, which has been approved by MEC’s board but remains subject to legal and regulatory approvals.

In July, MEC permanently laid off 200 staff after the pandemic resulted in temporary store closures and the cancellation of equipment rentals, classes and community events.

However, like many retailers that have filed for creditor protection, struggles at MEC pre-date the pandemic due to an already difficult retail environment. CEO Phil Arrata, who was hired last year from Best Buy, has been looking to put the focus back on categories where MEC had traditionally performed best and streamline the company’s operations, as expanding its assortment and numerous new store openings over the last decade had resulted in millions of dollars in losses.

The summer layoffs brought the total positions cut in 2020 to 900. According to its most recent available annual report, the company had sales of $462 million in the year ending in Feb. 2019 – with steady sales growth every year since 2013 – but it still had an $11 million loss, as revenue generated from new stores has not been enough to make up for costs associated with expansion and same-store sales declines at existing locations.

“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,” MEC board chair Judi Richardson said in a release.

In the summer, large-format outdoor competitor Sail was also forced into creditor protection due to the struggles it faced during the pandemic, resulting in the closure of two stores and ending its Sportium banner.