In the Easter Rising, Charles Eason and Son’s business was levelled by a British siege gun. The Easons owned two stores right around the corner from each other on Sackville Street and Middle Abbey Street, less than 50 yards from the GPO. 

The Eason family decided to stick around and rebuild. They’d bought the Sackville Street shop thirty years before, in 1887, and the Middle Abbey Street one in 1866. They combined the two sites into one large, gracious store over five floors, with handsome stone facades. It became their new headquarters.

The Sackville Street — now known as O’Connell Street — store has been Eason’s flagship for 101 years. Over the years Eason bought fine stores much like it on main streets all over the country: on Shop Street in Galway, O’Connell Street in Limerick, Grand Parade in Cork and Marine Road in Dún Laoghaire. These properties were acquired gradually, starting in the mid-1960s. Today it operates from more than 60 stores, and a presence in nearly every major town in the country.

Eason is one of the most trusted brands in the country. For many people in Ireland, Eason is their nearest major bookshop. More than half of best-selling books are sold at an Eason. It employs more than 600 people. 

But for Eason’s shareholders, it must be a frustrating business. On the one hand, it’s very valuable, with net assets of €86 million in 2018. But it generates very little by way or profits or dividends. It’s like an old manor house – august and valuable, but not especially useful. 

To solve the shareholders’ problem, in 2018 Eason set out a new plan. It’s decided to split the business in two. One newly-formed company houses the trading business — the Eason stores, in other words. Another houses the assets — €80 million worth of buildings, like the 101-year-old O’Connell Street store. The buildings are being sold, and the bulk of the cash is being returned to shareholders. The trading business is to get €20 million.

For Eason shareholders, this plan makes a lot of sense. Selling the buildings will unlock up to €80 million. After years of paltry dividends, they’re overdue a payday. 

The question is over the trading business. Eason has been treading water for years now. It has been helped in large part because it doesn’t pay rent on many of its locations. What will become of the stores if they have to compete on a level playing field with other retailers? And with Covid-19, will sales even be possible?

Eason’s 101-year-old flagship store on O’Connell Street.

The family silver

Under the new corporate strategy, the trading business was moved into Eason Retail PLC, and the property assets stayed in Eason Holdings PLC. The company then began to sell down the properties.

The plan at the outset was to sell €80 million worth of properties. €20 million would go into Eason Retail PLC, to set it up for life on its own. The remaining €60 million would go to the shareholders in a cash distribution.

At the outbreak of Covid, the plan was halfway completed. €40 million of properties had been sold: the Cork store on St Patrick’s Parade, the store in Galway, and a warehouse near the airport which it sold to IPUT for €19 million. €20 million went into the retail business, as planned. The remaining €20 million is due to be returned to the shareholders this year. 

Eason has been cosseted by its fantastic premises, which deliver footfall day-in and day-out, free of charge.

Covid has put everything on hold. The flagship store on O’Connell Street, and the stores in Blanchardstown and Athlone remain unsold. They’re valued at around €40 million. 

Having sold these premises, the plan is for Eason Retail PLC to lease them back. For shareholders, this makes all the sense in the world. Eason is a fantastically inefficient company from the perspective of return on equity. It employs massive amounts of assets (valuable buildings in prime locations) to generate a tiny profit. 

Return on equity is a ratio used to show how well a company is managing its assets to generate profits. It’s calculated by dividing net income by net assets. In 2020, Eason Retail PLC made €376,000 in net income, and Eason Holdings had €60 million of net assets. That’s a return on equity of 0.6 per cent. In 2019 the number was 5.2 per cent (flattered by a one-off tax credit related to a property sale of €3.7 million). In 2018 it was nil because the company lost €3.8 million. And in 2017 it was 0.1 per cent. By comparison, publicly-listed US general retailers generate a return on equity of 18 per cent. For Eason, an 18 per cent return on equity would equate to a profit of 10.8 million in 2020.

For a manager of a business with a tiny return on equity – and whose bosses are the shareholders – it’s clear two things need to happen. Profits need to grow, and assets need to be sold off. From a shareholder value perspective, selling off the properties is a no-brainer. 

Eason was at one time a family-owned business. But the company is now 156 years old and ownership is widely dispersed among 200 shareholders. The shareholders are grandchildren and great-grandchildren of the Eason family, of its managers, and many employees. Families of important former managers collectively own chunks of 4 to 11 per cent: Walmsleys, Ryders, Halls, Carpenters, Crooks and Brabazons. But no single person owns more than seven and a half per cent. The median shareholder owns about a quarter of a per cent.

At a time, the shares might have paid out a big income stream. But that time is now past. In the five years up to 2019, Eason paid out €1.5 million in dividends — about €800 per year for the median shareholder. The median shareholder’s share of a €60 million property sale, by comparison, would be €150,000. Again, for the shareholders, it’s a no-brainer.

Against the tide

There are 60 Eason stores around the island of Ireland. They’ve been a stalwart of Irish main streets for as long as most can remember.

The company’s main business is retailing books, stationary and newspapers. It also has a small business in book wholesaling. Of the 60, 27 stores are run independently by franchisees, mainly in smaller towns. The franchise business makes up a relatively small part of Eason’s revenues.

Eason has struggled in recent years. In the last five years, revenue has fallen by 2.5 per cent per year, from €147 million in the 2016 financial year to €129 million in 2020. 

As we’ve seen in recent years, profits have been tiny compared to net assets. And profit margins are just as small. In the last five years, Eason made a cumulative €1.7 million in profit on €683 million in revenue. Last year, it made €376,000 in profit on €129 million in revenue, for 0.3 per cent net margin.

In previous years the company has gone through some restructuring. Between 2018 and 2020, for example, headcount was reduced from 657 to 633, which added €5.9 million in redundancy costs. 

However, by the financial year 2020 (which takes in 11 months of 2019), the worst of the restructuring was over. Only €400,000 or so of its costs could be said to be one-offs. Retail is a tough industry, and margins tend to be low. But Eason’s 0.5 per cent net margin in 2020, which excludes exceptional costs, is as tight as it gets.

Retail is always a hard business, but book selling has been particularly tough. Competition from big retailers, as in Northern Ireland, and from Amazon has squeezed margins. 

In the US, where Amazon is most dominant, big booksellers like Borders have gone bankrupt. Barnes and Noble was sold to Elliot, a private equity fund, for just one seventh of its revenue. So Eason does not have it easy.

Eason’s home market of Ireland has spared it somewhat. There are three reasons why. The first is that Amazon doesn’t (yet) have a fulfilment centre in Ireland. Irish packages go through the UK, which means they’re a bit slower and a bit more expensive. Amazon penetration in the UK and US is much greater than it is in Ireland. 

The second is that Irish people tend to buy Irish books. Of course, Amazon can sell Irish books too. But Eason has its finger on the pulse of Irish readers. 

The thing about high-volume retail that it depends on great locations, and great locations cost money.

And third, related to that, Ireland is a trade paperback market, meaning that books get released here in paperback format. The UK and US are hardback markets, meaning books get released first in hardback, which makes them somewhat more expensive. So Irish consumers comparing a new release on Amazon and Eason won’t see such a big price difference.

There was a time when Amazon was selling kindle books for €1 each, and physical book sales cratered, and the entire future of physical books was in doubt. But the situation has stabilised. Amazon can’t get away with charging €1 for a kindle edition any more. Kindle editions now only sell at a slight discount to the physical book. And sales of physical books have bounced back. It appears that there’s a robust market for physical books.

What’s less clear is who’s going to sell them. In the US for example, which is Amazon’s most mature market, more than half of households are members of Amazon prime, which entitles them to free shipping. Amazon prime customers tend to justify the upfront cost of prime membership by buying more stuff on Amazon. Three years after joining, prime members’ average spend grows from an average of $600 to $1400 per household. In the US, Amazon sells more than half of new books. This is the tide Eason is fighting.

Poor timing

The first thing to be said about Eason Retail PLC, the newly formed retail company, is that it’s starting out life with a healthy balance sheet. It has €27 million of net liquid assets and €36 million of net assets. Unfortunately Eason Retail will need all its balance sheet strength in the horrific year of 2020.

On February 25 this year, Eason announced the acquisition of Dubray Books and its chain of seven stores. Ominously, the previous day, the ISEQ dropped 6 per cent as traders started to get nervous about the novel Coronavirus, which was then showing signs of having spread to Northern Italy. Eason hasn’t disclosed what it spent on Dubray Books, but in October 2020 it’s probably safe to say it would rather have the cash than seven mostly-empty bookshops.

In response to the Coronavirus, in June Eason cut 150 jobs, almost a quarter of its workforce, in response to Covid-19. It’s targeting a 30 per cent reduction in costs. The book market, said Eason managing director Liam Hanly, is down 20 per cent in total since March. 

A week prior, Eason announced it was pulling out of Northern Ireland entirely. It shut all seven of its stores in the territory with the loss of 144 jobs. Eason faced two challenges in the North. The first is competition. Big grocers like Asda, Sainsbury’s and Tesco sell books cheaply there. In the south, grocers stay out of the book market. 

Grocers in Northern Ireland sell a lot of books because the Northern Irish and British book markets are similar. Northern Irish customers tend to buy British books, rather than Irish ones. The grocers focus on the top 50 best-selling UK titles, buy them in bulk, and sell them very cheaply. 

In the Republic, by comparison, people buy Irish books. That’s Eason’s niche. And grocers, who can’t buy in the same bulk, don’t dabble in the book market. 

Northern Ireland has been a millstone for Eason for years. Sales in Northern Ireland have declined steadily from 20 per cent of the total in 2015 to 12.5 per cent in 2020. And over the last three years, the company has lost €2 million there. 

Cutting it fine

So Eason Retail PLC started out life this year with somewhat uncertain business model, albeit one with a strong balance sheet. Then it bought Dubray Books for an unspecified sum, and then Covid-19 struck. 

Doubtless, Eason will come out of 2020 in worse shape than it went into it. Covid-19 is a big, unpredictable one-off hit. It’ll wipe out Eason Retail’s 2020 and probably bring exceptional costs in the following years too. But I’m less interested in it than I am in Eason’s income statement in 2021 and beyond, when the sale and leaseback plan has been fully executed. 

Eason is a high street retailer. It relies on great locations to drive footfall, and a big turnover. Margins aren’t big, but that’s not necessarily such a bad thing if turnover is huge. 

The thing about such a model is that it depends on great locations, and great locations cost money. WH Smith in the UK is a great example. WH Smith had been a high street bookseller and stationer (indeed, the Eason brothers bought their first store in Middle Abbey Street from WH Smith in 1866). WH Smith realised that the way to go in retail was to grab the very best locations (often in airports and train stations), use them to drive footfall and charge a premium. And WH Smith spends fully 16 per cent of its turnover on rent.

Now, Eason isn’t WH Smith. It sells more books than it does bottles of water. But the point is that retailers require footfall, and rent is the price they pay for it. Publicly-listed US retailers spend between 1 and 5 per cent of turnover on rent. And according to Hartman, a real estate consultancy, booksellers can expect to pay 3.3 per cent of turnover on rent. On Eason’s 2020 turnover of €129 million, 3.3 per cent would be €4.25 million.

Another way of looking at it is the yield investors will expect to make when they buy Eason’s buildings from them. According to CBRE, a consultancy, yields on retail property in Ireland vary from 4.75-6.5 per cent, depending on the quality of the location. If we conservatively say that Eason’s buildings fetch a 5.5 per cent yield, that means €80 million of property earmarked for sale would give Eason an annual rent bill of €4.4 million. 

Let’s say the rent bill for the whole lot, the €80 million, comes to €4.4 million per year. Could Eason Retail PLC live with that?

The first thing to say is that by 2020, Eason had already sold a number of those buildings (and indeed is already involved in rent disputes with some of its new landlords). So some additional rent was already included in the 2020 accounts. About €2 million in extra rent is what will be liable in future years, as and when the remaining buildings get sold. 

As we’ve seen, Eason Retail made €375,000 profit in 2020, with €400,000 or so of exceptional costs. So let’s call it €775,000. 

In May, Eason announced it was closing its Northern Irish business. Northern Ireland amounted to 12.5 per cent of revenue, but as we’ve seen it’s been a money-loser for the company. Northern Ireland has lost an average of €600,000 per year. 

And as it closed Northern Ireland, Eason added Dubray books to its portfolio. Dubray owns seven stores around Ireland. These stores will contribute to earnings.

In addition, Eason Managing Director Liam Hanley has said he intends to find €1 million of cost-saving from the supply chain this year. It’s also likely that the company will be able to find more efficient ways to use space than it did in its big old homes (where space was free). In Cork, for example, Eason is moving out of its historic building on Grand Parade.

Adding all these together — the savings from better use of space, from supply chain cuts, from closing Northern Ireland, and extra sales from Dubray — Eason is expecting to generate an extra €3 million per year of income going forward. Which is enough to cover the additional €2 million it will need to spend on rent.

It takes a number of optimistic assumptions to get to €1-2 million of net income. That’s about one per cent net margin. For a business with more exceptional costs coming down the pike, this is cutting it fine. 

On hold

Eason’s shareholders have decided to sell the family silver, leaving the trading business in an unarguably weaker position.

But on the other hand, it’s the shareholders’ business, and as things stand they’re getting very little value from what ought to be a tremendously valuable company. Selling the buildings is the obvious way to unlock value for shareholders.

Plus, Eason Retail probably would benefit from a bit more competitive pressure. Its been cosseted by its fantastic locations, which deliver footfall day-in and day-out, free of charge.

And it could be argued that Eason’s poor return on equity means society should be getting more from Eason’s assets. That they should be freed up and put to better use – like IPUT taking over the warehouse by Dublin Airport, or Sports Direct taking over the store in Cork. 

But the best-laid schemes of mice and men often go astray. Because of Covid-19, the sale of €40 million worth of buildings has been put on hold. And the retail business is facing another lockdown, with no end in sight.