The financial year to the end of March 2007 comprises 52 weeks compared to the corresponding period of 53 weeks in 2006, which makes direct comparisons misleading.
Our group has enjoyed a superb five years with compounded growth in headline earnings per share over that period increasing by 56%. Against this very high base, the current year’s growth of 15,4% (18,5% in the case of 52 weeks) is extremely pleasing.
Over this very buoyant period our group has continued with its strategy of reinventing, extending and revitalising our brands and I can say with confidence, that all our stores are excellent in regard to their appearance and layout, systems, merchandise offering and customer service. Over the last five years all of our stores have advanced to new levels of excellence and bear little resemblance to our stores of five years ago.
I’m also pleased to be able to report that the calibre of our staff, our most valuable asset, continues to improve year-on-year and we have detailed succession plans in place at all levels of our business.
Having approached this year with a confident feeling, we had a very good first six months as we continued to benefit from the favourable economic climate in this country. The second half proved to be a little more challenging particularly due to the stock shortages experienced by our Foschini division during the period up to November 2006. The political stability in our country combined with the low interest rate environment and low inflation, has certainly assisted retailers to produce above normal results. In addition, the growth of the emerging black middle class has enabled the retail environment to grow at a faster rate than the overall economy which is evidenced by our comparable turnover growth for the 52 weeks of 14,6% compared to the product inflation in our company of approximately 4%.
Whilst these favourable trading conditions are expected to continue, it will become increasingly more difficult to sustain these exceptional results, having regard to the very high growths achieved in the last five years and accordingly the extremely high base created. The increase in interest rates over the past short while together with the petrol price hikes, will make the trading environment in the next financial year more difficult as consumer spending must inevitably be impacted.
Having said that, it would appear that the interest rate cycle is now at or very close to its peak. We expect that towards the end of our next financial year interest rates could start declining which should result in an increase in consumer demand. This will be good for our group.
An area of concern for the next year relates to the introduction of the new National Credit Act which becomes effective on 1 June 2007. Whilst this Act will in the medium term be beneficial to our group, in the short term, it will present some unique challenges for us. It is inevitable that, post the implementation of this Act, the opening of new accounts will become more difficult, until the marketplace has absorbed the practicalities of applying the new provisions.
Whilst our group’s detailed financial performance for the year is set out
in the Financial Director’s Report, I would like to draw attention to the
following
highlights:
As already mentioned, the lower interest rate environment and buoyant trading conditions experienced in the first half of the financial year continued into the second half, albeit at a reduced tempo. All our divisions performed well, once again substantially above our product inflation of approximately 4%, the exception being our Foschini division which suffered stock shortages during the period August to November. We estimate that the loss in turnover arising from this out-of-stock position was approximately R100 million. Sales and sales growth in the various divisions were as follows:
| Retail | |||||||
| turnover | |||||||
| 52 weeks | |||||||
| ended | % change | % change | |||||
| No. of | 31.03.07 | 52 versus | 52 versus | ||||
| stores | Rm | 53 weeks | 52 weeks | ||||
| @home | 51 | 412,4 | 26,3 | 28,6 | |||
| Exact! | 180 | 682,6 | 15,2 | 17,4 | |||
| Foschini division | 386 | 2 911,8 | 9,4 | 11,6 | |||
| Jewellery division | 316 | 1 022,5 | 14,5 | 16,3 | |||
| Markham | 191 | 1 138,3 | 15,9* | 18,6* | |||
| Sports division | 208 | 1 062, 4 | 17,4 | 20,0 | |||
| Total | 1 332 | 7 230,0 | 12,4 | 14,6 | |||
| * Growth excludes the discontinued RJL brand. | |||||||
Total comparable 52-week same store sales for the year grew by 8,0%, with apparel growing 4,8%, cosmetics 15,5%, cellphones 26,9%, jewellery 10,7% and homewares 2,6%. During the year the group’s trading area grew by 7,3% with 96 new stores added and 36 stores closed. At the year-end our group was trading out of 1 332 stores.
Our gross margins were marginally down on the previous year, primarily as a result of a change in the sales mix, with cellphones and cosmetics growing at a higher rate than our other products.
Whilst the positioning, performance and strategy of our trading divisions are outlined in some detail later in this report, I would like to comment on some of the highlights of each division.
The Foschini division started off the year with impressive sales growth growing by 16,5% for the first four months to July 2006. From August to November, which is our key opening summer period, sales were negatively impacted by approximately R100 million as a result of stock shortages. These stock shortages were caused, in the main, by changes to the in-house manufacturing process as well as the procurement lead time being reduced too aggressively in order to improve stock turns and flexibility. These problems were resolved from December onwards. Overall therefore, this division had a disappointing year with comparable 52-week growth of 11,6% and same store growth of only 3,7%. Cosmetic sales continue to grow very well, gaining market share, with turnover now in excess of R430 million annually. Luella, the newly-created standalone footwear and accessory chain continues to improve and will be expanded in the future to more than 50 stores.
The Markham division traded well with comparable 52-week same store growth of 8,2%, excluding the discontinued RJL brand. The repositioning of the Markham brand that started in 2005 has been extremely successful and has now been rolled out to 72 stores, with the remainder still to be completed. The level of markdown sales has been particularly well controlled, with markdowns improving to 10,5% of turnover. Its RJL brand was discontinued during the year with its real estate being converted into other group formats – in the main Luella.
The Exact! division continues to grow and maintained its strong performance with sales densities improving still further. Its new-format stores now number 97 and its two larger stores which were developed this year in Pretoria and Durban have experienced an exceptional response from the market. This chain has found its niche and is well positioned to capitalise on the growing emerging middle class. Comparable 52-week sales growth for the year was 17,4% and a very satisfactory same store growth of 12,9%.
The Sports division, trading as Sportscene, Totalsports and DueSouth, traded well with growth in comparable 52-week turnover of 20,0% and same store growth of 10,9%. For the first time this division achieved turnover in excess of R1 billion. Its relatively new DueSouth division consisting of 16 stores is now recognised as a key player in the outdoor lifestyle market, with a vastly improved product range.
Our Jewellery division, comprising American Swiss, Sterns and Matrix retains its position as the leading jeweller in the middle mass market in the country. Given that jewellery is a luxury item, sales surprised on the upside with comparable 52-week growth at 16,3% and turnover for the first time exceeding R1 billion.
Our @home division continued with a substantial increase in its store base during the year and grew its turnover to R412,4 million, an increase of 28,6% for the comparable 52 weeks. Its first two lifestyle stores branded as @homelivingspace have improved considerably and will be rolled out in the next few years to at least 7 stores country-wide. In addition we plan to expand the size of certain @home stores in order to include an additional décor range. Comparable 52-week same store growth was only 2,6% primarily due to its own cannibalisation as additional stores are rolled out.
Our Foschini Group Financial Services (FG Financial Services) division, which has, inter alia, responsibility for the group’s accounts receivable function has had another successful year. In our interim profit announcement at the end of September 2006 we indicated that there was evidence that the credit cycle had entered a new phase where conditions are not as favourable as they had been in recent years. Our credit division responded to this change in the market by strengthening their collection procedures which resulted in our collections from debtors remaining very satisfactory. Our retail debtors book, which amounts to R2,2 billion, increased by 5,6% during the year, whilst credit turnover increased by 8,5% compared to the previous corresponding period. Cash sales as a percentage of total sales increased from 30,8% to 33,3%. Net bad debts as a percentage of credit transactions increased only marginally from 2,4% to 2,6% which in the current economic cycle is extremely good.
On 1 June 2007 the National Credit Act (NCA) will be implemented. The NCA makes provision for more stringent evaluation of new and existing account holders to service the credit which we grant them. Whilst the NCA will make it more difficult for credit providers to operate with the same freedom as before, we are supportive of the intent of the NCA and have applied substantial time and resources to ensuring that on 1 June our policies, systems and processes will be compliant with the NCA, whilst ensuring that the impact on our business is minimal.
Our RCS Financial Services division comprises RCS Personal Finance, our group’s personal loans business, and RCS Cards, which offers credit to customers of merchants outside of the group. This division continued to show strong growth during the year, growing its pre-tax profits by 27,5%. Since the sale of a minority stake in this business to the Standard Bank of South Africa Limited (SBSA), this division has embarked on a number of new initiatives such as the introduction of private label cards for other retailers, home loans granted to RCS customers, and the pending introduction of a dual card between FG Financial Services and RCS Financial Services as well as launching our vehicle finance product. As from 1 April 2007, our group’s shareholding in this division is now at 55%, with the remainder being held by the Standard Bank of South Africa Limited.
This is my last CEO’s report, as my retirement from this position was announced in February of this year after 39 years with the group, the last ten as CEO. I have had a great experience with the group and the last ten years, whilst being challenging, have been stimulating and fulfilling with the group during this period growing its turnover and earnings from R2,4 billion to R7,2 billion and from 82,7 cents per share to 534,2 cents per share respectively. This could not have been achieved without the assistance of a dedicated management team and the contribution of each of our 15 000 staff members.
Whilst the choice of a CEO is a board’s most onerous decision, we embarked in 2005 on a comprehensive succession process to select an internal candidate. Simon Bowley’s appointment as CEO Designate with effect from 19 February 2007 was done to facilitate an orderly eleven-month transition, during which time Simon and I will adjust our roles to accommodate a seamless change in leadership on 1 January 2008 when Simon will be appointed as Group CEO. Simon has been with the group for 20 years.
At the same time that Simon was appointed as CEO Designate, Doug Murray, previously Retail Director of our group, who has been with our group for 22 years, was appointed as Group MD Designate.
The detailed succession planning and development of staff in our group has made my retirement and the reshuffling of senior staff an easy task. I am very happy and pleased that we have senior executives such as Abigail Bisogno, who has headed our Exact! division for many years who can move within our group to new challenges. Abi will be moving to the MD role in our Foschini division to fill the gap which will be left by Simon. Her position in Exact! will be ably filled by Suzanne Annenberg, previously the marketing and planning director of that division. During the year Adrienne Kleinman moved as General Manager of our jewellery division to replace Ken Schreuder who has moved to head our Group Property division. I wish all of them every success in their new positions in which I’m confident they will all excel. It is significant that three of our trading divisions are now led by women.
During the year Shani Naidoo and Brent Curry were appointed to the operating board and just prior to the year-end Abigail Bisogno and Martin Mendelsohn were appointed as well. I am confident that our enlarged operating board will be in a position to meet all challenges and ensure that the group grows from strength to strength.
My thanks and gratitude to our chairman, Eliot Osrin, for his personal support and guidance during my tenure as CEO.
The strategic focus across our divisions is to improve our customers’ experience by targeted expansion of our store base and constantly developing our merchandise offering according to identified needs of our customers.
Core to the success of this strategy is optimisation of our supply chain and a steering committee has been formed which will focus on optimising lead times, supplier conformance, replenishment and merchandise pipelines.
Strategies of the individual divisions are referred to in the divisional review section of this report.
We anticipate opening in excess of 80 new stores across all divisions in the year ahead.
Whilst these favourable trading conditions are expected to continue, it will become increasingly more difficult to sustain these exceptional results, having regard to the very high growths achieved in the last five years and accordingly the extremely high base created. As mentioned previously, the increase in interest rates over the past short while together with the petrol price hikes, will make the trading environment in the next financial year more difficult as consumer spending must inevitably be impacted.
Turnover for the first eight weeks of the new financial year is in line with budget, and in the absence of unforeseen circumstances we remain confident that we will be able to produce another year of satisfactory growth.
The contribution of each of our 15 000 staff is reflected in these good results as well as in the development of our group which has enabled us to produce sustained superior performance and I extend to each and every one my sincere appreciation.
Thanks are also due to all the members of the board for their wisdom, guidance and direction.
To our shareholders, thank you for your support and we trust that your loyalty will continue to be rewarded. Finally, a word of appreciation goes to our suppliers, advisers, corporate stakeholders and customers.
Dennis Polak
CEO
31 May 2007
