Our group has once again had a good year delivering pleasing results against the high base set in the previous few years.
It is common practice within the retail industry to treat a week of trading as a business period and to consider a year to consist of 52 weeks. Since 52 weeks translates into only 364 days, each year the retail trading calendar is one day short of a calendar year. This, together with leap years in between, requires a correction approximately every five years by having a 53-week retail trading calendar. The group took this extra week during 2006. Since last year consisted of 53 weeks versus only 52 weeks in 2007, the results of the group must thus been seen against this background. Where applicable, the results for the comparable 52 weeks are shown in brackets.
The key financial indicators for the year are as follows and are discussed in more detail elsewhere in this report.
| 52 weeks | 53 weeks | ||||
| ended | Medium- | ended | |||
| Key performance indicators | 31.03.2007 | term target | 31.03.2006 | ||
| Turnover (Rm) | 7 230,0 | 6 432,1 | |||
| Turnover growth (52 vs 53 weeks) | 12,4% | 21,8% | |||
| Turnover growth (52 vs 52 weeks) | 14,6% | 21,8% | |||
| Gross margin | 42,0% | 42,4% | |||
| Operating margin | 26,1% | 24% | 24,3% | ||
| Profit before tax (Rm) | 1 782,3 | 1 488,2 | |||
| Profit before tax growth | 19,8% | 29,8% | |||
| Profit after tax (Rm) | 1 192,0 | 1 009,0 | |||
| Headline earnings per share | |||||
| (HEPS) (cents) | 534,2 | 463,0 | |||
| HEPS growth (52 vs 53 weeks) | 15,4% | 28,8% | |||
| HEPS growth (52 vs 52 weeks) | 18,5% | 25,4% | |||
| Dividend per ordinary share (cents) | 270,0 | 220,0 | |||
| Dividend per ordinary share growth | 22,7% | 34,1% | |||
| Return on average equity | 32,5% | 35% | 33,6% | ||
| Gearing | 18,8% | 25% | 16,2% | ||
| Tangible net asset value per share (cents) | 1 789,4 | 1 523,4 | |||
| Tangible net asset value per share growth | 17,5% | 23,5% | |||
| Stock turn (times) | |||||
| - jewellery | 2,18 | 1,91 | |||
| - @home | 2,43 | 2,31 | |||
| - other | 3,20 | 3,31 |
The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) since 2006 and comply with the requirements of the South African Companies Act. The principal accounting policies are consistent with those applied in the previous year, except for the adoption of the following Standards and Interpretations:
The group reclassified certain balance sheet items in order to achieve improved disclosure.
Further information regarding all restatements can be found in note 33.
Retail turnover of R7,2 billion for the 52 weeks for the first time exceeded the R7 billion mark – an increase of 12,4% (14,6% in the case of 52 weeks) on the previous year. Comparable same store turnover growth for the 52 weeks was 8,0%. The buoyant sales growth of 16,6% achieved in the first half continued into the second half, albeit at lower growth levels, growing at 12,9%, having regard to the high base.
All product categories performed reasonably well, with apparel growing 10,7%, jewellery 14,3%, cellphones 31,6%, cosmetics 25,0% and homewares 28,6% for the 52-week period. Our divisions performed well, once again substantially above our product inflation rate of approximately 4%, the exception being our Foschini division which suffered stock shortages during the period August to November 2006 resulting in a loss in turnover of approximately R100 million.
Trading area in the first six months of the year grew by 4,3%, but accelerated towards the end of the financial year reaching a total of 7,3% growth.
During the year, cash sales as a percentage of total sales once again increased to 33,3% from 30,8%.
| Retail | Retail | ||||||
| turnover | turnover | ||||||
| 52 weeks | 53 weeks | % change | % change | ||||
| ended | ended | 52 versus | 52 versus | ||||
| 31.03.07 | 31.03.06 | 53 weeks | 52 weeks | ||||
| @home | 412,4 | 326,3 | 26,3 | 28,6 | |||
| Exact! | 682,6 | 592,4 | 15,2 | 17,4 | |||
| Foschini division | 2 911,8 | 2 660,6 | 9,4 | 11,6 | |||
| Jewellery division | 1 022,5 | 893,4 | 14,5 | 16,3 | |||
| Markham | 1 138,3 | 1 054,7 | 15,9* | 18,6* | |||
| Sports division | 1 062,4 | 904,7 | 17,4 | 20,0 | |||
| Total | 7 230,0 | 6 432,1 | 12,4 | 14,6 | |||
| * Growth excludes the discontinued RJL brand. | |||||||
Our gross margin decreased by 0,4% from 42,4% to 42,0%, primarily as a result of a change in the sales mix where again this year, cellphone and cosmetic turnover grew at faster rates of 31,6% and 25,0% respectively. Gross margins in these categories are lower than our other product lines and hence the reduction in the overall gross margin.
Expenses were well controlled during the year, with total net expense growth for the year at 12,7%. This increase in expenses has been impacted by a larger than normal growth in new stores as well as ongoing store improvements and refurbishments resulting in an increase of 7,3% in floor space. The annual depreciation charge of R172,6 million increased by 16,4%.
Store occupancy costs, the group’s second biggest operating cost, increased by 11,6% to R512,7 million, and as a percentage of sales remains at 7,1%. The increase in this cost is due mainly to the opening of new stores. During the year 96 new stores were opened whilst 36 stores were closed. In addition 18 stores were enlarged whilst 38 were relocated.
This year an amount of R7,7 million was charged to store occupancy costs, an increase of R14,5 million over the R6,8 million credit in the previous year in order to comply with IAS 17 (Leases).
Employment costs of R945,3 million are our group’s biggest operating cost and increased by 9,3% over the previous year. The increase in these costs is due to normal staff salary increases, the appointment of new staff to service the new store openings, as well as to fill positions necessary in terms of our group’s capacity issues. Included in these costs are incentive bonuses and restraint payments which are paid in line with the group’s performance as well as to ensure the retention of key staff. These payments this year amount to R24,4 million, a reduction from the R51,9 million paid last year.
The IFRS 2 share option charge to the income statement this year amounted to R19,2 million. An amount of R19,0 million was recognised as an expense last year.
Included in other operating costs of R620,2 million are the group’s net bad debt writeoffs. Details of our group’s credit operations are dealt with more fully in the review of Foschini Group Financial Services elsewhere in this report.
Interest paid increased to R104,7 million primarily due to increased investment in receivables of R514,2 million with the most significant increase being in private label card receivables.
As a result of operational efficiencies profit before tax of R1,78 billion increased by 19,8% on an increased turnover of 12,4%. Our pre-tax profit is approaching the R2 billion level.
Our group’s operating margin increased still further to 26,1% from 24,3% exceeding our medium-term target of 24%.
The group’s effective tax rate increased to 33,1% primarily as a result of increased secondary tax on companies (STC) on increased dividend payments. Further details are contained in the notes to the Financial Statements.
Headline earnings increased by 13,4% from R986,9 million to R1 119,2 million, whilst headline earnings per ordinary share increased from 463,0 cents per share to 534,2 cents per share, an increase of 15,4%. Headline earnings per share has been calculated on the weighted average number of ordinary shares in issue of 209,5 million, down from 213,1 million in the prior year as a result of continued share buybacks.
The group’s return on equity (ROE) of 32,5%, remains at a satisfactory level, marginally down on last year’s restated ROE of 33,6%. Our medium-term target remains at 35%.
A final dividend of 170 cents per share has been declared, and together with the interim dividend of 100 cents per share, the total dividend for the year of 270 cents per share is 22,7% higher than the previous year. Having regard to the group’s financial performance, cash flow and strong balance sheet, the dividend cover has been further reduced from 2,1 to 2,0 times headline earnings per share.
Property, plant and equipment of R782,1 million increased from last year’s restated R654,4 million primarily as a result of:
The restatement of the prior year amount relates to shopfitting work in progress that has now been reclassified to property, plant and equipment. This amount was previously disclosed as part of other receivables and prepayments.
The group’s net retail trade receivables increased by 5,6% to R2 235,2 million on credit turnover growth of 8,5%, reflecting a very sound trade receivables book. 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. In light of this, we took corrective action by focusing on the earlier stages of delinquency which resulted in our collections from our debtors being satisfactory. Net bad debts as a percentage of credit transactions increased only marginally from 2,4% to 2,6%, which we believe is extremely good in the current economic cycle.
Inventory on hand increased by 15,8% to R1 292,9 million from R1 116,7 million. Shopfitting stock and consumables previously reflected in other receivables and prepayments, have been reclassified and are now disclosed as part of inventory. Stock turn in respect of jewellery at 2,18 was an improvement over the previous year’s 1,91, whilst the stock turn on other merchandise of 3,20 was slightly below last year’s 3,31. Adequate provision has been made for markdowns, shrinkage and inventory obsolescence.
Our 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 with its strong performance with growth in profit before tax and minority interest of 27,5% over last year.
As a result of the growth in this division, the combined loan receivables reflected under both non-current and current assets increased by 6% to R866,5 million. The more recently-established private label card business which is growing very fast increased its private label card receivables by 72,2% to R826,7 million. Our group’s non-retail receivables now total R1 693,2 million. Bad debts in this division continue to be well managed, although the net bad debt experienced is at a higher level than that experienced with our retail trade receivables, as reflected in more detail in the review of RCS Financial Services. This division currently represents 18,1% of our group’s profit before tax, increasing from last year’s 17,0%. It is anticipated that this will grow in the years ahead to around 20%.
The group’s attributable equity increased to R3 823,6 million from the restated R3 267,9 million, translating into tangible net asset value of 1 789,4 cents per share. At the financial year-end treasury shares held by subsidiaries, including the share trust, amounted to 28,5 million shares, representing 11,9% of the total issued shares.
The minority interest of R181,3 million relates to the minority shareholding in our RCS Group financial services division, RCS Investment Holdings (Pty) Ltd (RCSIH). At the financial year-end our group’s shareholding in this division was 65% with the balance being held by the Standard Bank of South Africa Limited (SBSA). On 1 April 2007, SBSA acquired the final 10% of RCSIH increasing its shareholding in this division to 45%, the maximum possible in terms of our agreement. Subsequent to the year-end the group received cash proceeds of R211,5 million in respect of this transaction. Our group’s holding in this division is now 55%. Refer to note 15 for further details.
Our group’s operations are financed primarily by means of its own cash flow as well as banking facilities. This debt, offset by the group’s cash and its “near cash” preference share investment of R200 million, represents net gearing of 18,8%, which is below our group’s revised medium-term objective of 25%.
Included in interest-bearing debt is an amount of R389,7 million advanced by SBSA to RCSIH and its subsidiaries in terms of a funding agreement between the parties. This funding agreement is not subject to any guarantee or security from Foschini Limited or any of its subsidiaries, and accordingly the debt is ring-fenced within the RCS Group financial services division.
Trade and other payables increased by 16,4% to R1 139,1 million from R978,5 million. Our group’s policy of paying all suppliers 30 days from statement date remains consistent with prior years.
Cash flows from operating activities before working capital changes amounted to R1 191,5 million, an increase of 11,1% over the previous year. Due to the improved trading activities during the year, there were larger working capital requirements primarily as a result of a high investment in private label card receivables of R346,6 million and inventory of R176,2 million. This is partially offset by an increase of R161,9 million in trade and other payables, all of which resulted in cash generated by operations amounting to R973,4 million.
The net cash outflow from investing activities amounted to R112,7 million, investments being made in IT equipment and shopfitting and R26,1 million in respect of an enlargement to our head office complex in Parow East. Share purchases by the share trust amounted to R288,4 million. Due to these outflows, interest-bearing debt increased by R217,6 million which resulted, as mentioned previously, in our group’s net gearing increasing to 18,8% from 16,2% last year.
Subsequent to the year-end, our group received cash proceeds of R211,5 million in respect of the transaction with SBSA referred to above. As has been our stated intention, the group will apply these funds to share buybacks.
Our group’s financial targets have been included in the Financial Highlights section of this annual report.
Ronnie Stein
Financial Director
31 May 2007
