Chairman’s Report

Overview

The retail sector in South Africa has experienced substantial growth in the last six years, with consumer spending being extremely strong. This began to change for our group in June 2007 as the retail cycle started to move downwards.

The advance in profit achieved by our group this year was more modest than in the previous six years, with headline earnings per share increasing by 2,4% and diluted headline earnings per share increasing by 4,5%. This reflects the more difficult trading environment which prevailed, particularly in the credit non-durables sector.

Nevertheless, having regard to our very strong balance sheet and the satisfactory level of ongoing cash flow, we have maintained our final dividend at 170,0 cents per share. This means that the total dividend for the year has been increased by 6,7% to 288,0 cents per share.

Economy and operating environment

A combination of a possible recession in the USA, global equity market volatility, high interest rates, implementation of the National Credit Act, fuel price increases and food inflation have collectively created a mood of negativity among South African consumers as they enter a lean year after a period of relatively plenty. This is not the first time that there has been a bleak outlook in the retail industry which happens each time our economy adjusts from an overheated position back to more reasonable levels. It has happened before and undoubtedly will happen again. I am confident that in the medium term, our economy has the strength and resilience to recover and continue to grow. Internally, we have taken strong measures to ensure that our stakeholders have good reason to retain their confidence in the group.

The prime interest rate has increased to 15,0%. There is reason to hope that it will start declining from the middle of next year. This should once again allow consumer sentiment to become positive and spending to resume at a greater rate than currently.

There is, however, risk that CPIX inflation will remain outside the Reserve Bank’s inflation target range in the forthcoming year, and this could delay the inevitable reduction in interest rates.

We are concerned that if the Reserve Bank only uses interest rates as its tool to achieve its inflation target, the inevitable increase in interest rates could have the effect of seriously harming our economy.

Even though household debt as a percentage of total disposable income has risen to a new record high of 77%, the ratio of household debt-servicing costs to disposable income remains manageable at around 9,5%, which compares favourably to historical ratios.

Infrastructural development spending will gather pace this year, but short-term investment spending in the private sector may be placed on hold until confidence in the outlook for household demand and for lowered interest rates is restored.

Our next financial year is likely to be one of considerable political fluidity. The African National Congress’ conference in December 2007 settled many issues, but left others open, with much remaining unclear.

Staff and directors

Our group’s greatest asset continues to be its excellent management. To ensure that this situation continues in the years ahead, we pay considerable attention to retention and succession planning in all facets of our business.

Doug Murray was appointed as Group CEO on 1 January 2008. Doug has been with our group for 22 years, the past eight as Retail Director, with all divisions except the Foschini division reporting directly to him. Doug is an outstanding retailer who has a wide knowledge of all aspects of the group and thus he has picked up the reins quickly and deftly and I am confident that he will steer the group to new heights in the future.

Leslie Bergman resigned as a director of Foschini Limited on 14 April 2008. Leslie had been a director since 2002 and we thank him for the role he played during this time.

Community responsibility

We remain committed to achieving a balance between economic performance and the part we can and must play for our society and the community in which we operate. We are mindful of the critical role that business has to play in the upliftment of the community and for this reason we continue to invest in the development of society. We make charitable donations to more than 100 national and local non-governmental organisations, with our primary focus areas being education; skills development; arts, culture and the environment; special projects and combating HIV/AIDS, with specific emphasis on women and children. Full details of our CSI endeavours are covered in the sustainability report in this document.

Transformation

Our transformation committee, with myself as chairman, has the task of driving the group’s broad-based black economic empowerment (BBBEE) strategy into the future. Our various internal transformation subcommittees tackle, on a daily basis, the various issues underlying BBBEE in order to ensure that our group plays its rightful role in the advancement of historically disadvantaged communities. In the Financial Mail’s Top Empowerment Companies Report of 2008, our group has once again fared well.

Governance

The directors consider responsible corporate governance to be integral to the success of the group and our commitment to it is outlined in our corporate governance report, which appears elsewhere in this document.

Assessment starts at the top with a comprehensive annual peer review of the performance of all board directors. The board’s various subcommittees, which cover the fields of audit, remuneration, risk, nominations and transformation, keep ongoing observation of all significant factors within their purview. The group has formulated and abides by a code of ethics which includes a set of clear goals to achieve in its relationships with customers, suppliers, staff, the general public and the communities among which we operate. The increasingly complex field of compliance with the laws and regulations governing our businesses is another among the many issues on the governance agenda.

Looking ahead

Consumers are facing testing times as the economy slows down and inflation rises. These circumstances will have an inevitable impact on the group, but nevertheless all our divisions remain, in all respects, in good shape. Overall, in attempting to maintain or improve our performance, the group will be reliant on achieving good turnover levels while tightly containing costs.

The strategies which the group has devised and which it is now implementing to retain and grow its market position and its profitability are multi-faceted, but the following deserve special mention:

  • we have been cautious in the past in the opening of new stores, and whilst this remains our approach, there are certain of our formats which are ready for further roll-out and we anticipate opening in excess of 100 new stores in the year ahead;
  • our supply chain initiative, designed to improve lead times and cut distribution costs, has reached the point where implementation is already occurring and benefits can be expected to be derived progressively as it evolves; and
  • credit sales, as well as interest revenue are likely to be boosted by providing customers with a 12-month account as an alternative to the current 6-month option.

In addition, the performance of our retail debtors’ book appears to be far better than the norm in the retail industry, demonstrating the value of our conservative credit extension policies of the past.

The 2009 financial year will undoubtedly be a tough year, but at the same time we are well placed to maximise the benefits of any upturn in the economy, therefore making our group even stronger for the future.

Thanks

On behalf of my board I wish to extend appreciation and thanks to:

  • all employees for their continued excellent performance during the year;
  • our customers for their continued and growing support;
  • our shareholders for their continued confidence in the group;
  • our suppliers, advisers and business associates for their co-operation and contribution to the continued growth of the business; and
  • my fellow directors for their ever ready support, guidance and valuable input.

Eliot Osrin
Chairman

11 June 2008