Home

Financial Director's Report

Overview

This year was a difficult year for our group. The first half of the year, whilst challenging, produced acceptable performance with retail turnover growth of 8,8% and headline earnings per share increasing by 12,2%. The second half became extremely difficult, particularly from the third week of June after the introduction of the NCA. This, together with above-average food inflation, substantial petrol price hikes and interest rates which have now increased nine times since June 2006, have increased the cost of living of the average South African consumer, which has taken its toll on the semi-durable retail sector. Second-half turnover grew by 3,7% with a reduction in headline earnings for the half of 4,0%.

For the year as a whole retail turnover increased by 6,1% to R7,7 billion. Headline earnings per share increased by 2,4% to 547,0 cents, whilst diluted headline earnings per share increased by 4,5% to 538,0 cents. The compounded annual growth in headline earnings per share over the past seven years is 40,7%.

The key financial indicators for the year are as follows and are discussed in more detail elsewhere in this report.

    Medium-  
    term  
Key performance indicators 2008 target 2007
Turnover (Rm) 7 668,7   7 230,0
Turnover growth 6,1%   14,6%
Gross margin 41,6%   42,0%
Operating margin 24,8% 24% 26,1%
Profit before tax (Rm) 1 786,3   1 782,3
Profit after tax (Rm) 1 206,1   1 192,0
Headline earnings per share      
(HEPS) (cents) 547,0   534,2
HEPS growth 2,4%   15,4%
Diluted headline earnings per      
share (HEPS) (cents) 538,0   514,8
Diluted HEPS growth 4,5%   14,5%
Dividend per ordinary share (cents) 288,0   270,0
Dividend per ordinary share growth 6,7%   22,7%
Return on average equity 29,6% 35% 32,5%
Gearing 36,2% 40% 18,8%
Net asset value per share (cents) 1 862,7   1 789,4
Net asset value per share growth 4,1%   17,5%
Stock turn (times)      
– jewellery 2,21   2,18
– @home 2,31   2,43
– other 3,21   3,20

Accounting policies and standards

The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) 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 increased disclosure requirements of IFRS 7: Financial Instruments.

The group reclassified certain balance sheet items in order to achieve improved disclosure.

Further information regarding restatements can be found in note 36.

Income statement

Retail turnover

Retail turnover of R7,7 billion increased by 6,1% on the previous year. Same store turnover for the year grew by 2,2%. As is usual in more difficult times our cash turnover growth of 16,1% outpaced credit turnover growth of only 1,1%.

Retail turnover by 2008 2007 %
merchandise category Rm Rm growth
Clothing 4 989,2 4 727,4 5,5
Jewellery 1 010,0 944,1 7,0
Cellphones 721,6 706,8 2,1
Cosmetics 488,2 435,7 12,1
Homeware and furniture 459,7 416,0 10,5
Total 7 668,7 7 230,0 6,1

The poorest performing merchandise category was cellphones with turnover growth of 2,1% after its frenetic growth in the past few years. There has been a lack of new generation phones this year which we feel has reduced the churn factor.

Surprising on the upside was the level of jewellery turnover as historically, when the economy gets tough, luxury goods tend to suffer more than other products.

Homeware and furniture, as well as cosmetics, performed reasonably well with double digit turnover growth, whilst clothing turnover grew by 5,5%.

Overall product inflation for the year was approximately 4%.

      % Same    
Retail turnover 2008 % store Number % Space
by division Rm Growth growth of stores growth
@home 458,0 11,1 (0,3) 61 8,1
Exact! 707,2 3,6 1,7 182 2,8
Foschini division 3 070,5 5,5 1,2 400 6,3
Jewellery division 1 090,7 6,7 3,3 328 2,2
Markham 1 190,9 6,6* 3,4 201 5,3
Sports division 1 151,4 8,4 3,7 221 10,2
Total 7 668,7 6,1 2,2 1 393 6,0
* Growth excludes the discontinued RJL brand.

Prior to the introduction of the NCA our group adopted a conservative approach to the opening of pre-approved accounts, having opened far fewer new accounts than other credit providers in the country. This negatively affected the level of our retail turnover for the year, although it has resulted in our group entering these more difficult times with a healthy retail debtors’ book in contrast to what appears to be happening in the wider economy. The percentage of account holders at the year-end who were able to purchase was 82,0%, almost identical to the 82,1% in the previous year.

Trading area in the first six months of the year grew by 3,2% and for the year reached a total of 6,0% growth.

During the year, cash sales as a percentage of total sales once again increased to 36,4% from 33,3%.

Our gross margin decreased by 0,4% from 42,0% to 41,6%. Our budgeted input margins remained constant and although we had budgeted stock levels conservatively for Christmas, Christmas trading was softer than expected resulting in marginally higher markdowns. Markdowns as a percentage of turnover increased from 12,5% last year to 13,9% this year.

Gross margin trend analysis

Gross margin trend analysis

Interest received

Interest received increased by 20,4% to R1 056,4 million from R877,4 million primarily due to the growth in all the debtors’ books, with the exception of the loans book which declined, combined with higher interest yields on all debtors’ books.

Expenses

Expenses before bad debts were well controlled at 12,8%.

Depreciation and amortisation grew by 17,6% reflecting the costs associated with new stores as well as enhanced IT systems.

Employment costs of R1 120,0 million are our group’s biggest operating cost and increased by 16,1% over the previous year. The increase in these costs is due to normal staff salary increases which this year averaged 6,5%, as well as the appointment of new staff to service new store openings. Included in these costs are restraint payments which are paid to ensure the retention of key staff. Restraint payments amounted to R35,4 million and we now have in excess of 60 of our key executives covered by four-year restraints. There should be minimal restraint payments paid in the next four years. This year, no incentive bonuses were paid to staff as performance targets were not met. The IFRS 2 share option charge this year amounted to R30,7 million, whilst an amount of R19,2 million was recognised as an expense last year.

Store occupancy costs, the group’s second largest operating cost, increased by 12,1% to R583,5 million, and as a percentage of sales increased to 7,6% from 7,2% last year. The increase in this cost is due mainly to the opening of new stores. During the year 76 new stores were opened whilst 15 stores were closed. In addition 12 stores were enlarged whilst 14 were relocated. This year an amount R7,7 million was charged to store occupancy costs, exactly the same amount as in the prior year in order to comply with IAS 17: Leases.

Net bad debt and movement in provisions in our retail debtors’ book increased by 15,7% to R217,2 million, reflecting the healthy state of this book. In contrast the net bad debt and movement in provisions in the RCS Group, which was more severely impacted by the NCA grew by 91,6% to R253,7 million. More detail on the group’s bad debt and provisions is dealt with in the Financial Services review elsewhere in this report.

Interest paid increased to R120,1 million from R104,7 million, of which R97,7 million relates directly to the funding of the RCS Group. Included in this amount is a reversal of an interest provision of R35,6 million which is no longer required. This R35,6 million is a non-recurring income item which in the current year is balanced by the non-recurring restraint payments of R35,4 million. The increase in interest paid is due to the increase in interest rates, as well as the increased capital requirements of our group relating to new stores and receivables.

Income from associate

During the year our RCS subsidiary acquired a net 60% share in Effective Intelligence, a data intelligence company and the income from associate reflects our share of the profit of that company for the year.

Profit before tax

Profit before tax marginally increased from the prior year to R1 786,3 million. The group experienced a sharp downturn in turnover in the last quarter of the financial year and although cost cutting measures were immediately introduced, they had little effect on this year, the full impact of which will be evident next year. This resulted in the group’s operating margin being reduced to 24,8% from 26,1%, still however above our medium-term target of 24%.

Taxation

The group’s effective tax rate reduced from 33,1% to 32,5%. Further details are contained in the notes to the Financial Statements.

Earnings

Headline earnings increased by 0,8% from R1 119,2 million to R1 128,4 million, whilst headline earnings per ordinary share increased from 534,2 cents per share to 547,0 cents per share, an increase of 2,4%. Headline earnings per share has been calculated on the weighted average number of ordinary shares in issue of 206,3 million, down from 209,5 million in the prior year as a result of continued share buy-backs.

Diluted headline earnings per share increased from 514,8 cents to 538,0 cents, an increase of 4,5%.

The group’s return on equity (ROE) of 29,6% remains at a satisfactory level, but is down on last year’s ROE of 32,5%. Our medium-term target remains at 35%.

Dividends

Having regard to our strong balance sheet and cash flow, we have maintained our final dividend at 170,0 cents per share and together with the interim dividend of 118,0 cents per share, the total dividend for the year of 288,0 cents per share is 6,7% higher than the previous year.

Balance sheet

The tangible net asset value per share grew by 4,1% to 1 862,7 cents per share (2007: 1 789,4 cents). Total assets now amount to R7 074,4 million and grew by 4,3%.

Assets

Property, plant and equipment

Property, plant and equipment increased by 8,4% to R847,4 million from last year’s R782,1 million primarily due to:

  • the opening of new stores, store enlargements and refurbishments in line with our strategy to increase our total trading area; and
  • the introduction of new IT systems.

Trade receivables – retail

The group’s net retail trade receivables increased by 8,0% to R2 414,9 million on credit turnover growth of 1,1%. As mentioned elsewhere in this report, prior to the introduction of the NCA our group adopted a conservative approach to the opening of new pre-approved accounts. Whilst this negatively affected the level of our retail turnover, it has resulted in our group entering the next year with a healthy retail debtors’ book. Net bad debt as a percentage of credit transactions increased from 3,0% to 3,5%, which is a good performance in the current economic climate. The key debtors’ statistics are detailed in the FG Financial Services section of this report.

There has been speculation regarding credit retailers divorcing their financial services from their retail operations. In our case, our retail financial services are an integral part of our business and we have no intention of divorcing them from our retail business.

Inventory

Total inventory on hand decreased by 0,2% to R1 290,0 million from R1 292,9 million. Inventory of merchandise for resale increased by 2,7% to R1 227,5 million in line with our stringent control on stock levels. The group moves into the next financial year with a clean stock position. Stock turns in our business need to be improved and are being addressed through our supply chain initiative. Our stock turn in respect of jewellery merchandise at 2,21 is satisfactory in terms of world benchmarks, whilst the group’s stock turns on other merchandise categories fall well below world standards. Adequate provision has been made for markdowns, shrinkage and inventory obsolescence.

RCS Group

This division provides a range of broader financial services to both customers of the group, as well as to customers of retailers outside the group. This division experienced a challenging year, having been affected by the introduction of the NCA, which resulted in a reduction in the number of new loans advanced and accordingly a reduction in the loans receivable book to R716,2 million from R866,5 million.

Its private label card receivables however increased by 29,2% to R1 068,3 million from R826,7 million. The group’s non-retail receivables now total R1 784,5 million, an increase of 5,4% over last year.

Profit before tax reduced from R322,7 million to R269,6 million for the year, with net bad debt costs and provisions increasing significantly in line with current market trends. The key debtors’ statistics are detailed in the RCS Group section of this report.

This division currently represents 15,1% of our group’s profit before tax, reducing from last year’s 18,1%.

Equity

The group’s attributable equity increased to R3 845,2 million from R3 823,6 million, translating into tangible net asset value of 1 862,7 cents per share. During the year 12,5 million shares were repurchased at a cost of R760,4 million. At the financial year-end treasury shares held by subsidiaries, including the share trust, amounted to 35,9 million shares, representing 14,9% of the total issued shares.

Minority interest

The minority interest of R290,9 million relates to the minority shareholding in the RCS Group. At the financial year-end the group’s shareholding in this division was 55% with the balance being held by The Standard Bank of South Africa Limited (SBSA).

Debt profile

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 36,2%, which is below the group’s revised medium-term objective of 40%.

R1,2 billion of the group’s debt relates directly to the funding of the RCS Group, where the group’s facility is fixed at R750 million, the balance being funded by SBSA. The SBSA funding 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.

Accordingly the group’s debt relating to the retail business is only R298,7 million, which is equivalent to our usual month-end creditors’ payment. This year the March month-end creditors’ payments amounting to R289,7 million were paid on the last day of the financial year, whilst in the previous year, because the month-end occurred on a weekend, the month-end creditors were paid after the year-end.

Having regard to the current instability in financial markets, the group has secured three-year term funding of R700 million which is almost equivalent to our agreed facility to the RCS Group. Thus, should financial markets deteriorate further, the group should not be impacted.

Trade and other payables

Trade and other payables reduced from R1 171,7 million to R741,8 million. It would thus appear that we have substantially paid down our creditors, which is not the case. As already mentioned, in the 2007 financial year, March month-end trade creditors amounting to R286,9 million were paid on 2 April 2007, after the year-end, whilst those in respect of the current year amounting to R289,7 million were paid prior to the year-end. Our group’s policy of paying all suppliers 30 days from statement date remains consistent with prior years.

Capital expenditure

Total capital expenditure for the year amounted to R274,4 million, most of which relates to the opening of new stores and refurbishments, as well as investment in IT systems. R27,1 million was incurred this year in respect of the RCS Group’s move to their new premises.

Due to our continuing expansion in new stores, budgeted capital expenditure for 2009 is R315 million.

Cash flow

Cash flows from operating activities before working capital changes amounted to R1 074,2 million, marginally down on the previous year’s R1 187,9 million. There were larger working capital requirements during the year primarily as a result of an increased investment in private label card receivables of R241,6 million, as well as a reduction in trade and other payables of R429,9 million which is due primarily to timing of the year-end trade creditors’ payments. Cash generated by operations amounted to R505,9 million.

The net cash outflow from investing activities amounted to R52,2 million with investment of R274,4 million having been made in IT equipment and shopfitting.

Included in cash inflows from financing activities are share purchases by the share trust amounting to R760,4 million.

Due to these outflows, interest-bearing debt increased by R741,8 million which resulted, as mentioned previously, in our group’s net gearing increasing to 36,2% from 18,8% last year.

Financial targets

Our group’s financial targets have been included in the Financial Highlights section of this annual report.

Ronnie Stein
Financial Director

11 June 2008