annual report 2009
Doug Murray
chieF executive officer'S report
group overview
In our last annual report we anticipated that this year would undoubtedly be difficult as consumers had to contend with high interest rates, high inflation and high levels of consumer debt. This proved to be correct.
In the context of the economic climate which prevailed during the year both locally and in global markets we believe our result is satisfactory, particularly the second half performance. Our previous financial year was a tale of two halves, and this year has been no different. The first half of the year produced turnover growth of 2,9% and a reduction in headline earnings of 2,7%, whilst the second half saw a significant improvement with turnover growth of 7,8% and an increase in headline earnings of 6,1%. Christmas trade was better than expected. For the year as a whole retail turnover increased by 5,5%, whilst headline earnings per share increased by 2,3%. Diluted headline earnings per share were up 2,8%. Our final dividend has been maintained at 170,0 cents per share with the full year dividend also maintained at 288,0 cents per share.
There were two major challenges for our group during this year. Firstly, Foschini stores, which represents 30% of our group retail turnover, had significantly underperformed our other trading divisions and the market place for a number of years. The repositioning and turnaround strategy which was put in place is proving successful, resulting in far better merchandise selection and store layout. This is evidenced by a significantly improved second half financial performance. Secondly, our financial services division, RCS Group, mainly as a result of the worldwide banking crisis, had to restructure it’s activities to the level of it’s funding as well as secure new sources of funding other than from its shareholders. The business has been restructured and will be able to trade profitably for the whole of the next financial year without any source of new funding, should this not be forthcoming. At the same time the business has embarked on a process to launch a medium-term note programme in the market place in order to raise additional funding. We are confident that this will be successful which will enable RCS Group to continue on it’s growth path.
We are now almost two years into the downturn and it is clear that the slowdown still has some way to go before the economy starts to recover. Our group is well positioned with all our divisions in good shape, which will enable us to maximise our returns when the economy recovers. Our retail debtors’ book continues to perform well in the current difficult climate and we see no reason why this should not continue. The emphasis this year was on cost containment to levels appropriate to our expected trading activity and our group fared well in this regard and will continue to focus on this area going forward.
trading environment
We approached this year knowing full well that it was going to be difficult, particularly the first half of the year, which proved to be the case. The second half of the year, however, was significantly better. The interest rate cycle hit its peak in June 2008 with the prime overdraft rate moving to 15,5%. Since then, we have seen the prime interest rate reducing five times to 11% which augurs well for our future performance. Our economy should start recovering in the second half of the next financial year and should be much improved by the 2010 calendar year.
Looking ahead, a particular area of concern for us is the level of unemployment which is already prevalent in the mining and motoring sectors. It is of course possible that the infrastructural investment by the government, the impact of the reduction in interest rates and the improvement in social grants could ensure that the level of unemployment will not reduce the total consumer wallet.
FINANCIAL PERFORMANCE
Whilst the group’s detailed financial performance for the year is described in the Financial Director’s report, I would like to draw attention to the following:
- operating margin improved to 25,0% from 24,8% last year;
- operating profit before finance charges and tax in excess of R2 billion;
- the total dividend being maintained at 288,0 cents per share;
- good performance from our retail debtors' book; and
- the group's return on equity of 26,9%.
TRADING PERFORMANCE
Trading in the first half was challenging with turnover growth of 2,9%, but the second half has shown an improvement with turnover growth of 7,8%, resulting in growth of 5,5% for the year as a whole. Retail turnover and growth in the various divisions were as follows:
| Number of | Retail | % | |
| stores | turnover | Change | |
| Rm | |||
| @home | 72 | 508,1 | 10,9 |
| exact! | 198 | 743,5 | 5,1 |
| Foschini | 432 | 3 103,5 | 1,1 |
| Jewellery division | 350 | 1 126,0 | 3,2 |
| Markham | 223 | 1 311,7 | 10,1 |
| Sports division | 264 | 1 296,8 | 12,6 |
| Total | 1 539 | 8 089,6 | 5,5 |
Whilst total same store turnover for the first half reduced by 2,5%, the second half produced positive growth of 3,0% resulting in same store turnover for the year being flat.
Product inflation averaged approximately 8% for the year.
Cash sales as a percentage of total sales increased from 36,4% to 38,2%.
Our @home division continued with its expansion, opening 11 stores and now has 72 stores, 7 of which are the larger @homelivingspace stores. Whilst turnover growth in the first half was 6,1%, the second half saw an improvement to 15%, aggregating to 10,9% for the year as a whole which is satisfactory in this competitive sector. Same store turnover for the year reduced by 1,3%, with the second half growing by 1,9%. What is particularly pleasing is that same store turnover in the last quarter grew by 3%.
exact! which offers stylish and affordable fashion for the modern South African family, grew its store base during the year from 182 to 198, growing turnover for the year by 5,1% and achieving same store turnover growth of 1,9%.
The Foschini division comprising Foschini, donna-claire, fashíonexpress and Luella performed much better in the second half of the year with turnover growth of 6,3% and same store turnover growth of 2,5% compared with -4,2% and -8,8% respectively for the first half. The repositioning and turnaround of the Foschini brand is now well underway and we expect the performance of this business to continue improving. This division increased its store base by 32 stores to 432 stores.
The Jewellery division comprising American Swiss, Sterns and Matrix performed above expectation in the current climate with turnover growth of 3,2% with a reduction in same store turnover of 1,4%. This division remains the dominant player in the mass middle market jewellery sector and continued to grow its market share this year. This division increased its store base by 22 stores to 350 stores.
The Markham division traded well with turnover growth of 10,1% and same store turnover growth of 4,0%. This division continues to benefit from the brand repositioning towards a younger and more fashionable customer that was undertaken in the past few years. Its store base increased by 22 stores to 223 stores.
The Sports division, trading as Totalsports, sportscene and DueSouth, continues to trade well with turnover growth of 12,6% and same store turnover growth of 5,3%, maintaining its position as a market leader. This division is actively focused on leveraging World Cup 2010, where we are the partner of choice for several of the major brands. This division increased its store base by 43 stores to 264 stores.
FG Financial Services – our retail debtors’ book, which amounts to R2,7 billion, increased by 12,3% during the year. Because of our conservative approach to new account openings prior to the National Credit Act (NCA), the performance of our debtors’ book continues to be satisfactory with net bad debts as a percentage of closing debtors’ book increasing marginally to 8,7% from 8,3%. During this year we commenced with our offer to customers of a 12-month account as an alternative to the existing 6-month option. This has achieved positive results and since its introduction, approximately 90% of new customers have opted for the 12-month account which should positively impact our interest revenue as well as ongoing retail revenue.
RCS GROUP
The RCS Group provides a range of broader financial services to both customers of the group, as well as to customers of retailers outside the group. This group consists of two business units namely Transactional Finance and Fixed Term Finance. The Transactional Finance business comprises the RCS general-purpose card and other private label card programmes. The Fixed-term Finance business comprises RCS Personal loans. The RCS Group, which experienced a challenging first half with net bad debt costs and provisions increasing significantly in line with current market trends, had a far better performance in the second half of the year, resulting in profitability for the full year being down 24,9% as opposed to 43,5% in the first half. Profit before tax for the full year reduced from R269,6 million to R202,5 million. The quality of new business written in the second half has improved and better results are expected next year. Whilst the RCS Group has significant growth potential for the future, this growth is dependent upon the availability of funding and this is currently being addressed.
Our group’s shareholding in the RCS Group is 55%, with the balance being held by the Standard Bank of South Africa Limited.
INVESTING FOR LONG-TERM GROWTH
Notwithstanding the difficult trading environment currently being experienced, we have continued to invest in new store expansion in order to position ourselves favourably for the future as the economy improves.
During the current year we grew our trading space by 13,9%, having added 154 new stores across all our brands. An amount of R244,7 million in capital expenditure was spent on these new stores.
In line with our strategy of investing for the longer term, we anticipate opening in excess of 120 new stores in the year ahead.
STRATEGY
The continuing strategic focus across our divisions is to improve our customers’ experience through targeted expansion and upgrading of our store base and by constantly developing our merchandise offering to meet our customers’ needs.
A key element of the group’s strategy is the continuation of our supply chain initiative in order to ensure that lead times in ordering, acquiring and distributing stock are reduced to the minimum. Over a period of time, this will result in improved lead times and increased stock turns, ensuring our ability to be first to market with key products and ultimately ensuring a more consistent delivery of our merchandise promise to our customers.
Being a credit retailer we plan to maximise turnover from our credit book by actively pursuing new credit account drives and maximising low usage of available credit. This should be achieved with the assistance of our newly formed Customer Relationship Management (CRM) department which is referred to in the Foschini Group financial services divisional review section.
Strategies of the individual divisions are referred to in the divisional review section of this report.
PROSPECTS
In line with our strategy of investing for long-term growth, we will continue to open new stores in certain of our formats that are under-represented and we anticipate increasing trading space by approximately 11%.
Retail turnover for the first ten weeks of the new financial year has been encouraging as the improving trend demonstrated in the second half of last year has continued. The trading environment remains challenging however, and the South African economy faces a number of risks which could impact negatively upon our business. Accordingly, costs and inventory management will remain significant focus areas.
As interest rates and inflation continue to drop, we expect the economy to start improving, but we expect to only benefit from this in the second half of the new year.
Despite the current difficult trading climate, all our trading divisions remain in good shape and are well placed to maximise any upturn in our economy.
THANKS
Eliot Osrin, our previous chairman, retired at the end of March 2009 and I would personally like to thank him for the assistance and guidance which he has given me since my appointment as CEO. He has guided the group to much success over many years and I wish him well in his retirement.
Thanks are extended to the group’s 15 000 staff members for their contributions to its development and success. I extend my sincere appreciation to each and every one of them.
Thanks are also due to all the members of the board for their wisdom, guidance and direction.
To our shareholders, I extend thanks for their support of the group. I trust that their loyalty will continue to be rewarded.
Finally, I would like to express the group’s appreciation to our suppliers, advisers, corporate stakeholders and customers for their contributions to the group’s activities and its successes.
Doug Murray
CEO
17 June 2009
