annual report 2009
Ronnie Stein
financial director's report
OVERVIEW
This was one of the most challenging trading periods experienced by our group for many years. The first half of the year was difficult with operating profit of R836,5 million, a reduction of 3,1% on the prior period and a reduction in headline earnings per share of 2,7% at 229,5 cents per share. Turnover growth was mediocre growing by 2,9%. The second half of the year saw a significant improvement with turnover growing 7,8% and operating profit of R1 189,0 million growing by 14,1%. Headline earnings per share grew by 6,1%. For the year as a whole retail turnover grew by 5,5% to R8,1 billion. Headline earnings per share increased by 2,3% to 559,5 cents, whilst diluted headline earnings per share increased by 2,8% to 553,0 cents per share. In the context of the current economic climate, our group delivered a satisfactory performance for the year.
| Historical financial | ||||||||
| performance | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
| Retail turnover (Rm) | 3 289,9 | 3 880,6 | 4 410,0 | 5 279,3 | 6 432,1 | 7 230,0 | 7 668,7 | 8 089,6 |
| Retail turnover growth % | 10,4 | 18,0 | 13,6 | 19,7 | 21,8 | 12,4 | 6,1 | 5,5 |
| Compound retail turnover growth % | 15,9 | 14,5 | 13,7 | |||||
| Operating profit before finance charges (Rm) | 348,5 | 582,0 | 814,6 | 1 204,8 | 1 567,3 | 1 887,0 | 1 905,5 | 2 025,5 |
| Headline earnings per share (HEPS) (cents) | 87,9 | 162,2 | 237,1 | 359,6 | 463,0 | 534,2 | 547,0 | 559,5 |
| HEPS % increase | 75,4 | 84,5 | 46,2 | 51,7 | 28,8 | 15,4 | 2,4 | 2,3 |
| Compound HEPS growth % | 48,4 | 40,7 | 30,3 | |||||
| Dividends per share | 31,0 | 56,0 | 94,0 | 164,0 | 220,0 | 270,0 | 288,0 | 288,0 |
Looking back at the financial performance of our group for the last eight years, we experienced an unprecedented boom between 2002 and 2007 where our operating profit before finance charges increased from R348,5 million to R1 887,0 million. The growth in consumer spending started to decline sharply from 2008, signalling an end to the consumer-led boom referred to above. The factors impacting on consumer spending included the very high food prices, the implementation of the National Credit Act in June 2007 and the sharp decline in consumer confidence. The current year under review has been a continuation of this downturn and notwithstanding that the second half of 2009 was far better than the first half, it is too soon to predict whether this represents a turn in the consumer spending cycle. Looking forward, consumer spending will be influenced on the positive side by further declines in interest rates and inflation, but on the negative side by further declines in employment this year.
The key financial indicators for the year are as follows and are discussed in more detail elsewhere in this report.
| Key performance indicators | 2009 | Medium- | 2008 |
| term | |||
| target | |||
| Turnover (Rm) | 8 089,6 | 7 668,7 | |
| Turnover growth | 5,5% | 6,1% | |
| Gross margin | 42,0% | 41,6% | |
| Operating margin | 25,0% | 25% | 24,8% |
| Profit before tax (Rm) | 1 775,7 | 1 786,3 | |
| Profit after tax (Rm) | 1 211,3 | 1 206,1 | |
| Headline Earnings per share (HEPS) (cents) | 559,5 | 547,0 | |
| HEPS growth | 2,3% | 2,4% | |
| Diluted HEPS (cents) | 553,0 | 538,0 | |
| Diluted HEPS growth | 2,8% | 4,5% | |
| Dividend per ordinary share (cents) | 288,0 | 288,0 | |
| Dividend per ordinary share growth | – | 6,7% | |
| Return on average equity | 26,9% | 35% | 29,6% |
| Total gearing | 33,5% | 40% | 36,2% |
| Recourse gearing | 17,4% | 24,3% | |
| Tangible net asset value per share (cents) | 2 148,1 | 1 862,7 | |
| Tangible net asset value per share growth | 15,3% | 4,1% | |
| Stock turn (12 month average) | |||
| – jewellery | 1,7 | 1,7 | |
| – @home | 1,8 | 2,0 | |
| – other | 3,2 | 3,1 |
ACCOUNTING POLICIES AND STANDARDS
The annual financial statements have been prepared in accordance with the group’s accounting policies which comply with International Financial Reporting Standards (IFRS) and the requirements of the South African Companies Act. The principal accounting policies are consistent with those applied in the previous year.
In order to provide increased disclosure the group reclassified certain balance sheet items.
Further information regarding restatements can be found in note 37.
INCOME STATEMENT
Retail turnover
Retail turnover of R8,1 billion increased by 5,5% on the previous year. Same store turnover for the year remained flat. As is usual in more difficult times, our cash turnover growth of 10,7% outpaced credit turnover growth of only 2,5%.
| Retail turnover by merchandise category | 2009 Rm |
2008 Rm |
1st half growth % |
2nd half growth % |
Total growth % |
1st half same store growth % |
2nd half same store growth % |
Total same store growth % |
|
| Clothing | 5 227,1 | 4 989,1 | 0,9 | 9,7 | 4,8 | (4,0) | 3,4 | (0,4) | |
| Jewellery | 1 038,6 | 1 010,0 | 3,1 | 2,7 | 2,8 | (1,4) | 0,9 | (1,7) | |
| Cellphones | 762,6 | 721,6 | 7,3 | 4,7 | 5,7 | 3,5 | 1,3 | 2,0 | |
| Cosmetics | 552,2 | 488,3 | 12,3 | 14,1 | 13,1 | 6,0 | 7,4 | 6,8 | |
| Homeware and furniture | 509,1 | 459,7 | 6,1 | 15,0 | 10,7 | (4,9) | 1,7 | (1,4) | |
| Total | 8 089,6 | 7 668,7 | 2,9 | 7,8 | 5,5 | (2,5) | 3,0 | – | |
Clothing growth at 4,8% was much improved in the second half with growth of 9,7% versus 0,9% in the first half. This was influenced by the much better performance from the Foschini division where its repositioning and turnaround of the Foschini brand is well underway.
Cellphone growth of 5,7% was disappointing, but was affected particularly in the second half of the year by supply issues from our exclusive supplier, MTN. This is not the first time that supply issues have occurred and we do know from experience that as soon as the stock situation is corrected, turnover picks up very quickly.
Surprising on the upside was the level of jewellery turnover which held up well during the year. Historically, when the economy gets tough luxury goods tend to suffer more than other products.
Cosmetics performed well with growth of 13,1% and remains a consistent performer growing its market share year by year.
Homeware and furniture had a much improved second half with 15,0% turnover growth compared to 6,1% in the first half. In this very competitive sector, homewares achieved a positive same store growth in the second half of the year, the first time this has happened in a number of years.
Overall product inflation for the year was approximately 8%, with the exception of jewellery which approximated 15%.
| Retail turnover by division | 2009 Turnover Rm |
1st half growth % |
2nd half growth % |
Total growth % |
1st half same store growth % |
2nd half same store growth % |
Total same store growth % |
Number of stores |
|
| Foschini | 3 103,5 | (4,2) | 6,3 | 1,1 | (8,8) | 2,5 | (3,3) | 432 | |
| Markham | 1 311,7 | 12,6 | 7,9 | 10,1 | 6,1 | 3,5 | 4,0 | 223 | |
| exact! | 743,5 | 4,8 | 5,4 | 5,1 | 1,8 | 1,9 | 1,9 | 198 | |
| Sports division | 1 296,8 | 9,8 | 15,1 | 12,6 | 3,5 | 6,1 | 5,3 | 264 | |
| Jewellery division | 1 126,0 | 3,9 | 2,7 | 3,2 | (1,7) | (1,1) | (1,4) | 350 | |
| @home | 508,1 | 6,1 | 15,0 | 10,9 | (4,9) | 1,9 | (1,3) | 72 | |
| Total | 8 089,6 | 2,9 | 7,8 | 5,5 | (2,5) | 3,0 | – | 1 539 | |
| Cash sales | 3 089,3 | 8,2 | 12,8 | 10,7 | |||||
| Credit sales | 5 000,3 | 0,1 | 4,8 | 2,5 | |||||
| Total | 8 089,6 | 2,9 | 7,8 | 5,5 |
Same store turnover for the first half reduced by 2,5%, whilst the second half produced positive growth of 3,0%, resulting in same store turnover for the year being flat. In line with our strategy of investing for long-term growth, the group added 154 new stores across all our brands representing a total increase in trading space of 13,9%. During the year, cash sales as a percentage of total sales increased to 38,2% from 36,4%.
Our gross margin increased by 0,4% from 41,6% to 42,0%. Our budgeted input margins remained constant, but as Christmas trade was above expectation, markdowns for the group were lower at 11,9% compared to 13,9% in the previous year.
The table below reflects the historic gross margin trend analysis:
Gross margin trend analysis |
 |
Interest received
Interest received from our trade receivables book increased by 36,5% to R526,1 million. This was driven by a growth in the average book size as well as a higher yield resulting from increased interest rates. The take-up of 12-month accounts by new customers has been positively received with over 90% of all new customers opting for the 12-month account. Currently 68% of accounts are now attracting interest, up from 62% last year.
Interest received on the RCS Group receivables book increased by 14,2%, somewhat less than the growth in retail trade receivables interest as the average RCS Group receivables book did not grow substantially on the previous year.
Expenses
Expenses before bad debts were well controlled at 12,2%, which includes a non-comparable operating cost of R40 million relating to the RCS Group’s acquisition of the Massdiscounters credit business. Like-for-like expense growth was extremely well controlled at around 3%, the balance relating to the opening of new stores.
Depreciation and amortisation grew by 12,9% reflecting the costs associated with new stores as well as enhanced IT systems.
Employment costs of R1 222,0 million are our group’s biggest operating cost and increased by 9,1% over the previous year. The increase in these costs is due to normal staff salary increases which this year averaged 7%, as well as the appointment of new staff to service new store openings. Included in these costs are restraint payments amounting to R2,4 million which are paid to ensure the retention of key staff. Incentive bonuses of R13,6 million were paid to staff where performance targets were achieved for the year. The IFRS 2 share option charge this year amounted to R25,7 million, whilst an amount of R30,7 million was recognised as an expense last year.
Store occupancy costs, the group’s second largest operating cost, increased by 15,8% to R675,8 million, and as a percentage of sales increased to 8,4% from 7,6% last year. Whilst lease escalations average 8%, the balance of this cost is due to the opening of new stores. During the year 154 new stores were opened whilst 8 stores were closed.
Net bad debt and movement in provisions in our retail debtors’ book increased by 20,4% on a 12,3% book growth to R261,5 million which is within our expectation. This reflects the pressure under which consumers find themselves. 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%.
The net bad debt and movement in provisions in the RCS Group, grew by 25,0% to R317,1 million. Write-offs stabilised in the second half of the year with the health of the debtors’ book improving significantly due to a focus on quality and increased action on the collections side. 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 R249,8 million from R120,1 million. Taking into account the R35,6 million reversal of interest in 2008 referred to in the previous year’s report, interest paid effectively increased to R249,8 million from R155,7 million. This increase in interest is due to the increase in the average interest rates during the year as well as the increased capital requirements of our group relating to receivables and new stores.
It is significant to note that interest paid of R188,5 million relates to funding of the RCS Group whilst R61,3 million relates to the funding of our retail business.
Operating margin
Notwithstanding the difficult environment, the group’s operating margin increased from 24,8% to 25,0% which is our group’s medium term target.
Taxation
The group’s effective tax rate reduced from 32,5% to 31,8%. Further details are contained in the notes to the Financial Statements.
Earnings
Headline earnings increased by 1,5% to R1 145,8 million from R1 128,4 million, whilst headline earnings per ordinary share increased from 547,0 cents per share to 559,5 cents per share, an increase of 2,3%. Headline earnings per share has been calculated on the weighted average number of ordinary shares in issue of 204,8 million down from 206,3 million in the prior year.
Diluted headline earnings per share increased from 538,0 cents to 553,0 cents, an increase of 2,8%.
The group’s return on equity (ROE) of 26,9% remains at a satisfactory level, but is down on last year’s ROE of 29,6%. 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 the same as the previous year.
BALANCE SHEET
The tangible net asset value per share grew by 15,3% to 2 148,1 cents per share (2008: 1 862,7 cents). Total assets now amount to R8 664,0 million and grew by 20,7%.
Property, plant and equipment
Property, plant and equipment increased by 15,8% to R981,3 million from last year’s R847,4 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 12,3% to R2 746,3 million on credit turnover growth of 2,5%. As mentioned previously the take-up of 12-month accounts by new customers has been positively received with over 90% of all new accounts opting for the 12-month option and this is the main reason for the growth in the book. Net bad debt as a percentage of credit transactions increased from 3,5% to 4,0%, 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.
Inventory
Total inventory on hand increased by 18,2% to R1 524,9 million from R1 290,0 million. Inventory of merchandise for resale increased by 16,7% to R1 433,0 million from R1 227,5 million. Taking into account the new stores opened during the year as well as the very tight stock position at the beginning of the year, stock is now at appropriate levels for expected turnover and new store openings in the next financial year. Stock turns in our business remain a focus and are being addressed through our supply chain initiative. Our stock turn in respect of jewellery merchandise at 1,7 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 difficult year, with the liquidity crisis placing pressure on both the availability and cost of funds. The increase in bad debt in the RCS Group mirrors that of the market place. Bad debt write-offs have stabilised in the second half with the health of the debtors’ book improving significantly due to a focus on quality and increased action on the collections side. At the year-end RCS Group’s receivables increased by 38,6% to R2 472,6 million from R1 784,5 million. The key debtors’ statistics are detailed in the RCS Group section of this report.
Profit before tax reduced from R269,6 million to R202,5 million for the year, with net bad debt costs and provisions increasing in line with current market trends. RCS 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. The quality of new business written in the second half has improved and better results are expected in the new year.
RCS Group currently represents 11,4% of our group’s profit before tax, reducing from last year’s 15,1%. It is not core to our business and it still remains our intention at some future date to reduce our group’s holding in RCS to below 50%, which will obviate the need to consolidate this group. When markets change it is possible that this group could be separately listed.
Whilst the RCS Group has significant growth potential for the future, this growth is dependent on the availability of funding. It requires funding other than from shareholders and the business is currently being rated with the intention of launching a domestic medium term note programme by September 2009.
Equity
The group’s attributable equity increased to R4 496,3 million from R3 845,2 million translating into tangible net asset value of 2 148,1 cents per share. At the financial year-end treasury shares held by subsidiaries, including the share trust, amounted to 33,1 million shares, representing 13,8% of the total issued shares.
Minority interest
The minority interest of R359,2 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 33,5%, which is below the group’s revised medium-term objective of 40%.
Included in this debt are minority interest loans advanced by SBSA to the RCS Group amounting to R783,2 million. This debt has no recourse to Foschini Limited. Accordingly, our net recourse borrowings amount to R843,7 million which represents net recourse gearing of 17,4%. R825 million of this debt has been advanced by Foschini to the RCS Group resulting in debt relating to our retail business of only R18,7 million.
As reported last year because of the current instability in financial markets, the group secured three-year term funding in order to ensure that our group would not be impacted should financial markets deteriorate further. At the year-end R800 million of our group’s borrowings remain fixed for a further two years, with a further R100 million fixed for a further one year.
Trade and other payables
Trade and other payables increased from R741,8 million to R1 252,5 million. In the previous financial year, March month-end trade creditors amounting to R289,7 million were paid prior to the year-end, whilst those in respect of the current year amounting to R310,9 million were paid after 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 R370,6 million, most of which relates to the opening of new stores and refurbishments, as well as investment in IT systems. Nearly 70% of our capital expenditure amounting to R244,7 million relates to new stores.
Due to our strategy of investing for the longer term, budgeted capital expenditure for 2010 is approximately R320 million, but will depend on eventual store openings which at this stage are estimated to increase floor space by approximately 11%.
CASH FLOW
Cash flows from operating activities before working capital changes amounted to R945,7 million, marginally down on the previous year’s R1 074,2 million. Cash generated by operations amounted to R911,5 million compared to R505,9 million in the previous year. There were larger working capital requirements during the year primarily as a result of an increased investment in RCS Group receivables of R520,5 million.
The net cash outflow from investing activities amounted to R536,2 million, of which R370,6 million capital expenditure relates primarily to new stores, as well as RCS’ acquisition of the Massdiscounters credit business amounting to R175 million.
Due to these outflows, net gearing increased by R128 million.
Financial targets
Our group’s financial targets have been included in the Financial Highlights section of this annual report.
Ronnie Stein
Financial Director
17 June 2009
