Doug Murray
Our group is well positioned to enable us to maximise our returns when the economy recovers.
CHIEF EXECUTIVE OFFICER’S REPORT
GROUP OVERVIEW
This financial year has been difficult and volatile for our group with consumer spending worsening during the second half of the year. The significantly higher than projected unemployment figures have also had a negative impact on our sector.
Our group trades in the mass middle market space and our customers are severely impacted by the current economic climate, more so than those consumers in the higher LSM brackets. Although interest rates and inflation have continued to drop, this has not yet translated into increased consumer spending which remains under pressure.
In the context of the economic climate which prevailed during the year we believe our result is slightly disappointing. After six exceptional years from 2002 to 2007 when our compound HEPS grew at 48,4%, the economic cycle turned and we have now completed the third year in the current down cycle. Notwithstanding that this current downturn is arguably the worst experienced by South Africa since 1930 we have nevertheless managed over these three years to increase our operating profit before finance charges from R1 887 million to R1 973 million.
The first half of the year produced turnover growth of 7,9% and an increase in headline earnings per share of 1,5% whilst the second half worsened with turnover growth of 5% and a reduction in headline earnings per share of 12,6%. With consumer spending worsening during the second half, Christmas trade was at the lower level of our expectations which clearly impacted performance in this half. For the year as a whole turnover increased by 6,4% while headline earnings per share decreased by 6,8%. Diluted headline earnings per share decreased by 6,3%. Our final dividend has been maintained at 170,0 cents per share with a full year dividend also maintained at 288,0 cents per share.
Foschini stores, which represents 30% of our group retail turnover, had a mixed year with better growth in the first half. Its repositioning and turnaround strategy is taking longer than initially anticipated, but significant progress has been made, which positions this brand well for future growth.
Our RCS subsidiary which is an operationally independent consumer finance business, mainly as a result of the worldwide banking crisis, restructured its activities to operate during the year without any new funds being provided. This it did successfully, growing its earnings by 11,5%. In order to secure new sources of funding other than from its shareholders, RCS Group went to the market with its DMTN (domestic medium-term note) programme and was successful in raising R303 million of funding in a mixture of long- (four years) and short-term (12 months) paper. Subsequent to the year-end an additional R250 million has been placed on a seven-year term. This new funding will allow RCS Group to return to its growth potential in the future and will, in time, lessen its reliance on funding from the Foschini group.
Being now three years into the downturn, indications are that the economy will soon start to slowly recover. Our group is well positioned to enable us to maximise our returns when the economy recovers. Our retail debtors’ book which is our group’s largest asset, continues to be well managed notwithstanding the tough consumer environment. Whilst bad debt as a percentage of the debtors’ book increased to 9,9%, this is already showing a downward trend.
Our costs were again well controlled this year which will remain a focus going forward.
TRADING ENVIRONMENT
During the year consumers remained under significant strain with consumer sentiment driven by job losses, shorter working hours and a large increase in electricity prices. Nearly 900 000 jobs were lost in calendar year 2009, with a further 171 000 lost jobs in the first quarter of calendar year 2010. These job losses were significantly worse than initially projected.
Looking ahead, continued unemployment and associated factors in our economy remains our biggest potential risk.
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 profit before finance charges and tax almost R2 billion;
- the total dividend being maintained at 288,0 cents per share;
- solid performance from our retail debtors’ book; and
- strong financial position.
TRADING PERFORMANCE
| Number | Retail | ||
| of | turnover | % | |
| stores | Rm | change | |
| @home | 78 | 587,8 | 15,7 |
| exact! | 205 | 759,8 | 2,2 |
| Foschini | 454 | 3 306,0 | 6,5 |
| Jewellery division | 365 | 1 095,3 | (2,7) |
| Markham | 234 | 1 359,6 | 3,7 |
| Sports division | 291 | 1 496,7 | 15,4 |
| Total | 1 627 | 8 605,2 | 6,4 |
Whilst turnover growth in the first half was 7,9%, consumer spending continued to deteriorate in the second half with turnover growth of 5,0%, resulting in growth of 6,4% for the year as a whole. Retail turnover and growths in the various trading divisions are illustrated in the table above.
Same store turnover was flat, whilst product inflation averaged approximately 6% for the year.
Credit sales as a percentage of total sales increased to 62,6% from 61,8%.
Our @home division continued with its expansion, opening a further seven stores, three of which were the larger @homelivingspace stores. Turnover grew by 15,7% to R587,8 million. Same store turnover for the year reduced by 6,3% driven by slower sales and further cannibalisation caused by the rapid roll-out of the larger format stores. This cannibalisation is taken into account in the viabilities of all these new stores.
exact! which offers contemporary and modern fashion for South African families in the LSM 5 – 7 categories grew its store base during the year from 198 to 205, growing its clothing turnover for the year by 3,9% while its cellphone turnover reduced by 5,2%. Clothing same store turnover growth was -2,7%, whilst total same store turnover growth was -4,2%. In adding more authenticity and detail to their garments, product prices crept upwards which adversely affected sales. Focus has been placed on managing pricing architecture which has been particularly successful since its implementation in the new financial year.
The Foschini division comprising Foschini, donna-claire, fashíonexpress and Luella had a mixed year with a much better growth in the first half of the year than the second half. Clothing turnover grew by 6,9% with clothing same store turnover of 2,1%. After a stronger first half, the Foschini brand suffered from a lack of casual product in the summer season. Whilst the smarter brands such as Oasis and WWW struggled, the more casual labels such as News and Instinct fared much better. The fashíonexpress brand performed well whilst donna-claire had a disappointing year. Cosmetics turnover growth increased by 12,8%. Turnover of cellphones reduced by 7,9% whilst same store cellphone turnover reduced by 11,5%. Total same store turnover grew by 1,9%. Although significant progress has been made in the repositioning and turnaround of Foschini stores, this is taking longer than initially anticipated. I believe, however, that the progress made positions this brand well for future growth.
This division added 27 new stores and now trades out of 454 locations across its various brands.
The Jewellery division comprising American Swiss, Sterns and Matrix had acceptable performance in the current difficult climate. Jewellery merchandise turnover reduced by 1,2% whilst jewellery same store turnover reduced by 4,9%. Cellphone same store turnover reduced by 13,1% whilst total same store turnover reduced by 6,1%. This division remains the dominant player in the mass middle market jewellery sector with American Swiss Jewellers being the largest jewellery chain in southern Africa, followed by Sterns. This division increased its store base by 17 stores to 365 stores.
The Markham division traded satisfactorily in the current climate with clothing turnover growth of 4,9%, whilst cellphone turnover was
-4,8%. Total same store turnover was flat. Its store base increased by 12 stores to 234 stores.
The Sports division, trading as Totalsports, sportscene and DueSouth traded well in the current climate with turnover growth of 15,4% and same store turnover growth of 6,1%, maintaining its position as a market leader. Its store base increased by 27 stores to 291 stores. This is an exciting period for this division with the 2010 FIFA World Cup™ currently under way. It has spared no effort to prepare itself for this historic event. The three largest organisations active internationally in sportswear have officially recognised Totalsports as a preferred partner for the 2010 FIFA World Cup™.
FG Financial Services – manages the group’s in-store credit card programme, as well as handling the group’s financial service products such as Club and associated magazines, as well as insurance products. The consumer environment remains tough with many consumers without jobs or working fewer days. Anticipated defaults by customers grew as the incidence of customers resorting to bad debt counsellors for relief increased. Net bad debt as a percentage of debtors’ book increased to 9,9%, but this is already showing a downward trend.
Our retail debtors’ book, which amounts to R3,2 billion, increased by 15,4% during the year and remains in good shape.
RCS GROUP
The RCS Group is an operationally independent consumer finance business that provides a broad range of financial services under its own brand in South Africa, Namibia and Botswana. It is structured into two operating 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, whilst the Fixed Term Finance business comprises RCS Personal loans.
The RCS Group, which experienced a challenging year last year, performed far better this year with net profit before tax increasing by 11,5% to R225,9 million. The quality of new business written during the year has continued to improve with net bad debt as a percentage of debtors’ book reducing to 12,3% from 14,1% last year.
As referred to earlier in my report, RCS Group has been successful in raising in excess of R550 million with its DMTN (domestic medium-term note) programme which will allow RCS Group to return to its growth potential.
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 our awareness of the economic downturn, we decided at the beginning of 2009 to continue investing in new store expansion in order to position ourselves favourably for the future when the economy improves.
Our targeted trading space growth for our 2009 and 2010 financial years was 24%. Whilst we fell a little short of this target, we were successful in adding 22% new trading space over the two years.
During the current year we grew our trading space by 8,1% across all our brands, adding 100 new stores, whilst closing 12 stores.
In line with our strategy of investing for the longer term, we anticipate opening in excess of 100 new stores in the year ahead.
STRATEGY
The continuing strategic focus across our divisions is to improve our customers’ experience through constantly developing our merchandise offering to consistently meet our customers’ needs, and by targeted expansion and upgrading of our store base.
As part of this process, we recognise the need to ensure that our material sustainability issues are integrated as part of core business strategy. To this end, we have engaged external consultants to assist with a process of determining a sustainability strategy, which will guide a longer-term process of setting clear sustainability objectives and performance targets. A review of our material issues, and of the relationship between sustainable development and our core value drivers, is provided in our Sustainability Overview.
Our commitment to promoting sustainable development includes an ongoing focus on building and maintaining shareholder value, demonstrating concern for our employees and the communities in which we operate, promoting broad-based black economic empowerment, and ensuring responsible environmental practices.
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. An important focus this year has been the development and implementation of a supplier audit initiative aimed at ensuring the maintenance of appropriate ethical, labour and environmental performance standards amongst suppliers.
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. Our success with this during the year under review will be carried forward into the new financial year.
Strategies of the individual divisions are referred to in the divisional review section of this report.
PROSPECTS
We expect the tough trading environment to continue into the next financial year. The 2010 FIFA World Cup™ currently under way will create more positive consumer sentiment, which together with the reduced interest rate and inflationary environment should improve consumer spending. However, unemployment in the economy remains a potential risk.
Retail turnover for the first ten weeks of the new financial year has been encouraging with an upward shift in consumer spending.
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 in the new year by approximately 7%.
All our divisions remain in good shape, with remedial action taken where required, and they are well positioned to benefit from improved consumer spending.
THANKS
Thanks to our chairman, David Nurek, for his effective leadership of the board during his first year as chairman of our group.
Thanks are extended to the group’s 15 000 staff members for their contribution 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
Chief Executive Officer
21 June 2010
