David Nurek
In these difficult times, it is essential to retain a healthy and strong balance sheet which the group has done. Our relatively unleveraged balance sheet has held us in good stead.
CHAIRMAN’S REPORT
OVERVIEW
The 2010 financial year has been another difficult one for our group.
The deterioration in the retail sector in South Africa which began in the latter half of 2007 continued into 2010. The downturn was particularly apparent amongst credit-based cyclical retailers. The exceptional compound earnings growth of 48,4% achieved by the group during the period 2002 to 2007 could not be sustained as the economic cycle turned.
Against this background the group’s headline earnings per share declined by 6,8% whilst diluted headline earnings per share declined by 6,3%, which was disappointing. What is significant is that during the three-year depressed economic cycle, our group’s operating profit has not reduced. In these difficult times, it is essential to retain a healthy and strong balance sheet which the group has done. Our relatively unleveraged balance sheet has held us in good stead. Moreover the satisfactory level of ongoing cash flow, as well as future prospects, has enabled us to maintain our final dividend at 170,0 cents per share, resulting in the total dividend for the year being maintained at 288,0 cents per share.
ECONOMY AND OPERATING ENVIRONMENT
The worst financial crisis since 1930 and the worst global economic recession since the Second World War appears to have bottomed out in the first half of calendar 2009. The global economic business cycle has switched from recession to slow recovery. The South African economy has not escaped the impact of the global recession, despite the fact that the local banking sector did not share the sub-prime related problems experienced in other parts of the world. After registering a quarter-on-quarter decline of 7,4% in the first quarter of calendar 2009, South Africa’s real GDP increased by 0,9% in the third quarter and 3,2% in the fourth quarter. A number of other indicators also suggest that the economy is starting to recover. Inflation also slowed down during the course of calendar 2009. For the full calendar year 2009, real GDP declined by 1,8%, the first annual decline since 1993, reflecting inter alia a collapse in consumer demand and a sharp rise in unemployment levels.
Looking forward, and assuming that the global economy will continue to recover, the outlook for the South African economy is one of a sustained but slow recovery from the global recession. Domestic inflation now appears well contained below 6% in March 2010. Food price increases remain low and continued low inflation in the developed countries bodes well for South Africa’s inflation rate over the short term. The Rand exchange rate has fully recovered and appreciated strongly during the second half of calendar 2009. Both monetary and fiscal policies are expected to continue to support the recovery of the economy going forward.
Household spending on consumer goods and services declined by more than 3% in real terms in calendar 2009, the sharpest annual decline in 25 years. However, looking forward the increase in consumer confidence and relatively low interest rates should boost consumer spending. A risk remains the slow recovery in employment.
All of this may indicate that our economy will continue to recover during our next financial year. In addition the current 2010 FIFA World Cup™ taking place in South Africa is expected to create more positive consumer sentiment.
COMMUNITY RESPONSIBILITY
We remain committed to achieving a balance between economic performance and the part we play for our society and the communities in which we operate. We are mindful of the critical role that business has to play 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 here.
TRANSFORMATION
Our Transformation Committee has the task of driving the group’s broad-based black economic empowerment (BBBEE) strategy into the future. Our various internal transformation sub-committees 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. I am pleased to note that in the Financial Mail’s Top Empowerment Companies Report of 2010, 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.
Assessment starts at the top with a comprehensive annual peer review of the performance of all board directors, as well as of the board itself and its various sub-committees. These subcommittees, which cover the fields of audit, remuneration, risk, nominations and transformation, maintain diligent oversight 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.
Following the publication of the King III Code of Corporate Governance, management has reviewed current practices relevant to the code. In the current financial statements the group has early adopted many aspects of King III, the balance of which will be dealt with in the new financial year.
We recognise that integrated sustainability reporting is not simply a question of including a sustainability section within our annual report. Instead, it is about demonstrating that the material sustainability issues have been integrated across all areas of the group’s performance and have influenced the strategic decisions adopted by the board. With this understanding in mind, in this annual report we have integrated our review of our sustainability performance within each of the sections of the report.
An important aim of our annual report is to enable our stakeholders to understand the key social, economic and environmental issues that affect the company and to appreciate the impact, both positive and negative, of our operations on the social, economic and environmental well-being of the community. We seek to do this by providing a material account of our performance over the year, as well as by looking forward and outlining some of our future commitments in this area.
LOOKING AHEAD
Notwithstanding the difficult environment, we expect the South African economy to continue improving, particularly in the second half of the next financial year. The 2010 FIFA World Cup™ currently taking place should be the catalyst for some improvement in consumer sentiment which together with the reduced interest rate environment should improve consumer spending. Our group remains in good shape and is well positioned to take advantage of the upturn in our economy.
THANKS
On behalf of the board I wish to extend deep appreciation and thanks to:
- all employees for their excellent performance during an extremely challenging year;
- our customers for their continued loyal support;
- our shareholders for their support and confidence in the future of the group;
- our suppliers, advisers and business associates for their co-operation and contribution to the growth of the business; and
- my fellow directors for their insight, guidance and valuable input.
David
Nurek
Chairman
21 June 2010
