Ronnie Stein
We are now in the third year in the current economic down cycle, but have nevertheless been able to increase our operating profit during this downturn.
FINANCIAL DIRECTOR’S REPORT
OVERVIEW
This was a very difficult year for our group. In the first half of the year operating profit was R890,2 million, an increase of 6,4% on the prior period and an increase in headline earnings per share of 1,5% at 232,9 cents per share.
Turnover growth was 7,9%. As consumer spending worsened, the second half of the year saw turnover growing by 5,0% and operating profit of R1 082,4 million reducing by 8,9%. Headline earnings per share reduced by 12,6%. For the year as a whole retail turnover grew by 6,4% to R8,6 billion. Headline earnings per share decreased by 6,8% to 521,4 cents, whilst diluted headline earnings per share decreased by 6,3% to 518,2 cents per share. Notwithstanding the current economic climate, these results are somewhat disappointing.
| Historical financial performance | |||||||||
| Years ended | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| 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 | 8 605,2 |
| Retail turnover growth % | 10,4 | 18,0 | 13,6 | 19,7 | 21,8 | 12,4 | 6,1 | 5,5 | 6,4 |
| Compound retail turnover growth % | 15,9 | 14,5 | 13,7 | 12,5 | |||||
| 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 | 1 972,6 |
| Headline earnings per share (HEPS) (cents) | 87,9 | 162,2 | 237,1 | 359,6 | 463,0 | 534,2 | 547,0 | 559,5 | 521,4 |
| HEPS % change | 75,4 | 84,5 | 46,2 | 51,7 | 28,8 | 15,4 | 2,4 | 2,3 | (6,8) |
| Compound HEPS growth % | 48,4 | 40,7 | 30,3 | 29,7 | |||||
| Dividends per share | 31,0 | 56,0 | 94,0 | 164,0 | 220,0 | 270,0 | 288,0 | 288,0 | 288,0 |
Looking back at the financial performance of our group for the last nine 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 compounded growth in headline earnings per share during this period was 48,4%. The growth in consumer spending started to decline sharply from 2008, signalling an end to the consumer-led boom referred to above. We are now in the third year in the current economic down cycle, but have nevertheless been able to increase our operating profit during this downturn. Although retail turnover for the first ten weeks of the new financial year has been encouraging with an upward shift in consumer spending, it is too soon to predict whether this represents a turn in the consumer spending cycle. Further unemployment in the economy remains a risk.
The key financial indicators for the year are as follows and are discussed in more detail elsewhere in this report.
| Key performance indicators | |||
| Medium- | |||
| term | |||
| 2010 | target | 2009 | |
| Turnover (Rm) | 8 605,2 | 8 089,6 | |
| Turnover growth | 6,4% | 5,5% | |
| Gross margin | 41,8% | 42,0% | |
| Operating margin | 22,9% | 25% | 25,0% |
| Profit before tax (Rm) | 1 711,1 | 1 775,7 | |
| Profit after tax (Rm) | 1 162,5 | 1 211,3 | |
| Headline earnings per share (HEPS) (cents) | 521,4 | 559,5 | |
| HEPS growth | (6,8%) | 2,3% | |
| Diluted HEPS (cents) | 518,2 | 553,0 | |
| Diluted HEPS growth | (6,3%) | 2,8% | |
| Dividend per ordinary share (cents) | 288,0 | 288,0 | |
| Return on average equity | 22,5% | 35% | 26,9% |
| Total gearing | 27,1% | 40% | 33,5% |
| Recourse gearing | 11,6% | 17,4% | |
| Tangible net asset value per share (cents) | 2 399,6 | 2 148,1 | |
| Tangible net asset value per share growth | 11,7% | 15,3% | |
| Stock turn (12-month average) | |||
| – jewellery | 1,7 | 1,7 | |
| – @home | 1,8 | 1,8 | |
| – other | 3,2 | 3,2 |
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 except for the adoption of IAS 1 Presentation of Financial Statements, IFRS 8 Segmental Reporting and Circular 3/2009 Headline Earnings.
The principal effect of the changes required by IAS 1 were as follows:
- All non-owner changes in equity are now presented in “other comprehensive income” in the Consolidated Statement of Comprehensive Income. Previously these were presented in the Consolidated Statement of Changes in Equity.
- The Consolidated Balance Sheet is now the Consolidated Statement of Financial Position.
The adoption of IFRS 8 and Circular 3/2009 has had no significant effect on these results.
In order to provide improved disclosure in the Consolidated Cash Flow Statement certain reclassifications have been made. These changes had no impact on overall equity, net assets or profitability.
Further information can be found in notes 38 and 40.
INCOME STATEMENT
| Retail turnover by merchandise category | ||||||||
| 1st half | 2nd half | Total | ||||||
| 1st half | 2nd half | Total | same store | same store | same store | |||
| 2010 | 2009 | growth | growth | growth | growth | growth | growth | |
| R m | Rm | % | % | % | % | % | % | |
| Clothing | 5 660,2 | 5 227,1 | 11,2 | 5,7 | 8,3 | 4,6 | – | 2,2 |
| Jewellery | 1 025,7 | 1 038,6 | (3,0) | 0,2 | (1,2) | (6,2) | (4,0) | (5,0) |
| Cellphones | 707,6 | 762,6 | (13,4) | (1,6) | (7,2) | (15,9) | (6,4) | (11,0) |
| Cosmetics | 622,7 | 552,2 | 16,9 | 9,3 | 12,8 | 12,7 | 5,4 | 8,7 |
| Homeware and furniture | 589,0 | 509,1 | 18,9 | 13,3 | 15,7 | (5,3) | (7,1) | (6,3) |
| Total | 8 605,2 | 8 089,6 | 7,9 | 5,0 | 6,4 | 1,2 | (1,3) | (0,1) |
Retail turnover
Retail turnover of R8,6 billion increased by 6,4% on the previous year. Same store turnover for the year remained flat. For the first time in three years, credit turnover which grew by 7,7%, outpaced cash turnover which grew by 4,1%. This is an indicator that the economic cycle is starting to improve.
After a strong first half performance, clothing growth slowed in the second half resulting in a total growth of 8,3% for the year.
Whilst growth in jewellery sales was negative, this performance in the current economic climate is acceptable when compared to the market both locally and overseas. The first half growth was -3,0% improving to flat in the second half.
Cellphone sales improved substantially in the second half as the supply issues experienced in the first half improved.
Cosmetics continued to perform satisfactorily.
Homeware and furniture performed adequately in a competitive market.
Overall product inflation for the year was approximately 6%.
| Retail turnover by division | ||||||||
| 1st half | 2nd half | Total | ||||||
| 2010 | 1st half | 2nd half | Total | same store | same store | same store | ||
| Turnover | growth | growth | growth | growth | growth | growth | Number | |
| Rm | % | % | % | % | % | % | of stores | |
| Foschini | 3 306,0 | 11,0 | 2,5 | 6,5 | 6,2 | (2,1) | 1,9 | 454 |
| Markham | 1 359,6 | 1,4 | 5,7 | 3,7 | (2,8) | 1,1 | (0,8) | 234 |
| exact! | 759,8 | 0,6 | 3,7 | 2,2 | (5,7) | (2,7) | (4,2) | 205 |
| Sports division | 1 496,7 | 18,7 | 12,7 | 15,4 | 7,8 | 4,6 | 6,1 | 291 |
| Jewellery division | 1 095,3 | (5,0) | (0,8) | (2,7) | (7,6) | (4,9) | (6,1) | 365 |
| @home | 587,8 | 18,9 | 13,1 | 15,7 | (5,3) | (7,1) | (6,3) | 78 |
| Group | 8 605,2 | 7,9 | 5,0 | 6,4 | 1,2 | (1,3) | (0,1) | 1 627 |
| Cash sales | 3 221,7 | 6,3 | 2,3 | 4,1 | ||||
| Credit sales | 5 383,5 | 8,8 | 6,6 | 7,7 | ||||
| Total | 8 605,2 | 7,9 | 5,0 | 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.
Same store turnover for the first half was 1,2%, whilst the second half reduced to -1,3%, resulting in same store turnover for the year being flat.
In line with our strategy of investing for long-term growth, the group added 100 new stores across all our brands representing a total increase in trading space of 8,1%.
During the year, credit sales as a percentage of total sales increased to 62,6% from 61,8%.
Our gross margin reduced marginally by 0,2% to 41,8% from 42,0%. Our budgeted input margins remained constant, but as Christmas trade was at the lower level of management expectations, mark-downs for the group were marginally up on the previous year, increasing to 12,8% from 11,9%.
The table above reflects the historic gross margin trend analysis.
Interest received
Interest received from our trade receivables book increased by 21,0% to R636,4 million. This was driven by a growth in the average book size. The take-up of the 12-month accounts by new customers remains more popular with over 90% of new customers opting for the 12-month account. Currently 71% in value of accounts are now attracting interest, up from 68% last year.
Interest received on the RCS Group receivables increased by 5,1%, restrained by the lack of capital experienced by the RCS Group during the year (as a result of the world financial crisis), where advances to customers were substantially curtailed.
Expenses
Expenses before bad debts were well controlled at 14,9%. Like-for-like expense growth was managed at around 8%, the balance relating to the opening of new stores.
Depreciation and amortisation grew by 14,3% reflecting the costs associated with new stores as well as enhanced IT systems.
Employment costs of R1 376,9 million are our group’s biggest operating cost and increased by 12,7% over the previous year. The increase in these costs is due to normal staff salary increases which this year averaged 6%, as well as the appointment of new staff to service new store openings. Included in these costs are restraint payments amounting to R1,4 million which are paid to ensure the retention of key staff. Incentive bonuses of R1 million were paid to staff where performance targets were achieved for the year. The IFRS 2 share option charge this year amounted to R34,3 million, whilst an amount of R25,7 million was recognised as an expense last year.
Store occupancy costs, the group’s second-largest operating cost, increased by 20,8% to R816,4 million and as a percentage of sales increased to 9,5% from 8,4% last year. Whilst lease escalations average 8%, the balance of this cost is due to the opening of new stores, as well as the costs associated with the RCS Group’s acquisition of the Massdiscounters credit business towards the end of the previous financial year. During the year 100 new stores were opened whilst 12 stores were closed.
Net bad debt and movement in provisions in our retail debtors’ book increased by 37,3% on a 15,4% book growth to R359,1 million, reflecting the switch of new accounts to 12-month extended terms from the previous 6-month terms. The performance of our debtors’ book continues to be satisfactory with net bad debts as a percentage of debtors’ book increasing to 9,9% from 8,7%. The net bad debt and movement in provisions in the RCS Group, grew by 11,1% to R352,4 million. Write-offs improved this year, due to a focus on quality in new advances. 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 marginally to R261,5 million from R249,8 million. Whilst interest rates in the economy reduced significantly this year, our group still has R800 million of borrowings at fixed rates. As these borrowings start to unwind from May 2011 onwards, we will begin to receive the benefit of the lower interest rates. Notwithstanding the increased capital requirements of our group relating to receivables and new stores, cash flow for the year was positive with net gearing at the year-end improving by R141 million over the previous year.
It is significant to note that interest paid of R197,9 million relates to the funding of the RCS Group whilst R63,6 million relates to the funding of our retail business.
Operating margin
In this difficult environment, the group’s operating margin decreased to 22,9% from 25,0%, which is our group’s medium-term target. As the economy improves, and consumer spending becomes more buoyant, we would expect our operating margin to increase.
Taxation
The group’s effective tax rate increased from 31,8% to 32,1% mainly as a result of increased STC. Further details are contained in the Notes to the Financial Statements.
Earnings
Headline earnings decreased by 5,3% to R1 085,6 million from R1 145,8 million, whilst headline earnings per ordinary share decreased from 559,5 cents per share to 521,4 cents per share, a decrease of 6,8%. Headline earnings per share has been calculated on the weighted average number of ordinary shares in issue of 208,2 million up from 204,8 million in the prior year.
Diluted headline earnings per share decreased from 553,0 cents to 518,2 cents, a decrease of 6,3%.
The group’s return on equity (ROE) of 22,5% remains at a satisfactory level, but is down on last year’s ROE of 26,9%. Our medium-term target remains at 35%.
Dividends
Having regard to our strong balance sheet and cash flow, as well as future prospects, 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.
STATEMENT OF FINANCIAL POSITION
The tangible net asset value per share grew by 11,7% to 2 399,6 cents per share (2009: 2 148,1 cents). Total assets now amount to R9 236,9 million and grew by 6,6%.
Assets
Property, plant and equipment
Property, plant and equipment increased by 1,5% to R995,8 million from last year’s R981,3 million primarily due to:
- the opening of new stores, store enlargements and refurbishments in line with our strategy to increase our total trading area;
- the introduction of new IT systems; and
- larger than normal depreciation resulting in the main from the substantial store openings in the previous year.
Trade receivables – retail
The group’s net retail trade receivables increased by 15,4% to R3 169,3 million on credit turnover growth of 7,7%. 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 the12-month option. This is the main reason for the growth in the book. Net bad debt as a percentage of credit transactions increased to 4,8% from 4,0%, whilst net bad debt write-off as a percentage of the debtors’ book increased to 9,9% from 8,7%, but this is already showing a downward trend. In the current economic climate, the performance of our retail debtors’ book has been satisfactory.
The key debtors’ statistics are detailed in the FG Financial Services section of this report.
Inventory
Total inventory on hand decreased by 2,0% to R1 493,8 million from R1 524,9 million. Inventory of merchandise for resale decreased by 5,4% to R1 355,0 million from R1 433,0 million. As a result of the group’s supply chain initiative, our stock has been well controlled, with all our DCs at the year-end running with approximately 50% less stock than last year. Instead of stock sitting in the DC for a period, as it now gets to the warehouse, it flows through directly to stores. Taking into account the new stores to be opened in the next financial year, stock is at the appropriate levels for future trading. Stock turns in our business remain a focus and continue to be 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 at 3,2 should improve in future years as a result of our supply chain initiative. Adequate provision has been made for mark-downs, shrinkage and inventory obsolescence.
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. 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.
The key driver for the year was to improve the overall asset quality and all key debtors’ book quality measures now show positive trends. At the year-end, RCS Group’s receivables increased by 6,4% to R2 630,8 million from R2 472,6 million.
The key debtors’ statistics are detailed in the RCS Group section of this report.
RCS Group currently represents 13,2% of our group’s profit before tax, increasing from last year’s 11,4%. 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.
During March 2010, 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.
Equity
The group’s attributable equity increased to R5 058,3 million from R4 496,3 million translating into tangible net asset value of 2 399,6 cents per share. At the financial year-end, treasury shares held by subsidiaries including the share trust, amounted to 31,5 million shares, representing 13,1% of the total issued shares.
Non-controlling interest
The non-controlling interest of R427,0 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 |
|||
| 2010 | % | 2009 | |
| Rm | growth | Rm | |
| Interest-bearing debt and non-controlling interest loans | 1 969,5 | (7,2) | 2 123,1 |
| Less: preference share investment | (200,0) | (200,0) | |
| Less: cash | (284,0) | (296,2) | |
| Net borrowings | 1 485,5 | (8,7) | 1 626,9 |
| Less: SBSA loan to RCS Group (non-controlling interest loan) | (478,3) | (783,2) | |
| 1 007,2 | 843,7 | ||
| Less: RCS Group external funding (commercial paper + bonds + bank loan) | (372,1) | – | |
| Recourse debt | 635,1 | (24,7) | 843,7 |
| Less: Foschini funding of RCS Group | (804,5) | (825,0) | |
| Retail (cash) borrowings | (169,4) | 18,7 |
Our group’s operations are financed primarily by means of its own cash flow as well as banking facilities. This debt, off-set by the group’s cash and its “near cash” preference share investment of R200 million, represents net gearing of 27,1%, which is below the group’s medium-term objective of 40%.
Of this debt, the non-controlling interest loan by SBSA to the RCS Group of R478,3 million, together with the RCS Group’s external funding of R372,1 million, has no recourse to Foschini Limited. Accordingly, our net recourse borrowings amounts to R635,1 million which represents net recourse gearing of 11,6% (2009: 17,4%).
Taking into account the R804,5 million advanced as a loan to the RCS Group, the retail side of our business is totally ungeared.
The group’s fixed long-term borrowings of R800,0 million which were put in place as protection during the recent banking crisis, mature between May and November 2011.
Trade and other payables
Trade and other payables increased from R1 252,5 million to R1 293,8 million. 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 R289,6 million, most of which relates to the opening of new stores and refurbishments, as well as investment in IT systems. 60% of our capital expenditure amounting to R171,3 million relates to new stores. In addition to this, a fair portion of the group’s IT expenditure of R71,6 million also relates to new stores.
Due to our strategy of investing for the longer term, budgeted capital expenditure for 2011 is approximately R300 million, as we anticipate opening in the region of 100 new stores in the year ahead, increasing floor space by approximately 7%.
CASH FLOW
Cash flows from operating activities before working capital changes amounted to R2 237,5 million, an increase on the previous year’s R2 228,6 million. Cash generated by operations amounted to R1 696,1 million compared to R1 673,9 million in the previous year. The main working capital requirements during the year related to an increase in our retail debtors’ book of R423,0 million, as well as an increase in the RCS Group debtors’ book of R158,2 million.
The net cash outflow from investing activities amounted to R270,3 million all of which related to our investment in new stores (R289,6 million).
Total net borrowings decreased by R141,0 million during the year to R1 485,5 million.
Ronnie Stein
Financial Director
21 June 2010
