COMMENTARY
GROUP OVERVIEW
This financial year has been difficult and volatile with consumer spending worsening during the second half of the year, particularly in the mass middle market space. The significantly higher than projected unemployment figures have also had a negative impact on this sector.Although interest rates and inflation continued to fall, this did not translate into increased consumer spending, which remained under pressure.
Retail turnover increased by 6,4% to R8,6 billion. Gross margins for the year were down marginally by 0,2% on the previous year which was primarily due to Christmas trading being at the lower level of management expectations. 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.
In view of our strong balance sheet and future prospects, a final dividend of 170,0 cents per share has been declared. Accordingly dividends declared in respect of the full year amount to 288,0 cents per share.
In line with our strategy of investing for the longer term, the group continued to grow trading space in the second half by opening a further 41 stores. 100 stores were therefore opened for the full year, whilst 12 stores were closed. At the year-end the group was trading out of 1 627 stores, with an increase in trading area of 8,1% compared to the previous year.
MERCHANDISE CATEGORIES
Total sales have grown by 6,4% over the previous year with growths in the various merchandise categories as follows:| – | Clothing | 8,3% |
| – | Jewellery | (1,2%) |
| – | Cosmetics | 12,8% |
| – | Homewares and furniture | 15,7% |
| – | Cellphones | (7,2%) |
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. Cosmetics continued to perform satisfactorily. Homewares and furniture performed adequately in a competitive market. Cellphone sales improved substantially in the second half as the supply issues experienced in the first half improved.
TRADING DIVISIONS
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 were as follows:| Retail | |||
| Number | turnover | % | |
| of 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 |
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%. The repositioning and turnaround strategy of Foschini stores is taking longer than initially anticipated, but significant progress has been made, which 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 World Cup 2010 only a few weeks away. It has spared no effort to prepare itself for this historic event. The three largest organisations active internationally in sportswear, Nike, Adidas and Puma have officially recognised Totalsports as a preferred partner for the 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.
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.
Our group’s shareholding in the RCS Group is 55% with the balance being held by The Standard Bank of South Africa Limited.
PROSPECTS
Retail turnover for the first eight weeks of the new financial year has been encouraging, with an upward shift in consumer spending.The 2010 World Cup which gets under way in a few weeks’ time should create more positive consumer sentiment, which together with the reduced interest rate and inflationary environment should improve consumer spending.
However the effect of the increase in the cost of electricity on the disposable income of our consumers is unknown. In addition, unemployment and associated factors in our economy remain as a potential risk, as do the ongoing problems in international markets.
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 opening in the region of 100 new stores in the year ahead, which will increase trading space by approximately 7%.
PREFERENCE DIVIDEND ANNOUNCEMENT
Dividend No. 147 of 3,25% (6,5 cents per share) in respect of the six months ending 30 September 2010 has been declared, payable on Monday, 27 September 2010 to holders of 6,5% preference shares recorded in the books of the company at the close of business on Thursday, 23 September 2010.The last day to trade (“cum” the dividend) in order to participate in the dividend will be Thursday, 16 September 2010. Foschini Limited preference shares will commence trading “ex” the dividend from the commencement of business on Friday, 17 September 2010 and the record date, as indicated, will be Thursday, 23 September 2010.
Preference shareholders should take note that share certificates may not be dematerialised or rematerialised during the period Friday, 17 September 2010 to Thursday, 23 September 2010, both dates inclusive.
FINAL ORDINARY DIVIDEND ANNOUNCEMENT
The directors have declared a final ordinary dividend of 170,0 cents per ordinary share payable on Monday, 12 July 2010 to ordinary shareholders recorded in the books of the company at the close of business on Friday, 9 July 2010.The last day to trade (“cum” the dividend) in order to participate in the dividend will be Friday, 2 July 2010. Foschini Limited ordinary shares will commence trading “ex” the dividend from the commencement of business on Monday, 5 July 2010 and the record date, as indicated, will be Friday, 9 July 2010.
Ordinary shareholders should take note that share certificates may not be dematerialised or rematerialised during the period Monday, 5 July 2010 to Friday, 9 July 2010, both dates inclusive.
Signed on behalf of the Board.
| D M Nurek | A D Murray | |
| Chairman | CEO | |
| Cape Town | ||
| 27 May 2010 | ||
|
Executive directors: |
Registration number: 1937/009504/06 | |
| A D Murray, R Stein, P S Meiring | Share codes: FOS – FOSP | |
| Non-executive directors: | ISIN: ZAE000031019 – ZAE000031027 | |
| D M Nurek (Chairman), Prof F Abrahams, | Transfer secretaries: | |
| S E Abrahams, W V Cuba, K N Dhlomo, M Lewis, | Computershare Investor Services (Proprietary) | |
|
D M Polak, N V Simamane |
Limited, Ground Floor, 70 Marshall Street, | |
| Company secretary: D Sheard | Johannesburg 2001 | |
| Registered office: | Sponsor: UBS South Africa (Proprietary) Limited | |
| Stanley Lewis Centre, 340 Voortrekker Road, | ||
| Parow East 7500 |