| Tue 10 Apr 2001, 0:00 | | Rag - Interim Report For The Half Year Ended 31 De |
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Retail apparel group
(Registration number 1946/0021937/06)
(Incorporated in the Republic of South Africa)
("Rag")
Interim report for the half year ended 31 December 2000
- R410 million recapitalisation
- Gearing to improve from 332% to 36%
- New executive team appointed
- Changes to business model being effected
- Radical transformation of credit policies
- New marketing strategies
Consolidated Income Statement
Unaudited Unaudited Audited
Dec 00 Dec 99 June 00
R000s R000s R000s
Turnover 682 606 734 571 1 230 771
Operating income before interest 24 335 67 649 59 428
Net operating interest paid 40 574 44 528 84 391
(Loss)/Income before taxation, non-trading item
and abnormal items (16 239) 23 121 (24 963)
Non-trading items 13 604 - 2 100
Abnormal items - 94 927 209 927
Loss before taxation (29 843) (71 806) (236 990)
Taxation 23 159 5 152 7 283
Loss after taxation (53 002) (76 958) (244 273)
Loss attributable to outside
shareholder (586) (289) (701)
Loss attributable to ordinary
shareholders (52 416) (76 669) (243 572)
Determination of earnings from normal operations:
Loss attributable to ordinary
shareholders (52 416) (76 669) (243 572)
Abnormal items - 94 927 209 927
Non-trading items 13 604 - 2 100
Headline (loss)/earnings from normal
operations (38 812) 18 258 (31 545)
Consolidated Balance Sheet
Unaudited Unaudited Audited
Dec 00 Dec 99 June 00
R000s R000s R000s
Non-current assets 105 547 122 885 122 617
Current assets 925 274 1 020 957 862 142
Total assets 1 030 821 1 143 842 984 759
Capital and reserves 171 357 387 073 220 805
Outside shareholders' interest 940 1 938 1 526
Interest bearing debt 571 599 506 764 558 940
Current liabilities 286 925 248 067 203 488
Total equity and liabilities 1 030 821 1 143 842 984 759
Consolidated Summarised Cash Flow Statement
Unaudited Unaudited Audited
Dec 00 Dec 99 June 00
R000s R000s R000s
Net cash (utilised by)/generated from
operating activities (16 300) 44 154 7 913
Cash utilised in investing activities (7 270) (47 335) (57 595)
Net cash outflow before financing
activities (23 570) (3 181) (49 682)
Net increase in financing activities 15 041 21 212 26 956
(Decrease)/Increase in cash resources (8 529) 18 031 (22 726)
Consolidated Statement of Changes in Ordinary
Shareholders' Funds
Unaudited Unaudited Audited
Dec 00 Dec 99 June 00
R000s R000s R000s
Capital and reserves at the beginning
of the period 220 805 464 144 464 144
Movement in non-distributable reserves
Foreign translation reserve 2 968 (402) 233
Movement in distributable reserve
Net loss for the period (52 416) (76 669) (243 572)
Capital and reserves at the end
of the period 171 357 387 073 220 805
Salient Features
Unaudited Unaudited Audited
Dec 00 Dec 99 June 00
(Loss)/Earnings per share (cents)
Undiluted (26,2) (38,3) (121,8)
Diluted (25,4) (37,2) (118,2)
Normal operations - undiluted (19,4) 9,1 (15,8)
Normal operations - diluted (18,8) 8,9 (15,3)
Ordinary shares in issue (000s)
Undiluted 200 000 200 000 200 000
Diluted 206 138 206 141 206 138
Dividends per share (cents) Nil Nil Nil
Interest bearing debt less
cash/permanent capital (%) 331,8 130,3 251,4
Net asset value per share (cents)
Undiluted 86,1 194,5 111,2
Diluted 83,6 188,7 107,9
Depreciation (R000s) 11 432 11 967 23 744
Capital expenditure (R000s) 7 437 6 912 13 232
Capital commitments (R000s) 7 563 382 15 746
Contracted - - 4 546
Authorised but not contracted 7 563 382 11 200
Directors' valuation of unlisted
investments (R000s) - 13 078 13 078
INTRODUCTION
The RAG group retails fashionable quality clothing, footwear, jewellery and
other items of apparel. The clothing chains serve segments of the LSM 4 to LSM
7 market, while the jewellery business concentrates on the upper sector of the
LSM 8 group. The RAG business trades out of separate chains, namely Arthur
Kaplan Jewellers, Guys and Girls, Patrick Daniel, Bee Gee and Smart Centre.
There are 341 stores, spread throughout Southern Africa as follows: RSA (265),
Botswana (34), Swaziland (11), Lesotho (7), Namibia (15), Zambia (8) and
Mozambique (1).
COMMENTS ON RESULTS
Income Statement
During the period the company traded at levels below expectations, and produced
disappointing results. Trying conditions in the retail sector continued with
consumer spending patterns showing a marked shift towards cellular phones, the
lottery and gambling. Sharply increased transport costs also had a negative
effect on retail sales.
For the six month period ending 31 December 2000, the group recorded a loss of
R16,2 million before abnormal and non-trading items and taxation. Whilst this
represents a deterioration on the previous year, comparisons are difficult
because of a revised debtors provisioning policy only becoming operational
after the December 1999 half year period.
Turnover at R682,6 million for the six month period decreased 7% against the
comparative prior period. This arose mainly from the closure of 28 stores, the
prevailing trading conditions and merchandise deficiencies. The Arthur Kaplan
Jewellers and Guys and Girls chains traded well during the period. Operating
income declined due to the lower turnover, the effect that the reduced
allowable interest rate had on finance charges earned and the revised debtors
provisioning policy.
The tax charge for the period was R23 million. R4 million of this was in
respect of RAG's foreign entities, while the balance of R19 million arose from
the South African Revenue Services disallowing prior benefits taken in
connection with bad debts purchased from Smart Centre at the time RAG was
established. This is a non-recurring expense.
The non-trading item of R13,6 million comprises two elements. The first is a
R13,1 million impairment of the preference share investment. This investment
houses the securitised debt and the impairment recognises that the full extent
of the previously anticipated tax benefit will not materialise. The other
element affecting the non-trading line is a reduced amount owed by the RAG
Share Incentive Trust to RAG arising from the diminution in the quoted share
price of RAG shares.
The trading results translate into an undiluted loss (before non-trading and
abnormal items) of 19,4 cents per share (December 1999: profit of 9,1 cents).
After adjusting for abnormal and non-trading items the group's undiluted loss
is 26,2 cents per share (December 1999: loss of 38,3 cents) and a fully diluted
loss of 25,4 cents per share (December 1999: a loss of 37,2 cents).
Balance Sheet
Debtors
The major increase in current assets, viewed against the June 2000 figures,
arose from an increase of R64 million in trade debtors, affected largely by the
cyclical increase in credit sales over the Christmas period.
The company was disappointed that it did not improve collection rates during
the period, relative to prior year levels. This was attributable to the trying
conditions in the retail sector, and to inefficiencies in the credit collection
process. The transformation project, described below, will ensure that
improvement in collection rates is addressed as a priority.
Stock
Stock holding of R217 million at the end of December 2000, was 14% and 18%
above the levels at the June 2000 and the December 1999 reporting periods
respectively. This arose mainly because the Bee Gee and Smart Centre chains
were overstocked after not meeting forecast sales targets in December. The AKJ
chain also ended the period overstocked.
Cash Flow
Cash flow generated by operations amounted to R75 million, which was offset by
an increase of R46 million in working capital, an interest charge of R41
million and taxation paid in foreign subsidiaries of R4 million. This resulted
in an operational cash outflow of R16,3 million. The major component of this
cash outflow was the working capital increase, arising from the cyclical nature
of the business. Debtors increased by R64 million over the June 2000 balance
but dropped R117 million on the comparative prior period figure.
The R7,2 million cash utilised in investing activities went mainly towards
capital expenditure incurred in refurbishing AKJ , Bee Gee and Smart Centre
stores.
Gearing
The gearing level rose to 332%. This unacceptably high level, and the need to
address the operating funding requirements of the business, are addressed in
more detail in the section titled "Recapitalisation".
Transformation Initiatives
In order to ensure the future viability of the business the Board, and major
shareholders of RAG, recognised the need to transform the business
comprehensively. A number of key aspects of the business that have caused the
severe decline in the group's performance were identified. These include a lack
of clarity in defining the company's customer target markets, internal brand
confusion, a poor merchandise range as well as business expenses exceeding
retail benchmark standards. Credit granting has been at higher-than-acceptable
risk levels, resulting in repeated abnormal bad debt write-offs over a two year
period, and credit collection mechanisms have operated at below acceptable
standards. The business has not progressed sufficiently in consolidating stores
competing in the same trading areas.
These shortcomings are being addressed in a decisive and vigorous way through
the actions described below.
- The company appointed a new Chief Executive Officer - Dick Greeff - in
January 2001.
- The RAG executive team has been reconstituted and new, effective strategic
initiatives have been put in place. The following executives have been
appointed to drive those initiatives:
Dick Greeff Chief Executive Officer
Malcolm Hyland Finance Director
Kim Muller Chain Managing Director
Robert Maydon Credit Consultant
Wendy Banks Human Resources Director
Rodney Ross Munro Buying Executive
Paul Richardson Planning Executive
Lawrence Twigg Credit Director
- Radical changes have been made to credit policies and practices and the
business is working towards the achievement of world class credit retailing
standards. A number of short term actions have already been taken including the
outsourcing of the credit collection process to Howard Blake and Associates and
to Munnik, Basson and Dagama. These actions will improve the credit collection
rates and reduce the bad debt ratio.
- Through a number of structural changes, overheads will be reduced to levels
well within accepted retail norms.
- Merchandising focus and resources are in the process of being improved.
This includes the introduction of a sustainable core value programme that will
ensure that emphasis is placed on meeting the needs of customers.
- Pro-active Marketing has been employed to undertake an extensive customer
service survey aimed at achieving the company's stated objective of 'Giving the
customer what she or he wants'.
- A strategic alliance has been entered into with Acuity to greatly improve
the returns on marketing spend.
Recapitalisation
Readers are requested to refer to the separate announcement dealing with the
McCarthy Retail Limited ('McRetail') restructuring. Set out below is a
pro-forma balance sheet of RAG showing the effect of the R210 million RAG
rights offer as proposed in that announcement. The "Pro-forma after rights
issue" balance sheet set out below has been prepared based on the assumption
that R210 million of long-term loans from McRetail will be repaid from the
proceeds of the rights issue, and takes cognisance of the rights issue that was
completed in February 2001, which resulted in R200 million of long-term loans
being converted into variable rate compulsorily convertible secured debentures.
Pro-forma balance sheet
Before rights Pro-forma after
issue rights issue
Unaudited Unaudited
Dec 00 Dec 00
Consolidated balance sheet R000s R000s
Non-current assets 105 547 105 547
Current assets 925 274 925 274
Total assets 1 030 821 1 030 821
Capital and reserves 171 357 547 435
Outside shareholders' interest 940 940
Interest bearing debt 571 599 195 521
Current liabilities 286 925 286 925
Total equity and liabilities 1 030 821 1 030 821
Debt: Equity ratio (including
impact of AC125) 331,8% 35,7%
The proposed recapitalisation will require the approval of shareholders. A
circular will be sent to shareholders in due course to furnish shareholders
with all the relevant information relating to the proposal and to convene a
general meeting to enable shareholders to consider and vote on the resolutions
necessary to implement the recapitalisation.
Other Developments
In January 2001 the decision was taken by the Board of Directors to sell a 50%
share of Arthur Kaplan Jewellers for R25 million. The sale of AKJ will allow
the new RAG management team to focus on the transformation of the core RAG
clothing business, while continuing to receive a growing profit stream from
AKJ. The R25 million received from the sale will provide RAG with funds to
accelerate its transformation process.
Prospects
The local trading environment will probably remain difficult in the short term.
However, the transformation and recapitalisation processes, the energies and
skills of the new management team and a remotivated staff, together with the
clearly defined strategic action plan, will position the group for a
turnaround. The Board has targeted a period of 18 months for the achievement of
performance levels that will inspire the confidence of all stakeholders. RAG
faces the future secure in the knowledge that it has a viable business model
and a team equal to the challenge of competing successfully and profitably in
its chosen market sectors.
The Board's special thanks go to all RAG staff who have continued to work with
dedication and passion throughout the restructuring process and to suppliers
for their ongoing support.
This report is in compliance with generally accepted accounting practises.
For and on behalf of the Board
Brand Pretorius Dick Greeff
Chairman Chief Executive Officer
10 April 2001
Non-executive Directors: Brand Pretorius (Chairman), Eugene Roden, Roy
Parkhurst, Tony Cotterell, Des Scott, Sean McCarthy, Justin Divaris Executive
Directors: Richard Greeff (Chief Executive Officer), Malcolm Hyland, Wendy
Banks, Robert Maydon, Kim Muller
Company Secretary and Registered Office: AW Alison, Retail Apparel Group
Limited, 203 North Ridge Road, Durban 4001
Transfer Secretary: Mercantile Registrars Limited, PO Box 1053, Johannesburg
2000 Auditors: Deloitte & Touche
