| Tue 12 Nov 2002, 16:31 | | Edgars Consolidated Stores Limited - Interim Repor |
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Edgars Consolidated Stores Limited - Interim Report Six Months To September
Release Date: 12/11/2002 16:00:16 Code(s): ECO
Edgars Consolidated Stores Limited - Interim Report Six Months To September
2002
Edgars Consolidated Stores Limited
"EDCON"
(Registration No : 1946/022751/06)
Incorporated in the Republic of South Africa
Share Code : ECO ISIN number : ZAE000018388
INTERIM REPORT SIX MONTHS TO SEPTEMBER 2002
SALIENT FEATURES
COMPARABLE STORE SALES
rise by 17%
HEADLINE EARNINGS PER SHARE UP
219% at a record 290 cents per share
RECORD INTERIM DIVIDEND
123 cents per share compares with 36 cents last year
SUCCESSFUL SECURITISATION OF DEBTORS BOOK INCREASES
CASH BALANCES TO R750 MILLION
NEW BUSINESSES ACQUIRED
(RAG, SUPER MART AND CNA)
COMMENT
THE RETAIL ENVIRONMENT
Against the background of considerable uncertainty in global markets, the
South African economy has displayed remarkable resilience during the six
months under review. Personal taxation cuts announced by the Minister of
Finance in the past three years and positive economic growth have boosted
consumer spending. This has been achieved in spite of higher domestic
inflation and local interest rates increasing beyond expectation, as the
effects of the weaker Rand permeated the economy.
The upturn in the first quarter of calendar 2002 gained momentum, and based
on statistics provided by the Retailers` Liaison Committee, national
clothing, footwear and textile (CFT) sales have risen by 19% in the past six
months, while space occupied by clothing retailers has also increased. The
pace of sales growth has accelerated, particularly in footwear and
childrenswear.
GROUP RESULTS
Further meaningful benefits from the turnaround strategies, implemented by
management over the past three years, have been realised in these financial
results.
The recovery, which commenced last year, continued into the current period
and is highlighted by Edcon achieving its highest ever interim headline
earnings per share of 290c - 219% up on earnings for the comparable six month
period last year.
Encouraging retail sales growth of 13% was achieved with 4% less retail
space. Comparable store sales rose by some 17%. Focused merchandising,
efficient supply chain management and lower markdowns contributed towards a
significant improvement in the gross profit margin from 35,9% to 38,3%.
The Edgars chain increased its CFT turnover by 16% and cellular sales by 32%,
despite operating within 3% less space and with 31 fewer facias. Trading
profits improved by 90%, demonstrating the effectiveness of Edgars` focus on
appropriate and well priced merchandise, disciplined cost management and high
levels of customer service. Particularly pleasing has been the double digit
performance of softlines and active footwear and apparel. These businesses in
Edgars contribute 39% of total revenue reported for Edcon. Most notable was
that Starting Block, ladies and kids apparel achieved turnover growths in
excess of 20% and gross profit growths of over 30%. Enhanced merchandise
management and the benefits of Retek, the Group`s new merchandise system, are
evidenced in the marked improvement in Edgars` stock turn from 3,5 times last
year to 4,4 times.
United Retail, incorporating Jet, Sales House, Cuthberts and Smiley`s
Wearhouse, is beginning to realise the benefits of restructuring. The
business delivered a 7% increase in CFT sales with 5% less trading space, and
this, combined with controlled store expenses and focused inventory
management, has contributed to the 23% rise in trading profit. The chain`s
progressive improvement, particularly over the last three months, bodes well
for a strong performance during the vital December trading period. Of
significance has been its ability to achieve volume sales growth out of stock
holdings some 25% below those of last year. In spite of United Retail`s
decision to sell airtime for cash only, the turnover in the cellular division
matched that of the comparative period last year.
The Group`s commitment to sustainable growth is reflected in substantially
higher expenditure on systems and information technology, included in other
operating costs. The negligible rise in store costs reflects the efficacy of
continuing expense management disciplines within the stores. Consequently,
retail trading profit increased by 70%.
A notable achievement has been the reduction in the total cost of financing
from R73 million last year to R7 million. This reflects a lower bad debt
experience, arising from ongoing improvements in the quality of the debtors
book (86% of the accounts under administration are now current), coupled with
the recognition of a R36 million gain from better than anticipated
collections on the debtors` book purchased from the Retail Apparel Group
(RAG). This non-recurring profit has been excluded from headline earnings.
The Financial Services division, in its second full year of operation, more
than doubled its contribution to R45 million. To facilitate an understanding
of the separate trading and credit granting businesses, the format of the
Group income statement has been changed and additional disclosure on the cost
of financing has been provided. The operating profit, after credit and
financial services, rose from 4% of sales last year to over 8% - well within
reach of the Group`s long-term target of 10%.
In terms of the Group`s dividend policy of covering dividends 2,6 times by
attributable earnings, the board has declared a record interim dividend of
123 cents, reflecting a 242% growth on last year`s interim dividend.
SECURITISATION
In the 2002 year-end results announcement and annual report, Edcon announced
its intention to securitise a significant portion of its receivables. The
securitisation transaction was completed in July 2002 and resulted in
OntheCards Investments (OtC) acquiring, on a non-recourse basis, certain
receivables from Edcon and Nedcor, which both previously financed these
accounts. The transaction unlocked value for Edcon shareholders and gave
Edcon access to a lower cost of funding via the capital markets. The net
proceeds of R798 million were utilised to repay debt and, accordingly, the
Group is now particularly well-positioned to continue pursuing future growth
opportunities.
OtC was funded by the issue of R1,9 billion of rated notes into the market
and by a subordinated of R370 million. The latter amount in fact represents
the full extent of Edcon`s risk on the debtors sold. Edcon remains the
service provider to OtC and is responsible for the ongoing credit management
of the accounts owned by OtC.
ACQUISITIONS (Approved by the Competition Authorities)
RAG Receivables Book and Other Assets
Edcon acquired the rights to RAG`s retail brands, its debtors book, customer
database and a number of its retail stores for R243 million on 1 July 2002.
An estimated discount of R52 million has been recorded on the acquisition,
R36 million of which is recognised in these results for the six-months. The
purchase allows Edcon to leverage its debtor`s management competencies and to
strengthen its presence in Botswana.
Super Mart
This acquisition was effective 1 October 2002 and its integration into the
Edcon Group is now in progress. Super Mart is a discount general merchandise
retailer serving South Africa`s mass lower income market. The purchase price
consists of an initial payment of R70 million, together with contingency
payments to a maximum of R70 million, staggered over the next three years and
dependent on future earnings. Super Mart, a cash only business, strengthens
Edcon`s presence in the under-developed discount channel.
CNA
As announced in October 2002, Edcon acquired selected assets and assumed
certain liabilities of CNA for a net purchase price of approximately R130
million. CNA is a retailer of books, stationery, magazines, music,
interactive computer software and toys, with the highest market share in
South Africa of books and magazines. Their product range complements Edcon`s
current offerings and Edcon believes its strengths in merchandising and
logistics management can turn around CNA`s recent disappointing performance.
CASH FLOWS AND FINANCIAL POSITION
The quality of Edcon`s earnings is demonstrated by a significant increase in
attributable cash flow per share to 935 cents, more than double that of the
previous year. Continued disciplined inventory management and increased
profitability, combined with efficient collections, contributed to a dramatic
increase in cash generated from operating activities. The proceeds from the
securitisation transaction allow the Group to reduce its interest bearing
debt and to fund the acquisitions mentioned above. The Group`s policy of
unlocking excess capital continued in the current period and a further 1,1
million shares were bought back for R45 million and cancelled. Edcon`s
financial position is now exceptionally strong, with cash and cash
equivalents, net of interest bearing debt, at R545 million. Current borrowing
facilities available for utilisation are R1,1 billion.
CORPORATE GOVERNANCE
The Group, at all levels, subscribes to the values of good corporate
governance and is committed to applying the principles of the second King
Report and the JSE Securities Exchange South Africa requirements. It is also
determined to conduct business with discipline, integrity, transparency and
social responsibility.
PROSPECTS
High interest rates and double digit inflation will dampen consumer spending
somewhat in the months ahead. Nevertheless, the board is of the opinion that
the current positive momentum in the market should continue and that this
will buoy CFT sales through the vitally important festive season. Based on
this assumption, and with the turnaround in Edgars and United Retail now
complete, headline earnings per share for the full year could exceed previous
record earnings. Further benefits from the new acquisitions are expected to
become evident in the next financial year.
For and on behalf of the board
W S MacFarlane S M Ross
Chairman Chief Executive Officer
INCOME STATEMENT
2002 2001 2002
26 weeks 26 weeks 52 weeks
September September Change March
Rm Rm % Rm
(unaudited) (unaudited) (audited)
Revenue - retail sales 3 478,3 3 087,0 13 6 709,8
Cost of sales 2 147,7 1 978,8 4 264,1
Gross profit 1 330,6 1 108,2 2 445,7
Store costs 674,3 669,2 1 381,1
Other operating costs 397,3 287,1 680,8
Retail trading profit 259,0 151,9 70 383,8
Credit and financial services 25,8 (28,4) (55,2)
profit/(loss) (see note 2)
Operating profit before 284,8 123,5 328,6
financing costs
Net financing costs (see note 32,7 44,9 63,5
2)
Profit before taxation 252,1 78,6 265,1
Taxation 88,3 26,3 93,4
Earnings attributable to 163,8 52,3 213 171,7
ordinary shareholders
NOTES:
Note 1
The accounting policies adopted for the purpose of this report comply with
South African Statements of Generally Accepted Accounting Practice, AC127:
Interim Financial Reporting and International Accounting Standards and are
consistent with those of the previous year.
Note 2
Cost of credit (19,6) (49,1) (111,4)
Financial services profit 45,4 20,7 56,2
Credit and financial service 25,8 (28,4) (55,2)
profit/(loss) (per income
statement)
Notional financing costs (113,0) (101,5) (197,0)
allocated on own debtors*
Total cost of credit (87,2) (129,9) (252,2)
Net financing costs (per (32,7) (44,9) (63,5)
income statement)
Notional financing receipts 113,0 101,5 197,0
allocated
Group net financing receipts 80,3 56,6 133,5
Total cost of financing (6,9 ) (73,3) (118,7)
* Being a market related charge on the balance sheet assets within the credit
area.
Note 3
Dilution on possible exercise of share options
2002 2001 2002
26 weeks 26 weeks 52 weeks
September September Change March
Rm Rm % Rm
(unaudited) (unaudited) (audited)
Weighted average number of 51 158 57 198 56 667
ordinary shares in issue (000)
(reflecting share buy-backs)
Earnings per ordinary share
(cents):
- attributable earnings basis 320 91 252 303
- headline earnings basis 290 91 219 304
Diluted earnings per ordinary
share (cents) (note 3)
- attributable earnings basis 305 90 239 296
- headline earnings basis 276 90 207 297
Dividends per ordinary share
(cents) 123 36 242 117
Reconciliation of headline
earnings
Group attributable earnings 163,8 52,3 171,7
Plus: Loss on disposal of 7,9 - 0,6
fixed assets net of taxation
Less: Part recognition of (23,4) - -
discount on acquisition of RAG
receivables net of taxation
Headline earnings 148,3 52,3 172,3
Segmental analysis
Retail sales
Clothing, Footwear and Textiles
- Edgars
2 134,1 1 846,7 16 3 939,4
- United Retail 1 115,3 1 038,2 7 2 339,0
3 249,4 2 884,9 13 6 278,4
Cellular products
- Edgars 112,2 84,9 32 185,8
- United Retail 116,7 117,2 - 245,6
228,9 202,1 13 431,4
Total retail sales 3 478,3 3 087,0 13 6 709,8
Retail trading profit
- Edgars 208,9 109,9 296,4
- United Retail 44,9 36,5 115,5
- Other 5,2 5,5 (28,1)
259,0 151,9 70 383,8
September September March
2002 2001 2002
Retail space (m2)
- Edgars 382 127 395 115 391 566
- United Retail 285 598 300 593 289 495
667 725 695 708 (4) 681 061
No. of facias 152 183 166
- Edgars
- United Retail 571 456 557
723 639 723
CASH FLOW STATEMENT
2002
26 weeks 26 weeks 52 weeks
September September March
Rm Rm Rm
(unaudited (unaudited) (audited)
)
Cash retained from operating
activities
Operating profit 284,8 123,5 328,6
Depreciation and amortisation 98,3 96,0 198,7
Other non-cash items (23,6) 0,6 2,7
Cash "EBITDA" 359,5 220,1 530,0
Reduction in working capital 183,7 97,9 185,7
Inventories 53,8 44,6 180,9
Accounts receivable and prepayments (162,1) (43,3) (43,9)
Accounts payable 292,0 96,6 48,7
Cash generated from operating 543,2 318,0 715,7
activities
Net financing costs paid (32,7) (44,9) (63,5)
Taxation paid (32,1) (13,9) (40,0)
Cash inflow from operations 478,4 259,2 612,2
Dividends paid (42,0) (36,8) (57,2)
Net cash retained 436,4 222,4 555,0
Cash generated from/(utilised in)
investment activities
Increase in property, plant and (29,5) (77,4) (129,0)
equipment
Acquisition of RAG assets (229,1) - -
Net proceeds of securitisation 798,3 - -
Purchase of FNB/Jet branded book (27,0) - -
Other (5,6) (0,9) (30,8)
Net cash generated/(invested) 507,1 (78,3) (159,8)
Cash effects of financing activities
Decrease in shareholder funding (44,6) (12,0) (141,5)
Decrease in interest bearing debt (365,8) (135,2) (238,7)
Net cash outflow from financing (410,4) (147,2) (380,2)
activities
Increase/(decrease) in cash and cash 533,1 (3,1) 15,0
equivalents
Cash and cash equivalents at the 215,5 180,5 180,5
beginning of the period
Currency adjustments 1,0 7,9 20,0
Cash and cash equivalents at the end 749,6 185,3 215,5
of the period
Attributable cash flow per share 935 449 1 080
(cents)
BALANCE SHEET
2002 2001 2002
September September March
Rm Rm Rm
(unaudited) (unaudited (audited)
)
ASSETS
Non-current assets
Properties, fixtures, equipment 760,0 733,2 825,8
and vehicles
Trademarks - 1,8 -
Negative goodwill (16,0) - -
Investments 413,9 13,9 13,9
Other 81,6 46,1 76,0
Total non-current assets 1 239,5 795,0 915,7
Current assets
Inventories 938,7 1 129,7 993,2
Accounts receivable and 1 268,1 2 072,7 2 026,8
prepayments
Cash and cash equivalents 749,6 185,3 215,5
Total current assets 2 956,4 3 387,7 3 235,5
Total assets 4 195,9 4 182,7 4 151,2
EQUITY AND LIABILITIES
Capital and reserves
Ordinary shareholders` equity 2 379,3 2 308,6 2 296,8
Minority interest 0,3 0,4 0,6
Total shareholders` equity 2 379,6 2 309,0 2 297,4
Interest bearing debt 204,7 676,5 575,0
2 584,3 2 985,5 2 872,4
Interest free liabilities
Current 1 431,2 1 041,2 1 104,3
Deferred taxation 180,4 156,0 174,5
Total interest free liabilities 1 611,6 1 197,2 1 278,8
Total equity and liabilities 4 195,9 4 182,7 4 151,2
Gearing ratios
Net interest bearing debt/ (0,23) 0,21 0,16
total shareholders` funds
Total liabilities/ 0,76 0,81 0,81
total shareholders` funds
Future capital expenditure Rm Rm Rm
Contracted 18,3 2,0 6,5
Authorised but not contracted 107,0 80,4 151,0
Net equity per ordinary share 4 692 4 019 4 431
(cents)
STATEMENT OF CHANGES IN ORDINARY SHAREHOLDERS` EQUITY
2002 2001 2002
September September March
Rm Rm Rm
(unaudited) (unaudite (audited)
d)
Ordinary shareholders` equity at
the beginning of the year 2 296,8 2 305,3 2 305,3
Share capital
Share buy-back (44,6) (12,0) (141,5)
Movements in distributable
reserves
Earnings attributable to ordinary 163,8 52,3 171,7
shareholders
Ordinary dividends (42,0) (36,8) (57,2)
Movements in non-distributable
reserves
Foreign currency translation 1,0 (6,9) 7,8
reserve
Other 4,3 6,7 10,7
Ordinary shareholders` equity at 2 379,3 2 308,6 2 296,8
the end of the period
DIRECTORS
Non-executive directors
WS MacFarlane (Chairman)
AJ Aaron
TN Eboka
ZB Ebrahim
JDMG Koolen*
PL Wilmot
*Netherlands
Executive directors
SM Ross** (Chief Executive)
AVA Boshoff
MR Bower
Dr U Ferndale
JL Spotts**
**USA
Group Secretary
DJ Viviers
Transfer secretaries
Computershare Investor Services Limited
70 Marshall Street, Johannesburg 2001
PO Box 61051, Marshalltown, 2107
Fax : (011) 370-5487
Telephone : (011) 370-5000
Registered office
Edgars Consolidated Stores Limited
Edgardale, Press Avenue, Crown Mines, Johannesburg 2092
PO Box 100, Crown Mines 2025
Fax : (011) 837-5019
Telephone : (011) 495-6000
Auditors
Ernst & Young
Sponsors
Cazenove South Africa (Pty) Limited
First Floor, Moorgate
Dunkeld Park
6 North Road, Dunkeld West
PO Box 412468
Craighall
2024
Telephone (011) 280 7900
These results can be viewed on the Internet at http://www.edcon.co.za
INTERIM CASH DIVIDEND
Notice is hereby given that the interim ordinary dividend (No.112) of 123
cents per share in respect of the 26 weeks ended 28 September 2002 has been
declared payable to the holders of ordinary shares appearing in the records
of the company at the close of business on Friday, 27 December 2002. The
dividend is declared payable in the currency of the Republic of South Africa
and in compliance with the requirements of STRATE, the following dates are
applicable:
Last day to trade cum the dividend Wednesday,18 December 2002
Date trading commences ex the dividend Thursday,19 December 2002
Record date Friday,27 December 2002
Date of payment Monday, 30 December 2002
Share certificates may not be dematerialised or rematerialised between
Thursday, 19 December 2002 and Friday, 27 December 2002, both dates
inclusive.
On behalf of the board
D.J. Viviers
Group Secretary
Johannesburg
12 November 2002
Date: 12/11/2002 04:00:00 PM Produced by the JSE SENS Department
