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ECO
ECO
Edcon - Unaudited Interim Results For The Six Months To 30 September 2006
and dividend declaration
EDGARS CONSOLIDATED STORES LIMITED
"EDCON"
(Reg. No. 1946/022751/06)
(Incorporated in the Republic of South Africa)
ISIN CODE : ZAE000068649
SHARE CODE
JSE : ECO
NSX : ECN
UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2006
SALIENT FEATURES
- Retail sales growth of 13%
- Diluted headline earnings per share up 20%
- Dividend per share up 15%
- Cash "EBITDA" growth of 16%
- Inventory growth of only 3%
- Gearing of only 5%
THE RETAIL ENVIRONMENT
The retail sector continued to benefit from strong consumer spending during
the six months to 30 September 2006, albeit at a rate slower than the
exceptional pace seen in recent reporting periods. Consumer confidence has
declined marginally, but persisted at a level close to record highs.
Statistics provided by the Retailers" Liaison Committee reveal that
national clothing, footwear and textile (CFT) sales increased by 13,6% in
the past six months.
The two interest rate increases of 50 basis points each - one in June and
the other in August - had a negligible effect on the retail environment.
Despite the rises, and aided by a surprisingly unchanged usury rate,
interest rates are still at historically low levels and consumers" debt
servicing costs remain relatively low, compared to income levels. The tax
cuts announced earlier in the year, an increasing number of welfare grants,
the impact of a reported rise in employment numbers and a gain in the
momentum of broad-based black economic empowerment initiatives are further
positive factors, although partially negated by the steep increase in fuel
prices.
What is, however, becoming a matter of concern is the growing level of
indebtedness of South African consumers. The responsible and prudent
management of consumer credit presents a constant and very real challenge
to retailers in this situation.
GROUP RESULTS
In line with national CFT growth, total Group sales during the period
increased by 13% overall. Of greater significance is a higher trading
profit increase of 17%, despite the growth in retail space. Other key
performance indicators speak for themselves: the gross profit margin
improving from 38,1% to 38,6%; stockturn up from 5,9 to 6,0 times;
operating margins improving to 11,5% against the previous year"s 11,3%.
These have all contributed to the generation of additional value for
shareowners and the strong 20% rise in diluted headline earnings per share,
although at a slower rate than the remarkable 28% reported in the first
half of the previous year, is highly satisfactory.
The Department Stores Division - incorporating Edgars and CNA - reaped the
benefits of its focused merchandise strategy, disciplined cost management
and productivity enhancements, increasing trading profits by an excellent
27%. Sales at the flagship Edgars chain increased by 14%, with selling
price inflation of only 1%. The gross profit margin improved from 41,1% to
41,6%, as the chain benefited from lower input costs through a higher
volume order strategy. The sterling performers in the six-month period
were the childrenswear lines, which reported sales more than 20% higher
than last year, reflecting the focus on a quality product offering and well-
balanced pricing strategies. Menswear and cosmetics also recorded
noteworthy performances. The chain achieved a stockturn of 5,6 times
compared with last year"s 5,4 times.
CNA made great strides during the period under review. Sales climbed an
outstanding 29%, helped in large part by strong customer support for the
interactive, stationery and music product lines. The chain has begun to
excel under Edcon"s stewardship and is deriving significant benefit from
the Group"s merchandise systems and processes. This is further highlighted
by the improvement in stockturn from 3,5 to 4,1 times. As anticipated in
the 2006 year-end report, the gross profit margin improved to 33,4% from
31,1% last year.
The Discount Division recorded only modest growth, after experiencing some
difficulties during the six months under review. Sales were 12% higher
than the corresponding period last year, with selling price inflation at
1%. In May 2006, shareholders were alerted to issues relating to stock
imbalances and assortment problems in ladieswear and footwear. These
issues took longer to redress than anticipated. As a consequence, the
chain"s stockturn dropped to 7,2 times from 7,8 last year. Remedial action
has been taken to clear slow moving stock leaving the Discount Division
primed for growth. Notwithstanding this situation, the Discount Division
delivered a creditable 13% increase in trading profits. The gross profit
margin at 35,6% was in line with last year"s 35,7%, despite the issues
outlined above and the increase in the contribution of the lower margin Jet
Mart merchandise to the overall sales mix.
Management"s success in its focus on productivity and cost containment is
underscored by the reduction in store costs as a percentage of sales from
17,3% to 17,0%. A rise in other operating costs was necessary to increase
capacity in corporate departments to cope with the enlarged Group. The
Income Statement includes a R48 million cost related to the staff
empowerment transaction (last year R47 million).
During August 2006, Edcon announced plans to sell 51% of its manufacturing
operation to a consortium of management and staff. Consultation with all
affected stakeholders is in progress, with the effective finalisation date
expected in the second half of the financial year.
As expected, profits in the Credit and Financial Services Division declined
and at R113 million were 3% below last year. The wider penetration of
insurance products amongst the customer base continues to drive the
expansion of the financial services business which was up R17 million over
the previous year. This effectively offsets the rising cost of credit as a
result of the anticipated higher level of net bad debt write-offs.
Detailed profitability calculations confirm that the new accounts
comfortably absorb a higher level of net bad debt write-offs and have not
only contributed meaningfully to Group profitability since their opening
but will continue to boost earnings in the years ahead. The overall
condition of the book remains good with accounts that are current and able
to purchase at 84%, being down slightly from the 85% achieved in March
2006.
Net financing costs were boosted by a R20 million foreign exchange gain due
to the weaker Rand and its impact on foreign-denominated assets and foreign
exchange contracts.
CASH FLOWS AND FINANCIAL POSITION
The quality of Edcon"s earnings is underscored by the increase in cash
"EBITDA" of 16%. It is particularly pleasing to note that closing inventory
was only 3% higher than the same time last year. This was achieved despite
new store openings in the past twelve months.
The Group increased its number of active credit customers by approximately
19 000 over the past six months to 4,1 million accounts. Cash sales
accounted for 38% of total sales. Total debtors managed by the Credit
Division exceeded R8,1 billion, while collections remained strong. Edcon
has maintained its conservative policy relating to doubtful debts and has
provided adequately for write-off requirements. No debtors were sold to
the securitisation company during the period under review, unlike the
comparable period last year. It is anticipated that a further tranche of
debtors will be sold in the next six months. Further details will be
released in due course.
Capital expenditure included a R68 million investment in a new point-of-
sale system and the related hardware rollout. It is expected that the
project, which will have a meaningful impact on store efficiencies, should
take approximately two years to complete.
In addition, the Group has opened a net 24 new stores, equating to 32 000
square metres, during the period. These new stores, combined with store
refurbishments, resulted in investments in store fixtures of R164 million.
Edcon"s financial position remains exceptionally strong, with net interest-
bearing debt at R227 million, representing gearing of only 5%. Flexibility
is enhanced by the existence of R981 million in unutilised borrowing
facilities.
ACCOUNTING POLICIES AND COMPARATIVES
The interim financial statements have been prepared in accordance with the
South African Statements of Generally Accepted Accounting Practice,
International Financial Reporting Standards and the Listings Requirements
of JSE Limited. The accounting policies are consistent with those of the
previous year.
DIVIDEND
In terms of the Group"s policy of covering dividends approximately twice by
attributable earnings, the Board has declared an interim dividend of 71
cents, reflecting 15% growth on last year"s interim dividend.
CAUTIONARY ANNOUNCEMENT
In October 2006, the Board issued a cautionary announcement advising that
it had commenced discussions with a number of private equity investors
regarding a potential transaction to acquire the Company. Shareholders are
advised that these discussions are ongoing and that they must continue to
exercise caution in their dealings with the Company"s securities. Feedback
on progress will be given with the January 2007 quarterly trading update.
PROSPECTS
Consumer spending power and disposable incomes remain buoyant, despite the
tightening interest rate environment. Although the pace of growth in
spending is moderating, new job creation and real wage increases provide a
strong underpin to retail spending activity.
During the period under review, the Department of Trade and Industry
announced quotas on certain categories of clothing imports from China in an
effort to re-activate local manufacture. Despite a co-ordinated response
from the retail industry to Government, raising concerns about the
feasibility of the objective as well as the wide-reaching ramifications of
these restrictions, the quotas will be imposed from 1 January 2007, but
will have no impact on the current financial year. Edcon, like other
retailers, is currently engaged in sourcing forward orders to ensure
minimum disruption to the supply chain, and to protect the interests of
Edcon"s customers, employees and shareholders.
Robust consumer confidence combined with the Group"s merchandising
strengths, astute financial management and market leadership put it in a
strong position to continue to deliver further meaningful value to
shareholders for the year as a whole. Consequently, the Board remains
confident that the achievements of the first six months will continue for
the remainder of the current financial year.
For and on behalf of the Board
WS MacFarlane -Chairman -SM Ross -Chief Executive Officer
INTERIM DIVIDEND
Notice is hereby given that the interim ordinary dividend (No.120) of 71
cents per share in respect of the 26 weeks ended 30 September 2006, has
been declared payable to the holders of ordinary shares appearing in the
records of the Company at the close of business on Friday, 5 January 2007.
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 dividend Thursday,28 December 2006
Date trading commences ex dividend Friday, 29 December 2006
Record date Friday, 5 January 2007
Date of payment Monday, 8 January 2007
Shareholders may not dematerialise or rematerialise their shares between
Friday, 29 December 2006 and Friday, 5 January 2007, both dates inclusive.
On behalf of the Board
EA Bagley -Group Secretary
Johannesburg
14 November 2006
INCOME STATEMENTS
2006 Change 2006
26 weeks to % 52 weeks to
30 September 1 April
(unaudited) 2005 (audited)
Rm 26 weeks Rm
to
1 October
(unaudite
d)
Rm
Revenue - retail sales
8 302 7 350 13 16 316
Cost of sales 5 094 4 548 10 015
Gross profit 3 208 2 802 14 6 301
Store costs 1 412 1 268 2 724
Other operating costs 885 754 1 575
Trading profit 911 780 17 2 002
Cost of credit 75 54 158
Equity accounted 117 108
earnings of joint 254
venture
Operating profit 953 834 2 098
before financing costs
Net financing costs 4 21 24
Profit before taxation 957 813 18 2 074
Taxation 279 218 566
Earnings attributable 678 595 14 1 508
to ordinary
shareowners
Number of ordinary
shares (000)
in issue 502 038 484 348 489 825
weighted average 498 504 480 883 482 491
diluted weighted 515 539 514 022 515 391
average
Earnings per ordinary
share (cents)
attributable earnings 136 124 10 313
basis
headline earnings 136 117 16 307
basis
cash equivalent basis 160 143 12 375
Diluted earnings per
ordinary share (cents)
attributable earnings 132 116 14 293
basis
headline earnings 131 109 20 287
basis
Dividends declared per
ordinary share (cents) 71 62 15 162
Reconciliation of
headline earnings
Group attributable 678 595 1 508
earnings
Less:Profit on
disposal of property,
fixtures, equipment (2) - 5
and vehicles
Less: Discount on
acquisition of Topic (33) (33)
Taxation effect - - (1)
Headline earnings 676 562 20 1 479
SEGMENTAL/CHAIN
ANALYSIS
Retail sales
Edgars (incl.
Boardmans) 4 449 3 890 14 8 575
CNA 647 501 29 1 242
Department Stores 5 096 4 391 16 9 817
Division
Discount Division 3 206 2 873 12 6 411
Topic 86 88
8 302 7 350 13 16 316
Average retail space
(000m2)
Edgars
Edgars (incl.
Boardmans) 516 455 13 473
CNA 90 89 1 90
Department Stores 606 544 11 563
Division
Discount Division 448 382 17 400
Topic 20 14
1 054 946 11 977
Number of stores
Edgars (incl.
Boardmans) 246 205 240
CNA 195 190 192
Department Stores 441 395 432
Division
Discount Division 492 369 471
Topic 107 6
933 871 909
Gross profit
Edgars (incl.
Boardmans) 1 851 1 597 16 3 563
CNA 216 156 38 404
Department Stores 2 067 1 753 18 3 967
Division
Discount Division 1 141 1 026 11 2 314
Topic 23 20
3 208 2 802 14 6 301
Trading profit
Department Stores 627 492 27 1 299
Division
Discount Division 292 259 13 672
Manufacturing (7) (3) (1)
Amortisation of (1) (1) (1)
intangibles
Discount on
acquisition of Topic 33 33
911 780 17 2 002
Analysis of credit and
financial services
profit
Equity accounted
earnings of joint 117 108 254
venture after taxation
Taxation of joint 71 63 156
venture earnings
Equity accounted
earnings of joint 188 171 410
venture before
taxation
Cost of credit as per
the income statement (75) (54) (158)
Credit and financial
services profit 113 117 (3) 252
CASH FLOW STATEMENTS
2006 2005 2006
26 weeks to 30 26 weeks to 52 weeks
September 1 October to
(unaudited) (unaudited) 1 April
Rm Rm (audited
)
Rm
Cash retained from
operating activities
Operating profit 953 834 2 098
Depreciation and 141 112 235
amortisation
Other non-cash items 4 1 31
Cash "EBITDA" 1 098 947 2 364
Increase in working (304) 74 (547)
capital
Inventories (192) (40) 103
Trade accounts (334) (734) (1 567)
receivable
Net proceeds of 682 682
securitisation
Other debtors (13) (31) (26)
Accounts payable 235 197 261
Cash generated from
operating activities 794 1 021 1 817
Net financing receipts 4 (21) (24)
Taxation paid (505) (389) (592)
Cash inflow from 293 611 1 201
operations
Dividends paid (498) (409) (712)
Net cash utilised (205) 202 489
Cash utilised in
investment activities
Investment in fixtures,
equipment and vehicles (254) (232) (640)
Acquisitions (33) (33)
Net cash utilised (254) (265) (673)
Cash effects of
financing activities
Increase in shareowner 57 49 69
funding
Increase in interest- 498 (55) 56
bearing debt
Net cash inflow from
financing activities 555 (6) 125
Increase in cash and
cash equivalents 96 (69) (59)
Cash and cash
equivalents at the 349 411 411
beginning of the period
Currency adjustments 2 (2) (3)
Cash and cash
equivalents at the end 447 340 349
of the period
BALANCE SHEETS
2006 2005 2006
30 September 1 October 1 April
(unaudited) (unaudited (audited
Rm ) )
Rm Rm
ASSETS
Non-current assets
Properties, fixtures,
equipment and vehicles 1 437 1 041 1 320
Goodwill and trademarks 77 78 78
Other financial assets 700 700 700
Investment in joint venture 24 23 12
Deferred tax 110 116 84
Total non-current assets 2 348 1 958 2 194
Current assets
Inventories 1 860 1 809 1 666
Trade, other receivables and
prepayments 4 163 2 963 3 786
Cash and cash equivalents 447 340 349
Total current assets 6 470 5 112 5 801
Total assets 8 818 7 070 7 995
EQUITY AND LIABILITIES
Capital and reserves
Total shareowners" funds 4 318 3 385 4 030
Interest-bearing debt 674 65 176
Total capital employed 4 992 3 450 4 206
Interest-free liabilities
Trade and other payables 3 826 3 620 3 789
Total equity and liabilities 8 818 7 070 7 995
Gearing ratios
Net interest-bearing
debt/total shareowners" 0,05 (0,08) (0,04)
funds
Total liabilities/total
shareowners" funds 1,04 1,09 0,98
Future capital expenditure
Contracted 269 481 247
Authorised but not 199 262 473
contracted
Unutilised borrowing 981 1 390 1 279
facilities
Net equity per ordinary
share (cents) 860 699 823
STATEMENTS OF CHANGES IN ORDINARY SHAREOWNERS" EQUITY
2006 2005 2006
30 September 1 October 1 April
(unaudited) (unaudited (audited)
Rm ) Rm
Rm
Ordinary shareowners" equity 4 030 3 152 3 152
at the beginning of the
period
Ordinary share capital issued 53 37 38
Net movement in treasury 4 12 31
shares
Earnings attributable to 678 595 1 508
ordinary shareowners
Ordinary dividends paid (498) (409) (712)
Other 51 (2) 13
Balance at the end of the 4 318 3 385 4 030
period
KEY INDICATORS IN US DOLLAR TERMS
2006 2005 Chan 2006
26 weeks to 26 weeks ge 52 weeks
30 September to % to
(unaudited) 1 October 1 April
(unaudite (audited)
d)
Revenue - retail 1 217 1 134 7 2 541
sales (US$m)
Headline earnings
attributable to 99 87 14 230
ordinary shareowners
(US$m)
Net equity per
ordinary share (US 111 110 133
cents)
Diluted headline
earnings per share 19 17 12 45
(US cents)
Dividends per
ordinary share (US
cents)
Interim 9 10 (10) 10
(proposed/paid)
Final (paid) 14
Closing rate 7,77 6,35 6,21
Average rate 6,82 6,48 6,42
Note: Dividends paid are at actual rates on the date of payment.
The interim dividend proposed is at the closing rate.
CORPORATE INFORMATION
NON-EXECUTIVE DIRECTORS
WS MacFarlane (Chairman), AJ Aaron, ZB Ebrahim, JDMG Koolen#,
HSP Mashaba, KD Moroka, PL Wilmot, SDM Zungu (resigned on 15 August 2006).
#Netherlands
EXECUTIVE DIRECTORS
SM Ross** (Chief Executive), SR Binnie*, AvA Boshoff, MR Bower, Dr U
Ferndale, JL Spotts**.
**USA. *UK.
GROUP SECRETARY
EA Bagley
TRANSFER SECRETARIES
Link Market Services South Africa (Proprietary) Limited.
5th Floor, 11 Diagonal Street, Johannesburg, 2001.
PO Box 4844, Johannesburg, 2000.
Telephone: +27 11 834-2266. Fax: +27 11 834-4398.
REGISTERED OFFICE
Edgars Consolidated Stores Limited.
Registration Number 1946/022751/06.
Incorporated in the Republic of South Africa.
Edgardale, Press Avenue, Crown Mines, Johannesburg, 2092.
PO Box 100, Crown Mines, 2025.
Telephone: +27 11 495-6000. Fax: +27 11 837-5019.
AUDITORS
Ernst & Young Registered Auditors Incorporated.
Wanderers Office Park, 52 Corlett Drive, Illovo 2196.
PO Box 2322, Johannesburg, 2000.
Telephone: +27 11 772-3000. Fax: +27 11 772-4000.
SPONSORS
Merrill Lynch South Africa (Proprietary) Limited.
138 West Street, Sandown, Sandton, 2196.
PO Box 651987, Benmore, 2010.
Telephone: +27 11 305-5555. Fax: +27 11 305-5600.
Irwin, Jacobs, Greene (Proprietary) Limited.
24 Orben Street, 2005 Extension to the KPMG House, Ground Floor,Klein
Windhoek, Namibia.
PO Box 186, Windhoek, Namibia.
Telephone: +26 461 378-800. Fax: +26 461 378-844.
ISIN: ZAE 000068649
Share codes: JSE: ECO, NSX: ECN
These results can be viewed on the internet at: http://www.edcon.co.za
Date: 15/11/2006 08:05:35 AM Produced by the JSE SENS Department
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