| Wed 15 Nov 2006, 9:22 | | Edcon -- interim results and cautionary |
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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
