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Edcon Q2 growth marginally improved: Ongoing investment remains a priority

27 November 2012

Edcon, Southern Africa’s largest non-food retailer with 1,173 stores, reported marginally improved results for the second quarter 2013, ended 29 September 2012, and continues to invest in both existing and new store concepts as well as new brands, while it retains a sharp focus on its medium term strategic aspirations.
Salient features:
  •     Total revenue up 3%
  •     Retail sales up 2.4%
  •     Same store sales up 0.8%
  •     Adjusted EBITDA up 1.8%
  •     R8.8bn sale of credit book concluded

JOHANNESBURG, South Africa - 27 November, 2012: Edcon, Southern Africa’s largest non-food retailer with 1,173 stores, reported marginally improved results for the second quarter 2013, ended 29 September 2012, and continues to invest in both existing and new store concepts as well as new brands, while it retains a sharp focus on its medium term strategic aspirations.

Retail sales growth for the second quarter 2013 was 2.4%, marginally higher than the 1.8% growth posted in the first quarter, with the financial services and credit divisions showing enhanced profitability compared to the prior comparative period.

Jürgen Schreiber, CEO of Edcon, says, "Significantly, the benefits from our operational and strategic initiatives, which we implemented over the past year, are starting to flow through. Our footprint growth has increased from 0.4% in 2011, to 1.4% last year, and we are targeting 5% in 2013?.

He adds, "Equally pleasing is the progress made in group initiatives: These include direct sourcing; the increase in loyalty customers to 7.35 million, with over 69% of our retail sales now earning loyalty points; average store space growth of 3.1%; and improvements in our information technology systems”.

Shortly after the end of the reporting period, Edcon closed the first tranche of the sale of the South African portion of the private label store card portfolio to Absa for R8.8 billion. Simultaneously, the long term commitment to provide future retail credit to existing and new qualifying South African customers became effective.

Edcon’s quarter-on-quarter Adjusted EBITDA increased by 1.8% to R581 million from a 12.1% decline in the previous quarter ended 30 June 2012. Adjusted EBITDA for the six months ended 29 September 2012 was R1.38 billion (Adjusted EBITDA includes discontinued operations but excludes transitional costs, which include costs related to the closing of the sale of the private label store card portfolio to Absa, as well as other one-off strategic initiatives to improve Edcon’s business in the medium term).

Importantly, over the last six months, Edcon has incurred R368 million on capital expenditure. The majority of this has been for store fixtures and fittings, which is 35% higher than in the first half of the prior comparative period. This is a key component of the strategic initiatives in both Edgars and Discount divisions to improve the in-store experience. It is also aligned to increasing the footprint in South Africa and other parts of Africa. Approximately R120 million of the capital expenditure was invested in information technology infrastructure, which includes the upgrade of the merchandise system.

The Edgars division grew total retail sales by 4.9% boosted by the rollout of the Edgars Active format. On a like-for-like basis there was a 2.4% reduction in retail sales. Although continued aggressive winter stock clearance markdowns resulted in the divisional gross margin reducing to 39%, carry-over winter stock levels are less than half the value at the same time last year. Significant milestones achieved during the period include the completion of the first phase of the refurbishment of 72 Edgars store, as well as the launch of the 950m2 flagship TOPSHOP TOPMAN store in Sandton City on 22 November 2012. Edgars was also recently voted ‘Best Department Store’ by consumers in the 2012 Star Readers’ Choice competition, and recognised as ‘The Number One Retailer for both Women’s and Men’s clothing in South Africa’ at The Times & Sowetan Retail Awards in October 2012. Schreiber comments, "These accolades are a reflection of the brand’s success in improving responsiveness to our customers’ expectations”.

The Discount division grew same store retail sales by 4.9%. Total retail sales decreased by 0.1% as the division continued to be negatively affected by the conversions of the Discom stores completed in June 2012. The gross margin increased to 31.3% reflecting improved pricing and the negative impact of the lower margin Discom business in the prior year numbers. A range of opportunities is currently being explored to fully realise the potential of this business unit. Sound growth in the division’s African operations endorses management’s conviction in this initiative.

CNA increased like-for-like sales by 2.7%, while total retail sales were down 1.2%, partly due to the net reduction in the number of stores from 203 in the prior comparative period to 193 stores. The gross margin was largely unchanged at 30.7%. Management’s focus remains on existing stores and improvements in merchandising mix.

Profit from the provision of credit and income from the insurance joint ventures (reflected in both continued and discontinued operations) increased by R95 million to R261 million pre-tax. In the current reporting period, the provision of credit by Edcon has been disclosed as a discontinued operation and the prior period numbers restated.

Net financing costs decreased by 7% to R802 million, primarily as a result of a reduction in the prime interest rate.

The South African Revenue Service (SARS) recently notified Edcon that it is considering the issuance of an additional tax assessment. While Edcon has challenged the position, it is currently engaged in constructive discussion with SARS to explore a possible settlement, if this is in the best interests of Edcon. Although these discussions are not finally concluded, a potential settlement is expected to fall well within Edcon’s financial capacity.
Schreiber concludes, "Our continued commitment in the forthcoming quarter is to implement and refine medium term initiatives in the divisions, pursue store investment across the chains, and continue to explore opportunities in Sub-Saharan Africa.”


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