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2013 Business Update

04 February 2013

Johannesburg, South Africa: Edcon, Southern Africa's largest non-food retailer, has today  issued a business update statement to the Irish Sock Exchange and the JSE Limited providing the market with more detail on a number of recent developments in the business.

INVESTMENT IN STRATEGIC INITIATIVES STARTING TO SHOW TRACTION

           Preliminary results for 13-week ended 29 December 2012:

  • Headline results down for the quarter 
  • Tax settlement agreed with the South African Revenue Service with no near-term cash impact
  • Commitment letters signed for approximately R4 billion senior secured term loan facility to refinance short term maturities

This includes the key components of a four point strategic plan to drive growth and profitability, preliminary results for the quarter, an update on the tax settlement with SARS and a new ZAR senior secured term loan facility. Additional detail of all of these items can be found in the SENS issued today. 

Edcon CEO, Jürgen Schreiber, commented, "Today we are presenting a strategic plan for the business based on four key levers. We intend to drive same store sales, increase our footprint, improve margins and leverage our new strategic relationship with Absa. Furthermore we are pleased to be able to report initial progress with respect to strategic initiatives we have already implemented, as well as a settlement with SARS and commitments from a syndicate of South African and international banks for a ZAR denominated term loan."

Four point strategic plan

The Edcon management team has initiated the implementation of a number of strategic and operational initiatives, with further progress expected in 2013.

Same-store sales growth: Edcon recently initiated the process of refurbishing and improving certain categories of merchandise in 72 of the leading Edgars stores to deliver same-store growth, investing approximately R65 million in the first phase of this project. Since completion, sales of the merchandise categories covered by this initiative grew by an incremental 6% over sales compared to the same categories in the remainder of our Edgars stores. The second phase of this project, which includes rolling out the "store-in-store" concept devoted to brands such as Topshop, will run from April to August 2013 across the same 72 stores. Total investment for this second phase is budgeted at approximately R300 million. 

We have implemented a new merchandising strategy in our Discount division, and more recently in our Edgars division, which has already resulted in increased market share of our Discount division in ladieswear. The "Thank U" loyalty program has also proven to be successful, with approximately 8.8 million customers now signed up. 

Increased footprint: Management plans to continue a disciplined investment programme, targeting an average annual square metre growth of over 5% on a long-term basis. The total number of stores has increased over the past six years, from 909 stores at the beginning of fiscal year 2007 to 1,218 stores at 29 December 2012. In addition to adding space to existing stores and investing in new store formats, we intend to selectively consider expansion opportunities in the rest of Africa.

Improving margins: Edcon's management plans to enhance operating margins by continuing to: (i) improve our retail price management; (ii) leverage our sourcing capabilities and input price management while reducing markdowns; (iii) optimise our store operations to improve merchandise availability and effectively     organise promotional schemes; and (iv) improve the efficiency of our support functions. 

Steps have been taken to extend and enhance the quality assurance and control functions, reducing dependence on, and the costs associated with, intermediaries, whilst simultaneously increasing the number of South African and regional suppliers in support of our "quick response" strategy.The amount of product ordered from South African and regional suppliers more than doubled between summer 2011 and summer 2012. In addition, store optimisation initiatives, substantially rolled out in our Discount division, but only recently initiated in the Edgars division, have contributed to productivity and the stabilisation of store costs.  

Leverage credit opportunities through new strategic relationship with Absa: Edcon's new strategic relationship with Absa is expected to allow the Company to better focus on its core retail operations. It will also improve our working capital by changing our business to a cash business. We expect that this ready access to credit will continue to draw customers to our stores and help grow the customer base. 

Trading update for 13-week period ended 29 December 2012

Preliminary results showed trading results were down for the quarter. Total retail sales for the period are expected to be between R8.300 billion and R8.375 billion. This was primarily due to performance in the Discount division and was compounded by the impact of new initiatives being implemented in the Edgars division.

Gross profit margin is expected to be higher than the previous year due to improved margins in the Discount division, while Edgars' divisional margin is expected to remain stable. 

Adjusted EBITDA, after giving pro forma effect to the sale of the private label store card programme to Absa, is estimated to be 6% to 7% lower than for the 13-week period ended 31 December 2011. 

This financial information is preliminary and is subject to confirmation in our unaudited interim condensed consolidated financial statements and quarterly report for the 13 weeks ended 29 December 2012.

Tax Settlement

As the company has previously reported, on 31 August 2012, SARS notified us that it was considering the issuance of an income tax assessment, primarily in connection with our tax treatment of interest payable on the financing of the acquisition of the Group by Bain Capital. We challenged SARS's position and we believe that we were in compliance with applicable South African tax laws and regulations. Nevertheless, we perceived it to be beneficial to engage in settlement discussions and we entered into a settlement agreement with SARS in relation to the matters in dispute on 14 December 2012 in order to avoid protracted litigation with SARS. 

Pursuant to the settlement, no near term cash outflow in relation to tax payments due will be required until September 2014. However, as a result of the settlement, Edcon is likely to pay income tax earlier than was anticipated prior to the entering into of the settlement.  We believe that our cash flows should allow us to satisfy the additional income tax payments that may result from the settlement. 

The settlement does not relate to any matter other than those in connection with the acquisition of the Group by Bain Capital.

Funding Update

On 3 February 2013, Edcon signed commitment letters for a new Rand-denominated senior secured term loan facility for an amount of approximately R4 billion made available by a syndicate of South African and international banks. The availability of such loan is subject to certain customary conditions, including negotiation of definitive finance documents. We intend to use the proceeds from such loan to refinance a portion of our near-term maturities.


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