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Edcon reports Q3 results and an update on strategic initiatives

21 February 2013

"While we are confident that our strategic change initiatives will drive Edcon's future performance, we have not as yet reached critical mass and this together with a weaker than expected performance from the Discount division over the last three months, had a negative impact on profitability.

The closing of the sale of the trade receivables book to Absa in the third quarter 2013 is an important enabler for future growth within Edcon. This transaction resulted in a reduction in absolute leverage and the Group is now positioned as a cash business, with the added advantage of still offering credit. The South African retail apparel market remains relatively resilient and this will certainly support and contribute to the Group's turnaround strategy," said Chief executive of Edcon, Jürgen Schreiber. 

Salient features

  • Delivery against strategic initiatives progressing to plan                                                                                                
    • Increase in average space of 3.7% and phase 1 of Edgars refurbishment plan completed on time
    • First mono-brand stores launched, and new speciality store Edgars Shoe Gallery being piloted
    • Four stores opened in Mozambique
    • Total of 8.8 million loyalty customers
    Sourcing changes created some challenges
  • Changes in product mix improve profitability                                                
    • Gross profit up 1.7%
    • Margin improvement of 0.8 points
  • Commitment to strategic initiatives impacts results in the short-term                                                
    • Total retail sales down 0.4%
    • Same store retail sales down 3.4%
    • Pro forma adjusted EBITDA down 6.4%
  • Capital structure management well progressed                                                
    • Sale of receivables and securitisation debt of R4.3 billion repaid
    • Issuance of a further €300 million of senior secured 2018 notes
    • Repayment of €754 million of the 2014 notes
    • Conclusion of a R4.12 billion senior secured term loan facility to be used to call the remaining 2014

JOHANNESBURG, South Africa - 21 February, 2013: Edcon, Southern Africa's largest non-food retailer, has reported     trading results for the third quarter 2013, which ended 29 December 2012. Total retail sales for the period were down 0.4% to R8,355 million. This was primarily due to the performance in the Discount division, where retail sales declined 6%, and was compounded by the impact of new strategic initiatives being implemented across the group. Edgars' retail sales were 4% higher.                                            

Jürgen Schreiber commented, "While we increased our gross profit margin to 37.8%, the overall results for the third quarter were negatively impacted by the significant strategic initiatives underway within the organisation. The business is being positioned to drive revenue growth and unlock further margin expansion. We are already seeing some positive results, giving us confidence in the future."                                            

For the quarter ended 29 December 2012, total revenues increased 0.8% as the decline in retail sales was offset by growth in insurance revenue and an increase in Club revenue. Gross profit margin was up 0.8 points primarily due to improved margins in the Discount division, while the Edgars division's margin remained stable when compared to the same period in the prior year.                                            

Store costs remained well contained increasing by R51 million, or 3.9%, from R1,316 million in the third quarter 2012 to R1,367 million in the third quarter 2013. While increases in rentals remained high, as new space impacted total rentals, utility cost increases were well managed and further productivity savings in the third quarter 2013 from the store optimisation project reduced overall store costs. Other operating costs, excluding transitional costs, increased by R101 million, or 10.1%, from R999 million in the third quarter 2012 to R1,100 million in the third quarter 2013. The large transitional costs are as a result of fees and IT costs relating to the modification of the trade debtors system to accommodate the sale of trade receivables to Absa.                                            

Pro forma adjusted EBITDA decreased 6.4% as sound store cost management contributed positively but total operating cost growth remained higher than revenue growth. Pro forma adjusted EBITDA is adjusted to exclude clearly identified transitional costs and further adjusted to give effect to the transaction with Absa.                                                                                       

Edcon's focus on growth and expansions remained a priority and capital expenditure increased by 27.1% to R211 million (31 December 2011: R166 million). During the quarter, Edcon opened 56 new stores (including three conversions) and closed nine stores which, combined with store refurbishments, resulted in investments in store fixtures of 167 million.                                            

The Edgars division grew retail sales 4.1% primarily due to the increased number of Edgars Active stores (67 more than the same period last year) and promotional activity across the chain. In November 2012, Edgars also launched three Edgars Shoe Gallery stores on a pilot basis, bringing the total number of stores to 383 from 303 in the prior comparative quarter. The gross margin remained stable at 41%.                                            

Edgars' same store sales are 2.1% lower reflecting the complexity and time required to fully implement and reap the benefits of the various strategic initiatives across the chain, which include: the completed R65 million Phase 1 refurbishment of 72 stores; the launch of two mono-brand Topshop stores; use of quick response and direct sourcing; and a restructuring of the merchandising team. The pipeline of new international brands also continues to grow.                                             

The Discount Division retail sales declined 5.9% and same store sales were down 5.8%. The division faced some challenges in the quarter including delays in stock delivery, slower promotion of key value items and lower mobile phone sales. The discontinuation of the Discom format also affected total sales and this was the main reason for the total number of stores at 29 December 2012 decreasing from 680 in the prior comparative quarter to 641. The reduced promotional activity, changes in product mix and improved results from sourcing initiatives resulted in an increase in gross profit margin to 34.3% (31 December 2011: 32.7%)                                              

CNA retail sales are down 1.5% primarily due to lower mobile phone sales and a net reduction in the number of CNA stores to 196 from 200 in the comparative quarter. Same store sales decreased by 0.6%. The gross margin decreased to 31.8% (31 December 2011: 32.1%).                                             

Africa expansion. The continued growth in the Group's African operations through the Jet, JetMart and Edgars Active formats is encouraging and the company continues to expand its footprint at a steady pace. Four stores opened in Mozambique in mid-December 2012. African sales contributed 6.5% of total retail sales for the quarter.                                            

After the end of the reporting period, Edcon issued €300 million aggregate principal amount of notes due in 2018.  The Group has used the proceeds from the offering, together with a portion of the proceeds from the sale of its private label store card receivables portfolio and the net proceeds from the termination of certain derivatives related to the 2014 Senior Secured Notes, to buy back €754 million of its 2014 Senior Secured Notes.  This reduces the gross leverage and effectively extends the maturity of a significant portion of Group indebtedness.                                            

Edcon has also received commitments from certain South African and international financial institutions for a R4,120 million term loan facility, the proceeds of which will be used to redeem any of the remaining 2014 Senior Secured Notes.                                             

Schreiber says, "Edcon's strategic relationship with Absa is enabling a better focus on core retail operations. It will also improve working capital by changing the model to a cash business, reducing a certain element of risk. We expect our credit proposition with Absa to continue to draw customers to the Edcon stores and help grow the customer base.   

Schreiber concludes, "Our team has a very clear strategy to position Edcon optimally for future growth. We will continue to rollout our plan for the business based on four key levers: driving same store sales, increasing our footprint, improving margins and leveraging our new strategic relationship with Absa."                                            


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