Edcon trading update for the second quarter ended 28 September 2013
24 October 2013
Trading update and restatement of pro forma adjusted EBITDA
Retail sales for Q2FY14 up 4.7% to 6.5
Pro forma adjusted for Q2FY14 EBITDA up 9.0% to 9.5%
Edgars' transformation on track
Discount division continues to perform well
Edcon is in the process of finalising financial results for the 13-week period ended 28 September 2013 ("second quarter 2014"). Total retail sales for the second quarter 2014 are expected to be between R5,950 million and R6,050 million, compared to R5,683 million for the 13-week period ended 29 September 2012 ("second quarter 2013"). The increase in retail sales is primarily due to a healthy trading performance from the Discount division as well as a more positive trading performance in the Edgars division, despite the temporary disruptions caused by the refurbishment and other transformation initiatives ongoing in that division but nearing conclusion. On a same-store basis, retail sales are expected to be higher by 1.0% to 1.5% compared to the second quarter 2013, primarily due to the trading performance of the Discount division.
Edgars division retail sales are expected to be between R3,050 million and R3,100 million for the second quarter 2014, compared to R2,970 million for the second quarter 2013. The expected increase is primarily due to the continued opening of Edgars Active stores and promotional campaigns. However, we expect same-store sales to be lower by 1.5% to 2.0% compared to the second quarter 2013 as the temporary disruptions from the transformation initiatives continued across Edgars stores in the quarter. The transformation programme consists of three key elements; a refurbishment of 72 of the 186 stores as well as an optimisation and people support programme. An improved product offering, including the ongoing introduction of new brands is a key element of the refreshed proposition. The refurbishment element of the transformation project in Edgars has progressed to schedule. As at the end of the second quarter 2014, 61 of the 72 stores were completed and we remain on track to complete all but one of the stores before the start of the Christmas trading period. Trading in the first 16 stores - as previously disclosed - continues to trade up between 250 - 500bps 13 weeks post refurbishment when compared to the 19 weeks prior to refurbishment taking place. Results to date are before the benefit of the "New Look" marketing campaign, launched in early October 2013 to create heightened awareness of the changes in Edgars, as the majority of the stores had been completed and multiple new brands were in the process of being introduced.
Discount division retail sales are expected to be between R2,300 million and R2,350 million for the second quarter 2014, compared to R2,118 million for the second quarter 2013. The expected increase is primarily due a strong performance in ladies and menswear areas and built on the turnaround measures implemented in the division some 12-24 months ago, including many initiatives which are similar to the ones now being applied in the Edgar's Division. We expect same-store sales to be higher by 5.0% to 5.5% in the second quarter 2014 compared to the second quarter 2013.
CNA retail sales are expected to be between R450 million and R460 million for the second quarter 2014, compared to R443 million for the second quarter 2013, primarily due to the continued sales of digital merchandise. Same-store retail sales remained generally stable in the second quarter 2014 compared to the second quarter 2013.
We expect the group gross profit margin to be relatively consistent with the second quarter 2013, due to improved margins in the Discount division, as the benefits of the change in product mix and improved pricing and sourcing initiatives are realized, being offset by marginally lower margins in the Edgars division.
The growth in other operating costs benefitted positively from the costs initiatives, although store costs were negatively affected by the various transformation initiatives in Edgars.
Cash sales continued to grow strongly and are expected to report an increase of between 17.0% to 17.5% over the prior comparable period, a positive sign for both our in-store and Thank U loyalty offerings. However, credit sales are still lacklustre as the credit environment in South Africa remains tight, with credit sales reducing between 4.0% to 4.5% over the prior comparative period as new account openings remained low. As part of ongoing credit initiatives, Edcon, together with Absa, have begun launching new and enhanced credit products in October 2013.
Restatement of pro forma adjusted EBITDA
Following queries and to provide a more consistent and comparable analysis, Edcon is changing the methodology for its pro forma adjusted EBITDA as it relates to the sale of the trade receivables book from adjusting for the "percentage of the book actually sold" - which requires a constant restatement of comparatives - to adjusting for "100% of the book", ensuring reported numbers remain comparable in the future. Edcon has currently sold 93.1% of its private label store card programme to Absa and has a high level of confidence that the remaining portion of the book will be sold or collected. Edcon therefore believes that using a 100% adjustment to pro forma Adjusted EBITDA is appropriate. We expect that our pro forma adjusted EBITDA for the second quarter 2014, after giving pro forma effect to the sale of 100% of the book, will be between 9.0% and 9.5% higher than the prior comparable period, mainly due to a stronger operational performance. If the pro forma adjusted EBITDA for the 13-week period ended 29 June 2013 ("first quarter 2014") was reported on the same "100% of book sold" basis it would have been 8.7% higher than first quarter 2013 (a 6.0% increase was previously reported on a "book actually sold to date" basis). Pro forma adjusted EBITDA has not been adjusted for lost sales due to the refurbishment and other transformation initiatives ongoing in the Edgars division.
This information is based on our internal management accounts that may not be fully comparable with our audited consolidated financial statements or unaudited interim condensed consolidated financial statements. Such information has been prepared by, and is the responsibility of, our management, and has not been audited, reviewed or verified, nor have any procedures been completed by our auditors with respect thereto, and you should not place undue reliance thereon. It is subject to confirmation in our unaudited interim condensed consolidated financial statements and quarterly report for the 26-week period ended 28 September 2013 which is expected to be announced on 21 November 2013.