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Edcon’s debt restructuring finalised, with new orgnisational structure and board in place

21 February 2017

Johannesburg, 21 February 2017: The Edcon Group’s overall trading environment for the three month period ended 24 December 2016 has remained challenging as macro-economic factors continue to weigh on consumers. 

Key features

  • Debt restructure finalised, new ownership in place, appointment of board for newly-formed Group, and balance sheet no longer laden with debt
  • Retail sales declined by 2.8% to R8,441 million
  • Retail cash sales increased by 0.7%
  • Retail credit sales decreased by 8.7%
  • Controllable costs continue to be well managed
  • Adjusted EBITDA decreased by 16.3% to R963 million
  • Excluding the one-off net gain realised as a result of the Group’s Exchange Offer concluded in the third quarter 2016, the net loss for the period would have decreased by R732 million from R1,092 million to R360 million

Pertaining to the third quarter 2017 compared to the third quarter 2016:

Johannesburg, 21 February 2017: The Edcon Group’s overall trading environment for the three month period ended 24 December 2016 has remained challenging as macro-economic factors continue to weigh on consumers.

Edcon Chief Executive, Bernie Brookes, commented, “As expected, this last quarter’s performance has remained challenging, but pleasingly, the result was not as weak as the first two trading quarters in fiscal year 2017, which were severely affected by the aggressive clearance of aged inventory.  We have worked our way through 80% of these aging inventory levels. Stock clearances at Edgars and Jet are complete, while there remains some work still to be done in the Specialty division, and certain of the international brands”.

The Group has faced increased competition from established market participants, as well as new market entrants, and the ability to grant new credit and increase credit limits of existing customers remains restricted, largely as a result of the new credit affordability regulations that were implemented by the National Credit Regulator in fiscal 2016.

After the end of the quarterly period, the Group announced the completion of the court-sanctioned comprehensive restructuring (the “Restructuring”) of its existing capital structure, which resulted in some of the Group’s existing creditors exchanging their entire debt claims against the Group for a mix of new debt and equity. The Restructuring included a transfer of control over the Group’s operating companies from Edcon (BC) S.A.R.L, which was indirectly owned by the Group’s former majority shareholder, Bain Capital, to certain of the Group’s existing creditors.

The Group’s adjusted EBITDA decreased by R188 million or, 16.3% from R1,151 million in the third quarter 2016, to R963 million in the third quarter 2017.

Total revenues decreased by R185 million, or 2.0% from R9,163 million in the third quarter 2016 to R8,978 million in the third quarter 2017, due mainly to the weaker retail sales. Retail sales, which decreased primarily as a result of weak credit sales, were 2.8% lower at R8,441 million in the third quarter 2017 from R8,685 million in the third quarter 2016. Credit sales decreased by 8.7% whilst cash sales increased by 0.7% compared to the third quarter 2016.

Bernie Brookes added, “Retail sales in October and November of the current quarter were below expectations, but trading in December 2016 improved and was better than expected, largely as a result of numerous peak trading initiatives introduced throughout the group over this period”.

Ahead of the December trading period, Edcon implemented peak trading initiatives which focused on boosting cosmetics sales, providing a competitive offering on back-to-school, accelerating store optimisations and improving in-store service levels. These initiatives included aggressive marketing campaigns promoting Edcon’s new strategic offering and service levels, special buys and store incentive initiatives to drive credit account openings, credit limit uptakes and utilisation, which all contributed to a better December trading month retail sales performance.

Edcon’s overall gross profit margin declined by 310 bps from 37.5% in the third quarter 2016 to 34.4% in the third quarter 2017. The margin decline was due to planned better entry price points introduced across all divisions as well as additional discounts offered to Edgars’ customers during the quarter for which the full retail sales benefit will only be realised during the fourth quarter of 2017. Additionally, the margin was negatively affected by aggressive markdown and clearance activity in the Specialty division with the goal to clear international brands for exit in line with the Group’s strategy as well as providing for the international brands aged inventory.

As a result of credit initiatives introduced during the third quarter 2017 - and following a revised arrangement with Absa whereby Absa is to book approximately 20% of new credit accounts with the balance of new credit accounts being funded by the Group - Edcon’s in-house trade receivables book at 24 December 2016 was R330 million, up R153 million compared to the R177 million as at 24 September 2016 and up R185 million from R145 million as at 26 December 2015.  Credit sales contributed 35.3% of total retail sales for the third quarter 2017, a decrease of 2.3%, from the 37.6% in the third quarter 2016.

Edgars division: Retail sales in the Edgars division decreased by R87 million or, 2.5% from R3,552 million in the third quarter 2016 to R3,465 million in the third quarter 2017. Despite tough trading conditions, retail sales were flat for the November and December 2016 periods - up from a negative 8.3% in October 2016 - compared to the same periods in the third quarter 2016.  Trading across all apparel categories improved when compared to the first half of the 2017 fiscal year. Edgars’ cash sales increased 4.8% over the third quarter 2016, whilst credit sales decreased by 10.2% over the

same period. While credit sales were lower, the rate of decline improved compared to the first half of fiscal 2017.

Same store sales decreased by 3.1% compared to the third quarter 2016. The new strategies adopted are starting to show clear benefits for customers and top line sales performance.

Gross margin was 38.6% for the third quarter 2017, a planned decrease from 42.4% for the third quarter 2016. The decrease is primarily due to a focus on competitive entry price points and discounts offered to customers in the form of a gift card during the month of December 2016 of which only approximately half of the discount cost had materialised in the form of sales by the end of the third quarter 2017 as a result of which, the gross margin was negatively affected by approximately 0.4%.

Discount division: This division continues to be negatively affected by declining credit sales.  Credit sales decreased by 9.2% compared to the third quarter 2016, and cash sales decreased by 3.0% due to customers in this division being more susceptible to difficult macroeconomic circumstances. Total retail sales decreased by R151 million, or 4.9%, from R3,101 million in the third quarter 2016, to R2,950 million in the third quarter 2017. Same store sales decreased by 3.8%. Ladieswear grew positively when compared to the third quarter 2016, while the remaining categories continued to trade negatively.

Gross profit margin decreased to 32.2% in the third quarter 2017 from 34.1% in the third quarter 2016 as better entry price points have not yet delivered the desired retail sales uplift in volume of units sold. However, the division has significantly enhanced its price perception and consumer franchise. Markdown activity was in line with that of the third quarter 2016, negatively affecting the gross profit margin.

Specialty division:Total retail sales for the third quarter 2017 was R1,838 million, a decrease of R7 million, or 0.4% compared to retail sales of R1,845 million in the third quarter 2016. Credit sales decreased by 4.7% whilst cash sales increased by 1.1%. Ladieswear, menswear, childrenswear, cosmetics and homewear reported positive sales growths compared to the third quarter 2016, while footwear, cellular, reading, stationery and entertainment and digital underperformed. Same store sales decreased by 1.5%.

Aggressive markdown and clearance activity across the division’s formats, particularly in Boardmans, CNA and mono-brands, resulted in a decrease in gross margin by 4.0% from 33.2% in the third quarter 2016 to 29.2% in the third quarter 2017 as the division faced aggressive competition pricing activity. Clearance activity in our mono-branded stores is in line with the Specialty division’s strategic plan to exit non profitable international brands as well as providing for the related aged inventory with respect to the exit of those brands.

Rest of Africa:Sales from countries other than South Africa decreased by 1.4% compared to the third quarter 2016, and contributed 10.6% (8.6% excluding Zimbabwe) of retail sales for the third quarter 2017, slightly up from 10.5% (8.5% excluding Zimbabwe) in the third quarter 2016. Mozambique, Zambia and Ghana reported positive growth in their respective local currencies (but Mozambique negatively affected results once converted to Rand) whilst Zimbabwe remained flat compared to the third quarter 2016 and Botswana and Lesotho reported negative retail sales growth.

The Edcon Group’s total store costs remain well managed with store costs increasing by only R18 million, or 1.0%, from R1,795 million in the third quarter 2016, to R1,813 million in the third quarter 2017. Manpower costs were up 8.4% compared to the third quarter 2016, primarily due to increases and staffing stores to achieve our strategic service delivery, whilst stock losses decreased by 19.4%, partially offsetting the increase in manpower costs. Rental and manpower costs constituted 62.6% of total costs for the third quarter of 2017.

Operating cash inflow before changes in working capital decreased by R313 million from R842 million in the third quarter 2016 to R529 million in the third quarter 2017.

Group capital expenditure increased by R69 million to R236 million in the third quarter 2017, from R167 million in the third quarter 2016 mainly as a result of increased investments in the information systems infrastructure as the Group embarks on its strategy to simplify and upgrade its existing information technology infrastructure.  In the third quarter 2017, Edcon opened 17 new stores which, combined with store refurbishments, resulted in investments in stores of R64 million (excluding Zimbabwe), compared to the third quarter 2016, and Edcon invested R153 million in the information systems infrastructure, compared to R48 million in the third quarter 2016. The Group has planned total capital expenditure of approximately R600 – R700 million for fiscal year 2017.

On 15 September 2016, the Group agreed to the sale of its Legit business for R637 million (the “Legit sale”) to Retailability Proprietary Limited.  The closing of the Legit Sale has received Competition Commission approval and all other customary closing conditions. The sale became effective on 29 January 2017.

Bernie Brookes concluded, “The last calendar year has been one of the most significant in the nearly 90-year long history of the Edcon Group.  We have completely restructured our historical debt position, which is now considerably more manageable.  This resulted in a new controlling shareholder group, which led to the appointment of a new board of directors. At the same time, we have completely re-focused our efforts on the planning and implementation of numerous initiatives to transform the group internally, and in the way we serve our customers. Progress has been good, there is new energy, excitement and urgency among our 48 000 employees, and I am certainly encouraged that a new, strong and robust Edcon is fast becoming a reality, and which is set to re-emerge as the leading clothing retailer in Africa”.

Contact details:
Edcon
Vannie Pillay
Corporate Affairs and Communication Manager
vpillay@edcon.co.za

Aprio
Communications Advisor to Edcon
South Africa: Julian Gwillim
julian@aprio.co.za

About Edcon

Edcon is South Africa’s largest non-food retailer, with a market share of the South African clothing and footwear (C&F) market nearly twice that of its nearest competitor, trading through a range of retail formats. The Group has grown from opening its first store in 1929, to trading in 1545 stores (as at 24 December 2016) in South Africa, Botswana, Mozambique, Namibia, Swaziland, Lesotho, Zambia, Ghana and Zimbabwe. Edcon has been recognised in national surveys as one of the top companies to work for in South Africa and continues to make significant progress in its equity and transformation goals. 

For more information, please visit the Edcon website: www.edcon.co.za


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