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Edcon benefits from strategic changes

Johannesburg - Edcon, Southern Africa’s largest clothing and footwear retailer, has reported results for the 52 weeks ended 29 March 2014.

During the 52 weeks ended 29 March 2014, Edcon’s retail sales increased 5.1% to R27bn when compared to the prior comparative period.

Encouragingly, retail cash sales increased 15.3%, which is an indication that the benefits of the strategic changes are starting to positively impact performance.

There are also significant benefits being derived from the loyalty programme, which was launched in February 2012 and now has over 11 million cardholders.  

However, the strong cash sales growth was substantially eroded by a 4.3% decline in credit sales.

Group credit sales contributed 47.3% of total sales, down from 51.9%.  Several measures are being implemented to enable the company to compete more effectively on its credit sales offering.

Edcon has recently signed a term sheet with African Bank [JSE:ABL], which forms the basis for negotiations to potentially establish African Bank as a secondary credit provider.

This will not affect Edcon’s strategic relationship with its primary credit provider, Absa.

Gross profit margins declined marginally from 36.7% to 36.5% as gross profit increased 4.4% to R9.8bn.

Margin improvements in the Discount division were partially offset by lower margins in both the Edgars and CNA divisions.

Pro forma adjusted Ebitda was 2.6% lower at R2.7bn. Trading profit dropped R138m to R1.3bn and the net loss for the period improved significantly from R5bn to R2.5bn.

Capital investments

Total capital investments for the year were R1.4bn, increasing to 5% of retail sales and average space increased 5.2% year on year.

During the year the Edgars division executed an ambitious refurbishment project in 72 of its top stores, secured multiple new brands and rolled out 13 new mono-branded stores.

This together with the ongoing success of the loyalty programme resulted in a significant increase in cash sales of 16.4%.

Transformationi programme

The Edgars transformation programme is an important part of repositioning the chain for the future.

Reported trading in the refurbished stores was mixed with central business district and rural stores showing the weakest uplift due to their dependence on credit.

At March 29 2014, the cumulative capital expenditure cost of the project was R542m.

This division grew retail sales 2.7%, but this was negatively impacted by a 6.4% decline in credit sales, which reduced from 59.6% of total sales in the prior year to 54.3% of total sales.

New stores

During the year, 31 new Edgars Active stores, 10 new Edgars’ stores, three Boardmans’ stores, five Red Square stores and four Edgars Shoe Gallery stores were opened.

In addition, 13 new mono-branded stores were opened and the acquisition of a controlling stake in the companies with franchise rights to Inglot, La Senza and Accessorize contributed a further 39 stores.

During the same period there were 16 store closures, bringing the total number of stores in the Edgars division to 478, including mono-branded stores.

Edgars’ gross margin was 38.6% for the financial year 2014 down from 39.7%.

The decline was largely due to a higher level of promotional activity required to offset weaker credit sales as well as product cost inflation partly due to a weaker rand not being passed through price increases.

Credit and financial services

The Credit and Financial Services division, excluding Edgars Zimbabwe, ended the financial year 2014 with 130 000 fewer credit customers than financial year 2013.

On a 12 month rolling basis, credit sales decreased from 51.5% in the prior comparative period to 47.3% of total retail sales.  

Income from the insurance joint operation increased 11.0% over the prior comparative period to R739 million for the financial year 2014.

The increase was due in part to improved contractual arrangements as the pace of insurance growth was again impacted by the lower number of credit customers given that a store credit facility remains a prerequisite for an insurance policy.

Financial review

Edcon’s total revenues increased 5.1%, which is commensurate with the growth in retail sales and marginally boosted by the administration fee paid by Absa for the full period in the financial year 2014 financial year and not earned for the full prior comparative period.

Total store costs increased by R624m, or 12.3%, from R5.1bn in financial year 2013 to R5.7bn in financial year 2014, mainly due to new space resulting in rental and manpower costs that increased by 12.8% and 9.9%, respectively, and constituted 61.7% of total store costs.

These increases were more pronounced in the Edgars division. Initiatives are under way to contain these costs going forward.

The Edcon group spent approximately R174 million more than the previous estimate of R1.2bn on capital expenditure in fiscal year 2014 as it brought forward some projects previously scheduled for fiscal year 2015.

The company is currently planning to spend approximately R1.1bn on capital expenditure in the financial year 2015.
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