Key to the Group’s growth is its resilient business model which is based on a robust franchise network, reputable brands and a diverse customer base.
  Annual Report 2010  
Operational review
 
 
 
 

Overview

The year under review has been a challenging one, featuring continued curtailed discretionary spend and restrained consumer sentiment. Whilst the latter months of the period indicated that the country was emerging from recession, economic recovery has been slow and consumers’ response measured.

In this environment, the Group delivered solid results to outperform its sector peers. With no new mainstream stores opened over the period, growth has been organic and hard fought for.

Whilst economic factors out of the Group’s control shaped the trading environment, management focused on maximising turnover within its existing footprint by improving the quality of the business. A key strategy has been to simplify the model across the Company, from the management structure to the customer shopping experience, with the primary objective of focusing on what the Group does best: buying and selling.

With discerning customers spoilt for choice in terms of available offerings, Italtile continued to strive to entrench and grow appeal for its comprehensive offering.

The three fundamentals underpinning the Group’s strategy to own its customers are: an unwavering focus on customer service, an unrivalled in-store shopping experience, and dynamism in enhancing in-house efficiencies. Accordingly, improvements were aimed at the calibre of staff and store operators, the quality of merchandise and range, and the overall value offering for which the Group is renowned.

In the context of an onerous trading environment, key to the Group’s growth is its resilient business model which is based on a robust franchise network, reputable brands and a diverse customer base. This model is structured to take advantage of both the renovation and new build markets as those sectors enter alternate cycles. In the face of the dramatic slowdown in the new build sector, the Group was well positioned to benefit from the small improvement experienced in the renovations market.

Italtile’s continued investment in brand building campaigns across the Group’s brands ensured top of mind awareness with consumers and served to reinforce the value proposition of ranges such as Studio Ceramico, Tivoli, Kilimanjaro and ELF wooden flooring.

Prudent inventory management and strong cash flow ensured that the business did not suffer the stock shortages experienced by many of its peers. This strategic advantage enabled the Group to retain existing and gain new market share. With the general improvement in the economy, the de-stocking trend has now turned and retailers are once again re-stocking. There is a strong likelihood that a period of intense price wars will follow.

The fragmented nature of the local market continues to mimic the global model. A degree of consolidation has been experienced over the past two years, but it is anticipated that improved economic conditions and the low barriers to entry in the industry will provide opportunity for new entrants.

In line with other adjustments made by the industry during the recession, contractors are once again returning to the market, with restructured property portfolios that will cater to the current market demand for smaller, lower value homes in the R1 million range.

Financial review

System-wide turnover improved 7% to R2,75 billion (2009: R2,57 billion). Since no new mainstream stores were opened and price inflation was restricted to 1%, this growth is attributable to improvements in the quality of the business resulting from efficiencies implemented at store level and in the supply chain. Reported trading profit increased by 8% to R389 million (2009: R361 million), while Group operating margin remained constant. Inventory management at store level and in the supply chain remained a key priority and stock-turn across the brands continued to improve in line with the trend of the past two years. Cash reserves increased from R667 million to R711 million in the review period, and will be used to fund future expansion.

The adjusted net asset value per share increased by 10% to 161 cents (2009: 146 cents).

Divisional review

Retail  

Italtile  

Trading conditions in this brand’s market segment remained extremely challenging over the reporting period and the industry suffered further rationalisation with a range of high profile businesses closing down. While the renovations market started to show modest signs of recovery towards the latter half of the period, new build projects in the previously buoyant affluent end of the market stagnated.

Whilst consolidation of competitors assisted the business in extending its lead in the industry, the brand also succeeded in growing market share as a result of inroads made into the projects sector and the upper end of the middle income market. With dedicated resources targeting selected, quality projects, significant progress has been made by the recently established projects division over the past 18 months. In addition, upper-middle income customers are increasingly drawn to Italtile’s offering, and whilst they continue to research their purchases amongst a range of competitor offerings, Italtile’s aspirational brand and long-standing legacy serve to positively influence their buying decisions.

Management is cognisant that an improved shopping experience translates to increased sales. In this regard a number of initiatives were implemented to entrench the brand’s reputation for its unrivalled offering of a high quality fashionable range and unparalleled service in an aesthetically pleasing environment. The results of this process are evident in the Pretoria and Nelspruit bath shops where clients’ approval of the improved offering is reflected in the increased sales in bath shop products in those stores. Across the brand’s seven stores the product range was enhanced and broadened, specifically aimed at offering the consumer a unique one-stop solution.

The move to ecologically friendly products gained momentum over the reporting period. With industry professionals already entrenched in this mindset the trend is expected to gain ground among homeowners in the near future.

In this regard Italtile has built relationships with a range of international specialist suppliers who are highly regarded and accredited by European and American experts – widely recognised as pioneers in this field. These relationships will benefit the brand in terms of its first-to-market strategy in South Africa.

The trading environment is expected to remain difficult for the foreseeable future. However, unlike its peers which are predominantly independent operators, Italtile is uniquely positioned to offer a national solution to consumers via its seven-store network. This network will be expanded cautiously with the relocation of a new, larger Cape Town store in 2010 and an additional two stores, in Boksburg and Windhoek, planned for 2011.

Further growth potential is expected to be derived from the commercial projects market and attention will be paid to expanding the upper end of the middle market as the renovations trend takes hold. Management will continue to focus on efficiencies and innovations aimed at offering unmatched service and value.

 
     
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