Overview
At the outset of the year, management highlighted a range of opportunities which would be capitalised on to grow the business and gain market share through fulfilling the Group’s chief goal: to deliver an unparalleled shopping experience for its customers.
The theme underlying this growth strategy would be retail excellence – an intensive focus on the retail detail – in all the customer-facing elements of the Group’s offering, including: place, product, price, people and promotions. Improved use of business science and analysis would be integral to identifying, evaluating and optimising on the potential in each component of the business.
The growth opportunities would be realised under the auspices of a company-wide Business Optimisation Programme (“BOP”), which would be implemented in the key areas across the business in two phases. The programme would commence in the back-end functions: two of the Supply Chain businesses, namely International Tap Distributors (“ITD”) and Cedar Point, and the Support Services divisions. In the second phase, BOP would be implemented in the front-end retail brand operations.
Management is pleased to report that the first phase of BOP, which focused on leveraging the relationship between the Supply Chain and the retail operations, has been successfully implemented across the back-end of the business: suppliers, systems, and logistics, delivering satisfactory results. Enhanced performances were also reported by the Information Technology (“IT”) and e-commerce departments and the Human Resources division, core functions which are critical to the Group’s long-term growth strategy and sustainability. Detailed divisional reports are presented here.
Financial review
Trading conditions
While the renovations segment of the building industry continued to grow incrementally, no recovery materialised in the new build segment as infrastructure constraints (water, sanitation and power) hampered the roll-out of new housing developments. This situation is expected to persist in the foreseeable future.
Whilst South African homeowners remain very house-proud, deeming their homes to be their primary asset, there was a notable deterioration in investment sentiment and property-related spend as consumer confidence dropped to record low levels in the country. At the top end of the income spectrum, customers adopted a selective “wait and see” approach to property investment; in the middle-income market, the Group’s core target audience, consumers remained highly price sensitive and value conscious as they experienced intensifying pressure on disposable income. Discretionary spend was allocated cautiously, after extensive research, on tried-and-tested high profile brands. Customers with finite resources in the entry level segment continued to invest small amounts in their homes, on an ongoing basis, and as and when funds were available. In rural and outlying areas consumers’ purchasing decisions demonstrated preference for ease of access to one-stop shopping offerings which assisted in overcoming transport and logistical constraints.
Nationally, the trading environment remained competitive. Intensified promotional activity and price cutting featured throughout the period, as traders sought to reduce inventory levels and free up cash flow in the context of the deteriorating economy and local currency. In these conditions the Group’s sound balance sheet and integrated Supply Chain, which facilitated consistent availability of competitively priced quality merchandise, stood the business in good stead.
Results
Despite the subdued economic environment, the Group recorded double digit growth across its trading regions. Improved sales were delivered by each of the retail brands and Support and Supply Chain businesses, and across most of the merchandise categories.
This performance is largely attributable to better execution of basic retail principles and best practice in-store, resulting in fewer lost sales opportunities, as well as improvements in the key back-end functions.
Another notable achievement was the quicker than anticipated roll-out of TopT stores due to the availability of suitable sites.
The Group’s Staff Share Scheme is designed to incentivise employees for achieving greater profitability. This mechanism played an important role in generating buy-in from franchisees and staff for the far-reaching changes wrought by BOP and served to reward them for the programme’s contribution to the Group’s good results.
Continuing operations
The financial information outlined below refers to continuing operations only.
System-wide turnover grew 17% to R5,22 billion (2014: R4,46 billion), while same store revenue increased 16%. Average price inflation was 7%. In a year-on-year comparison, the Group reported a stronger performance in the first half than the second six months.
Margins were forfeited in both the Supply Chain and retail operations due to the deliberate strategy to absorb increased costs and contain price inflation to entrench the Group’s position as the price leader in a number of categories, and offset the effect of Rand weakness which drove up prices of imported product.
Trading profit increased 21% to R905 million (2014: R751 million).
Overheads were reduced as a result of improved management of utilities, and containment of delivery and transport costs. Efficiencies were also gained across the administration function.
Earnings per share increased 32% to 75,9 cents (2014: 57,4 cents), while headline earnings per share rose 22% to 71,6 cents (2014: 58,7 cents). Earnings reflect the impact of the following:
- An IFRS 2 charge of R12 million (2014: R17 million) related to the Italtile Staff Share Scheme, of which R7 million (2014: R11 million) is an accelerated charge related to franchise staff;
- The increased contribution of R62 million (2014: R29 million) to Group profit from associates Ceramic Industries (Pty) Ltd and Ezeetile;
- Net finance income of R11 million (2014: net finance cost of R9 million) attributable to the settlement of long-term debt and improved net cash holdings of the Group;
- A lower effective tax rate resulting from reduced consolidated dividend withholding tax charges compared with the prior corresponding period and the income tax benefit of share awards vesting and payments in the current period;
- A gain of R14 million derived from the loss of control of a subsidiary (SER-Export s.p.a.) to an associate, following the disposal by the Group of a portion of its shareholding in this company; and
- A once-off gain of R19 million resulting from the reclassification to income of foreign currency translation reserve related to Italtile Mauritius (Pty) Limited, previous bearer of certain of the Group’s non-South African trademarks, following the liquidation distribution of that company’s net assets to South Africa.
Inventories rose to R479 million (2014: R408 million) in line with increased sales growth, although firm control ensured stock turn was commensurate, and stock losses were contained. Stock management across the business has been prioritised as a key strategic initiative.
Capital expenditure of R219 million (2014: R166 million) was incurred largely on the Group’s Property Investment portfolio related to an ongoing store upgrade programme and the acquisition of four properties during the period. Investments were also made in IT requirements related to the BOP. In the review period dividend payments totalled R212 million, and loans totalling R136 million were settled, resulting in net cash reserves of R392 million (2014: R249 million) at the end of the period.
The Group’s net asset value was 296 cents per share (2014: 242 cents per share).
Investment in associates
Ceramic Industries (Pty) Ltd (“Ceramic”)
Ceramic is Italtile Ltd’s primary supplier of tiles, sanitaryware and baths. The strategic 20% investment which the Group holds in this business serves to provide tactical advantage and underpin its growth programme.
Pleasing performances were reported by both the South African and Australian tile operations, as well as the local sanitaryware plant. In the year under review Ceramic increased its contribution to Group profit to R55 million from R24 million in the prior period. This strong improvement is attributable to higher production volumes, supported by Rand weakness, which led to better capacity utilisation and enhanced efficiencies. In addition, improved margins were achieved through price recovery and intensified management of input costs.
Ceramic’s newest plant, Gryphon, is scheduled to commence manufacturing in November 2015. The factory will produce large format glazed porcelain tiles which will compete favourably with imported product.
Ezeetile
The Group holds an effective 46% stake in Ezeetile, a national manufacturer of grout, adhesive and related products. Following an extensive organisation-wide restructuring programme, the operation made good progress in achieving enhanced efficiencies in the factories and gaining market share.
For the year under review, the business contributed R7 million (2014: R5 million) to Group profits.
In the forthcoming period, two of Ezeetile’s six factories will be relocated from their existing premises: the plant in Polokwane will be moved to Mokopane, while the Port Elizabeth facility will be relocated to new premises elsewhere in the city.
Italtile Australia
The Group’s investment in Australia comprises a small portfolio of retail premises which it manages and leases out. During the period one of the five owned properties was sold. A net loss of R3 million (AUD360 000) was made on the sale, reflecting the weak state of the commercial property market in that country. The carrying value of the balance of the portfolio is R97 million (2014: R129 million).