TRADING UPDATE
For the 52 weeks ended 28 March 2015
2
CONTEXT
2
This trading update is presented in advance of possible capital structure initiatives and the annual financial
statements to keep stakeholders updated on operational and strategic initiatives, to the extent possible.
Progress on capital structuring initiatives:
• Appointed Houlihan Lokey and Goldman Sachs
• Entered into discussions with lenders as well as certain 2019 noteholders regarding potential debt
exchanges, new debt raises and/or transactions involving our existing debt
• Discussions are proceeding constructively
Management is unable to answer questions relating to possible capital structure initiatives.
Toon ClerckxCFO
Jürgen SchreiberCEO
Jürgen SchreiberCEO
AGENDA
Strategic and
operational update Looking forwardFinancial review
3
STRATEGIC AND OPERATIONAL UPDATE
VISION
Creating unique
experiences
Focused customer
groupings
Exceptional value
proposition and
choice of product
Distinctive retail
formats
5
Retail sales(1) Credit extension(1,2)
6
1) Stats SA and SARB
2) Credit extended to the domestic private sector: Other loans and advances
77.0%
77.5%
78.0%
78.5%
79.0%
79.5%
80.0%
80.5%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Other loans & advances Debt-to-Household income
TRADING ENVIRONMENT
• Consumer sentiment weakened in the 1Q2015, with the FNB/BER Consumer Confidence Index falling
to ‐4 from 0 in 1Q2014
• Consumers concerned about the outlook for the economy due to escalating electricity load shedding, tax increases
and a weaker exchange rate
• Confidence levels declined in high and middle income groups, but increased slightly in the low income group
• Total private sector credit extension growth driven by credit to companies while extension to
households remains weak
Total retail sales CTF sales
KEY STRATEGIC LEVERS
• Store enhancement and portfolio management
• Continuous store optimisation
• Assortment: brands and improved private label
• Leverage growing loyalty programme
Comparable
store growth
• Sourcing
• Pricing management
• Continue to drive group efficiencies
• Margin
expansion
• Grow existing format footprint
• Rollout of tested new formats
• Expand into rest of Africa
• Right sizing of stores
New space
growth
• Second look credit providers and other solutions
• Broaden financial services and insurance offeringCredit
Working capital management
7
TRADING HIGHLIGHTS – Q4:FY2015
Sales growth Profitability Space
8
• Q4 makes up 21.5% of FY15
retail sales
• Retail sales declined 0.7%
• Cash sales growth 6.3%
• Credit sales decline of 9.6%
• Pro forma adjusted EBITDA
growth of 11.1%
• GP margin improvement of
240bps to 37.3%
• Average space growth of 4.5%
• Capex spend of R198 million
• Increase of 31.1% compared to
Q4:FY14
• Bulk of capex spend on Edgars
division and IT
PERFORMANCE AGAINST STRATEGIC LEVERS
Sales growth Margin
9
Credit and cash sales growth New space growth
• GP Margin improved to 37.2% (36.5% in FY14)
• Sustained margins in both Edgars and Discount
• Better pricing
• Lower clearance activity
• Average space growth of 4.9% in line with
strategy
• Meaningful space growth in Edgars including mono-
branded stores
• Continued right-sizing of existing CNA stores
All numbers include Edgars Zimbabwe. All quarters refer to FY15
1.9
5.1
2.0
5.7
2.9
0.5-0.7
0.3 0.5 -1.6 2.6 -1.0 -2.6 -3.9
FY13 FY14 FY15 1Q 2Q 3Q 4Q
Retail Sales (%) Comp Sales (%)
3.0 -4.3 -8.0 -3.3 -3.8 -12.1 -9.6
0.7
15.3
11.015.1
8.7 11.76.3
FY13 FY14 FY15 1Q 2Q 3Q 4Q
Credit sales (%) Cash Sales (%)
Retail
sales
LFL
EDGARS DIVISION – OPERATIONAL PERFORMANCE
• Strong cash sales growth of 13.6%
• Credit sales reduced 8.2%
• Contribution of 48.9% from 54.3% in
prior year
• Solid performance in speciality and
mono-branded stores
• Margin sustained through
• Sourcing improvements
• Pricing initiatives
• Lower clearance activity
Sales growth Margin
1.8%
2.6%
GP
margin
39.5%
0.9pts
10
EDGARS DIVISION – CAPITAL INVESTMENT
• Total of R577 million spent in the year
• Spend in Q4:FY15 of R73 million
• Limited expansion outside South Africa for now
• 44 stores opened (and 15 closures)
• Edgars store chains
• 17 Edgars, 19 Edgars Active, 4
Boardmans, 1 Red Square, 1 Edgars
Shoe Gallery, 1 Cosmetics Emporium
and 1 Edgars Sales store
• 29 mono-branded stores opened in
malls (and 3 closures)
Capex (R millions) New space growth
11
Average
809m2
533 stores
6.6%
Refurbishment
307; 53%
Expansion
270; 47%
Retail
sales
LFL
DISCOUNT DIVISION – OPERATIONAL PERFORMANCE
• Cash sales growth of 10.0%
• Credit sales reduced 8.5%
• Contribution of 36.4% from 40.7% in
prior year
• Solid performance from ladieswear,
menswear and footwear categories
• Continued expansion
• Margin improvement due to
• Pricing architecture
• Improved buying and sourcing
Sales growth Margin
2.5%
0.3%
GP
margin
34.9%
0.8pts
12
DISCOUNT DIVISION – CAPITAL INVESTMENT
• Total of R180 million spent in the year
• Spend in Q4:FY15 of R23 million
• 56 stores opened (and 22 closures
or conversions)
• 34 Jet
• 20 Legit
• 2 Jet Mart
Capex (R millions) New space growth
13
Refurbishment
91; 51%
Expansion
89; 49%
Average
633m2
719 stores
3.9%
CNA DIVISION
• Sales growth
impacted by
• Product mix
• Continued right-
sizing of CNA
stores
• Credit a much
smaller part of the
business
• Increased digital
sales
• Space decrease in
line with right
sizing strategy
• Cumulative capex
spend of R14m for
the year
• Q4:FY15 spend of
R4 million
Sales growth New space growth Margin
• Margin decline due
to
• Mix change
• Increased
promotions
Retail
sales
LFL
5.6%
7.5%
Average
84m2
195 stores
4.5%
GP
margin
30.5%
0.6pts
14
FINANCIAL REVIEW
KEY CONSIDERATIONS FOR FY2015
• Credit: Cash sales ratio of 42.7%* from 47.3% in
FY14
• Initiated testing of a 2nd look credit option during
Q3:FY15, small but performing well
• Finding a long-term partner remains a priority
• Margin management improvements
• Good progress on gross margin
• Working capital initiatives continue to deliver
results and improve financial performance
• Sustained progress in both inventory and accounts
payable management
• Continued overhead cost improvements
16
Pro forma adjusted EBITDA stabilising
*Including Edgars Zimbabwe
-6.6%1.0%
4.2%
11.1%
1.4%
Q1:FY15 Q2:FY15 Q3:FY15 Q4:FY15 FY15
% change on previous year
STATEMENT OF COMPREHENSIVE INCOME
Q4:FY14 Q4:FY15 % change (R millions) FY14 FY15 % change
5 965 5 925 (0.7) Retail sales 26 974 27 510 2.0
2 083 2 212 6.2 Gross profit 9 842 10 245 4.1
34.9 37.3 2.4pts Gross profit margin 36.5 37.2 0.7pts
288 319 10.8 Other income 1 031 1 125 9.1
(1 507) (1 569) 4.1 Store costs 5 700 6 277 10.1
(1 233) (1 377) (11.7) Other operating costs 4 613 4 605 (0.2)
205 233 13.7Share of profits from insurance
business739 747 1.1
(164) (182) 11.0 Trading (loss)/profit 1 299 1 235 (4.9)
279 310 11.1 Pro forma adjusted EBITDA 2 687 2 725 1.4
17
PRO FORMA ADJUSTED EBITDA
Q4:FY14 Q4:FY15 % change (R millions) FY14 FY15 % change
(164) (182) 11.0 Trading (loss)/profit 1 299 1 235 (4.9)
289 296 Depreciation & amortisation 1 137 1 079
7 10 Net asset write off(1) 11 37
(50) 12Profit/(loss) before tax from discontinued
operations(2) (86) 15
139 167 Non-recurring costs(3) 266 360
221 303 37.1 Adjusted EBITDA 2 627 2 726 3.8
52 (3)Net (loss)/income from previous card
programme (4) 29 (23)
6 10 Net income from new card programme (5) 31 22
279 310 11.1 Pro forma adjusted EBITDA 2 687 2 725 1.4
4.7% 5.2% Pro forma adjusted EBITDA margin 10.0% 9.9%
18
1) Relates to assets written off in connection with store conversions, net of related proceeds.
2) The results of discontinued operations are included before tax.
3) Relates to FY2014 costs relating to the sale of the trade receivables book of R116 million, restructure costs of R93 million and post retirement liability buyout of R57 million and FY2015 costs
relating to the sale of the trade receivables book of R73 million, restructure costs of R69 million, post retirement liability buyout credit of R23 million, once-off lease adjustment of R49 million ,
onerous lease charges of R137 million and R55 million related to various strategic initiatives.
4) Net income derived from 100% of the trade receivables including finance charges revenue, bad debts and provisions.
5) Pro forma fee earned by Edcon under the new arrangement with Absa, based on 100% of the trade receivables book.
UPDATE ON COST PROGRAMME
(R millions) FY15
LTM pro forma adjusted EBITDA (reported) 2 725
Permanent adjustments:
Corporate and operational overhead reductions 356
Renegotiation of contracts 17
LTM pro forma adjusted EBITDA (incl. adjustments) 3 098
Normalised pro forma net debt (1)/LTM pro forma adjusted EBITDA (times) 7.6
• Overhead operational efficiency improvements
19
(1) Net debt has been adjusted by trade receivables still to be sold of R369 million in FY15.
COST ANALYSIS FOR FY2015
• Store costs increased 10.1%, impacted mainly
by a 12.0% increase in rental costs
• Rental and manpower constituted 59.6% of total
costs for FY15
Other operating costs Store costs
• Good progress made in controlling overhead costs
• Store card cost improvements
• Non-recurring costs include restructure costs and
once-off lease adjustment
20
(R millions) FY14 FY15
%
change
Other operating costs 3 791 3 804 0.3
Store card administration* 556 441
Non-recurring costs 266 360
Total other operating costs 4 613 4 605 (0.2)
* Excluding Edgars Zimbabwe
CAPEX INVESTMENT
• Total capex, excluding leases, of R1, 037m for
the year
• 146 new stores opened
• Investment weighted towards expansion
• Capex expected to normalise in FY16
21
Total capex breakdown (R millions)
577
180
14
223
33
Edgars Discount CNA IT Zimbabwe
Store capex mix* (R millions)
407
364
Refurbishment Expansion
* Excluding Edgars Zimbabwe
CASH FLOW ANALYSIS FOR Q4:FY201522
171
117
Net
financing
costs
Opening
cash
balance
1 282
23
10
Operating
activities
1 517
Capex &
investments
1 288
Net
financing
& other
Working
capital
1 443
2 563
Closing
cash
balance
Tax Currency
adjustments
150
Proceeds
on sale of
the book
42
Trade and
other payables
Inventories
169
Trade and
other
receivables
1 466
855573
410
Closing cash
balance
1 288
Net
financing &
other
1 898
Net
financing
costs
3 103
Tax
137
Capex &
investments
Working
capital
Operating
activities
2 502
Opening
cash balance
CASH FLOW FOR FY201523
(1) Includes R1 million relating to intangible assets and R2 million relating to a business combination
Working capital
(1)
35681
Trade
and other
payables
396
Trade and
other
receivables
260
Inventories Proceeds
on sale of
the book
(R millions)FY14
Drawn (1)
FY15
Drawn (1)
Super senior secured
Revolving credit facility in ZAR(2) 1 210 2 865
2016’s ZAR notes – J+625bps 1 010 1 005
Senior secured
2017 ZAR Term loan – J+700bps 4 008 4 083
2018’s € Fixed rate – 9.5% 8 691 7 881
2018’s $ Fixed rate – 9.5% 2 603 2 981
Deferred option premium 1 102 1 076
Lease liabilities 273 364
Senior
2019’s € Fixed rate – 13.375% 5 948 5 381
2015’s € Floating rate – E+550bps
Other loans(3) 173 254
Gross debt 25 018 25 890
Derivatives (1 930) (640)
Cash and cash equivalents (410) (1 288)
Net debt 22 678 23 962
LIQUIDITY AND CAPITAL RESOURCES24
1) FX rates at end FY2014; were R10.56:$ and R14.54:€ and were R12.04:$ and R13.12:€ at end FY2015.
2) The total limit under the super senior revolving credit facility is R3,717 million which matures on 31 December 2016. The maximum utilisation of the revolving credit facility during Q4:FY15 was R2,906 million. At the end of the period R465 million of the facilities
were indirectly utilised for guarantees and LC’s.
3) The portion of this debt relating to Zimbabwe was R170m in FY2014 and R234m in FY15.
• March is peak of working capital cycle
• Actively monitoring future liquidity
• RCF availability of R387 million (R2,311 million in
FY14), including LC and other utilisations
• High cash balance to manage liquidity
• Potential sale of non-core assets, including remaining
trade receivables book
• Additional capacity in super senior bucket,
securitization and general debt
• All principal amounts hedged, except 10% of 2018
fixed rate notes and all of the 2019 fixed rate notes
• Edcon continues to assess ways to improve the
capital structure, advisors appointed
36%
12%
27%
24%
1%
ZAR USD (hedged)
EURO (hedged) EURO (unhedged)
Other loans
Hedging of gross debt
LOOKING FORWARD
26
LEADERSHIP CHANGE
26
• Following succession discussions with the chairman in advance of contract which ends in April 2016
• Move to a new role as Vice Chairman of Edcon Holdings Limited from 15 August 2015
• Ensure smooth transition
• Give active commitment to support the company towards its next phase of growth.
• A search for a successor CEO is well underway
27
OUTLOOK
• Consider opportunities to improve the capital structure
• Solution to declining credit sales
• Capitalise on further gross margin opportunities
• Maintain store and overhead cost efforts
• Normalise capex
THANK YOU
For more information
Our website: www.edcon.co.za
Edcon contacts for more information:
Executive Investor Relations and Media:
Debbie Millar 011 495 4086 / [email protected]
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