consolidated results fy16 & q1:fy17 - …edcon.co.za/pdf/announcements/2016/fy16_and_...

CONSOLIDATED RESULTS

FY16 & Q1:FY17

BERNIE BROOKES

CHIEF EXECUTIVE OFFICER

11 October 2016

EDGARS

EXECUTIVE SUMMARY

CAPITAL STRUCTURE & TRANSACTION

MACRO ECONOMIC ENVIRONMENT

FINANCIAL REVIEW

STRATEGY & TURNAROUND INITIATIVES

RECENT DEVELOPMENTS & WAY FORWARD

AGENDA

EDGARSEDGARS1

EXECUTIVE SUMMARY

• The impact of debt on the business over the last 6 years has been substantial, impacting

customers, suppliers, staff perception and performance of the business

• Edcon has entered into an agreement with primary lenders resulting in a deleveraging of the

business reducing gross debt from R26.7 billion to R6.0 billion

─ Gross leverage circa 2.7x

─ Cash interest cover circa 3.1x

CAPITAL

RESTRUCTURING

Q1:FY17

• Retail sales decreased by 8.1% to R5,973m

• Retail cash sales decreased by 2.7%

• Retail credit sales decreased by 15.6%

• Gross profit margin decreased 200 basis points

(bps) from 38.0% in the first quarter 2016 to

36.0% in the first quarter 2017 mainly as a result

of the weaker Rand and increased clearance

activity

• Adjusted EBITDA significantly affected by

difficult trading conditions and debt burden, down

53.8%

FY16

• Retail sales decreased by 1.3% to

R27,147m

• Retail cash sales increased by 5.3%

• Retail credit sales decreased by 10.2%

• Second-look trade receivables book

grows in excess of 100%

• Controllable costs well managed

• Adjusted EBITDA decreased by 1.7% to

R2,639m

FINANCIAL

REVIEW

2

EXECUTIVE SUMMARY (CONTINUED)

• Sale of Legit to consortium comprising Metier and Retailability

─ Purchase consideration of R637m

• Changes in executive management group

• Deferral of interest payments and bridge financing of R1.5 billion

• Transaction with creditors and development of 4 year plan

• Clearance of aged stock to impact GP by circa R300m in FY17

─ Business has built up aged stocks of circa R600m

RECENT

DEVELOPMENTS

• De-levered balance sheet, combined with the “Fast Track” programme, provides a runway

which sees a interim decline in EBITDA followed by growth in sales and profits

• "Cost out" in FY17 will buffer a significant turndown in EBITDA, and see the business

surface with a lower underlying cost base

• The next four years will deliver a sustainable enhanced operating model driven by

improvements in space productivity, lower cost procurement of GNFR, a focus on better

sourcing, improved inventory management, a stronger management team, a stronger

management of markdowns and entry price points plus a revamped loyalty program

• In addition the plan echoes the development of a customer driven organisation, a renewed

supplier engagement, the development of a world class IT and supply chain infrastructure in

addition to a plan to maneuver through the ever changing environment of financial services

• The Strategic roadmap includes the development of a digital and Omnichannel template to look

at not only re- building the fundamental retail base but setting a platform for future growth

STRATEGY &

TURNAROUND

INITIATIVES

3

CHANGE IN CHAIN REPORTING STRUCTURE

4

PREVIOUS EXECUTIVE MANAGEMENT REPORTING STRUCTURE

• Edgars

(Planning

& Buying)

• Jet, Jet

Mart and

Legit

(Planning

& Buying)

• CNA

(Planning

& Buying)

• Logistics

& Distri-

bution

• BM & RS

(Planning

& Buying)

• Cellular

• Group

Mktg/

GNFR

• Active

(Planning

& Buying)

• Strat.

projects

• Store

Ops

• HR

• Trans-

formation

• CIO

• Credit &

FS

• Company

Secretary

& Legal

• Sourcing

• Merchant

Optimis-

ation

• Loyalty,

BI,Online

• Edgars

(Planning

& Buying)

• Edgars

Store

Ops

• Edgars

HR &

Edgars

Finance

• Jet

(Planning

& Buying)

• Jet Store

Ops

• Jet HR &

Jet

Finance

• CNA

• Board-

mans

• Red Sq.

• Edgars

Active

• Cellular

• HR &

Finance

• Sourcing

• Logistics

• QA

• Procure-

ment

• Property

• Online/

Omni-

channel

• Celrose

• Credit &

FS

• Loyalty

• Customer

Data

Mgmt

• NPS

• Trans-

formation

• Investor

relations

CURRENT EXECUTIVE MANAGEMENT REPORTING STRUCTURE

1. Store Operations

moved to chains, giving

greater control over store

model

2. Chain HR and Finance

moved into chains,

driving greater

accountability for these

support functions

3. All Specialty banners

moved under a single

CE, allowing Specialty to

be run as a portfolio

4. New “Customer” EMG

role created to

strengthen the business

customer focus

5. New “Strategy & PMO”

EMG role created to

enhance Edcon’s project

management capabilitiesEach Specialty banner

includes Store Operations Support functionsSpecialtyJetEdgars

CELROSE

INTER-

NATIONAL

BRANDS

DEPT.

STORESDISCOUNT

CNA AND

LOGISTICS

RS, BM,

CELLULAR,

GNFR

ACTIVE &

STRATEGIC

PROJECTS

COO CFOSOURCING

&

PLANNING

CEO

AFRICA &

INVESTOR

RELATIONS

EDGARS JET (INCL. JET

MART)SPECIALTY COO

STRATEGY

& PMOCIO

GROUP

FINANCECUSTOMERGROUP HR

CEO

LEGAL

KEY BENEFITS OF

NEW STRUCTURE

EXECUTIVE SUMMARY



FINANCIAL REVIEW


RECENT DEVELOPMENTS & WAY FORWARD

AGENDA

5

THE 2 BURNING PLATFORMS

6

2.5

3.7

3.1

2.6

3.4

4.2

FY11 FY12 FY13 FY14 FY15 FY16

Gross finance cost, R billion

1.9 1.9

1.41.3

1.2

1.0

FY11 FY12 FY13 FY14 FY15 FY16

Trading profit, R billion

ISSUE 1: HIGH FINANCING COSTS ISSUE 2: DECLINING TRADING PROFIT

To fix this we need new owners and

reduce our debt – this is happening

Less debt won’t help with this – we

need to turn around performance

EDGARS

7

BURNING PLATFORM - IMPACT OF DEBT

7

• Unattractive

employer due to

bad press,

uncertain future,

limited investment

in skills, lack of

financial incentives

• High turnover of key

management

personnel

• Long lead times to

fill key vacancies

• Senior

management

turnover now

approaching 30%

• Competitors

targeting key talent

• Edcon Provident

Fund: raised

concern regarding

our financial position

and liquidity

• BBEEE scheme

participants: worried

over the continued

ability to pay

dividends to the

participants

• Out of patience and

conscious of the

credit risk

• Certain suppliers

limiting supply

• Suppliers limiting

credit lines

• Stock targets with

many suppliers

limiting stock

availability between

payment periods

• Banks not providing

enough forward

cover for suppliers

and advise against

Edcon exposure

• Non-core asset

sales subject to bank

financing proving

challenging

• Suppliers with high

exposure struggling

to get finance

• Changed structure

on securitising local

and rest of Africa

book: greater

pressure on balance

sheet

• Absa continue to

tighten the book

• Banks no longer

provide cover for

corporate credit

cards

• Credit Insurers

declining willingness

to insure

• Insurers reducing

exposure

• Local brokers and

insurers reducing a

“pulling” covert

• Landlords nervous,

asking for urgent

meetings due to their

exposure

• Preference in site

selection to less risky

competitors

PEOPLENON-BAIN

SHAREHOLDERSSUPPLIERS BANKS OTHERS

TRANSACTION OVERVIEW

8 EDGARS | WINTER 16

Substantial

New Money

Injection

• Existing creditors committed to fund up to R2,825m to

significantly shore up the Group’s liquidity position

• R575m New Revolving Credit Facility(1)

• R2,250m-equivalent USD-denominated New Holdco 1 PIK

A-1 Notes(2)

Material

Deleveraging

of the

Operating

Company

• Part of the new money raised at New Holdco 1 to repay the

Bridge Facilities issued in July 2016

• Senior secured creditors to equitise 50% of their outstanding

claims and novate their reinstated claims to a holding company

• c. R3,200m of second and third-ranking super senior claims to be

novated to a holding company

• Pro forma for the transaction, gross leverage at the operating

company to decline to 2.7x from 12.0x

Reduction of

Cash Interest

Burden

• New commitments and novated claims at the holding companies

to be PIK-only instruments

• Pro forma for the transaction, cash interest coverage at the

operating company to increase to 3.1x from 0.8x

Extension of

Maturities

• Most indebtedness at the operating company to mature

December 2019

• New commitments and novated claims at the holding companies

to mature December 2022

(1) Raised at Edcon Limited. (2) Raised at New Holdco 1BOARDMANS

TRANSACTION OBJECTIVES

• Materially improve liquidity position to ensure ongoing operations

• Address high structural leverage and cash interest burden on

operating company

• Extend maturities and make funding available to facilitate operational

turnaround

• Refocus management onto running the business and executing its

strategic plan

• Alleviate concerns of key stakeholders (suppliers, employees,

landlords, credit insurers, etc.)

• Avoid a value-destructive process

• Make Edcon an attractive place to work and shop again

• Unlock ability to increase lending to credit customers

9 EDGARS | WINTER 16EDGARS | WINTER 16EDGARS

NEW STRUCTURE

(R millions)(1) Pro Forma

Capacity

Pro Forma

BalanceCash PIK Maturity

OPERATING COMPANY

Senior Secured Debt

ZAR New Revolving Credit Facility 575 - J+5.00% 3.00% 31 Dec 2019

ZAR Converted Revolving Facility(2) 1,250 1,250 J+5.00% 3.00% 31 Dec 2019

ZAR LC Facility 300 - J+5.00% 3.00% 31 Dec 2019

ZAR Term Facility(3) 2,047 2,047 J+5.00% 3.00% 31 Dec 2019

EUR Liquidity Facility(4) 2,074 2,074 E+4.00% 8.00% 31 Dec 2018

Lease Liabilities - 319 - - -

Other Loans(5) - 304 - - -

Gross Debt - Operating Company 5,994

HOLDCO 1

USD HoldCo 1 PIK A-1 Notes(6) - 2,320 - 25.00% 31 Dec 2022

USD HoldCo 1 PIK A-2 Notes(7) - 641 - 5.00% 31 Dec 2022

HOLDCO 2

EUR HoldCo 2 PIK A Notes - 2,476 - 8.00% 31 Dec 2022

ZAR HoldCo 2 PIK B Notes - 8,763 - 3.00% 31 Dec 2022

Gross Debt - Holding Company 14,200

Gross Debt - Total Group 20,194

(1) FX rates at the end of Q1:FY17 were R15.19:$ and R16.81:€. Balances are less unamortised issuance costs and exclude accrued (non-capitalised) interest.

(2) Amounts converted from Super Senior RCF Term Loan.

(3) Previously Super Senior RCF Term Loan.

(4) Previously Super Senior Liquidity Facility (excluding Facility A1 here); maturity extension to December 2018 at the Group’s option subject to satisfaction of

certain conditions.

(5) The portion of this debt relating to Zimbabwe was R229 million in Q1:FY17.

(6) Assumes 3.0% OID gross up on ZAR 2,250m.

(7) Assumes 95% of ZAR Super Senior Hedging Debt is converted into this facility (remaining 5% is written down).

EDGARS | WINTER 1610

Deal overview Purchaser details Transaction mechanics

• Legit chain identified as

potential asset for sale in

strategic review

• Strong interest from

range of potential trade

and financial purchasers

• Disposal improves Edcon’s

liquidity position and

intensifies focus on core

department stores and

specialist chain offerings

• Sale of business for

R637m cash

• Cash-free, debt-free

sale

• Sale of assets, going

concern basis

• Retailability - fashion retail

holding company: ~200

stores across SA, Namibia,

Botswana, Zambia

• Partnered by material

shareholder Metier Private

Equity: ~R6bn funds under

management

• Flagship chains Beaver

Canoe,Style

SALE OF LEGIT

11

Purchase consideration of R637m, subject to competition approval and requires the consent of certain of

the Group’s secured lenders

0.8x

3.1x

PRE-TRANSACTION POST-TRANSACTION

12.0x

2.7x

PRE-TRANSACTION POST-TRANSACTION

PRO FORMA OPERATING COMPANY CREDIT METRICS(1)

12

GROSS LEVERAGE (2) CASH INTEREST COVERAGE (2)(3)(4)

EDGARS | WINTER 16

(1) Based on Q1:FY17 LTM Group Adjusted EBITDA of R2,265m less Legit Q1:FY17 LTM EBITDA of R52m.

(2) FX rates at the end of Q1:FY17 were R15.19:$ and R16.81:€.

(3) Assumes annualised gross cash interest based on outstanding balances as at Q1:FY17 (except cash interest on Other Loans which is based on actual LTM results).

(4) 6 month JIBAR at the end of Q1:FY17 was 7.90% and 6 month EURIBOR at the end of Q1:FY17 was -0.18% (and therefore is assumed to be 0.0% based on applicable rate floor).

12

EXECUTIVE SUMMARY



FINANCIAL REVIEW


NEW DEVELOPMENTS & WAY FORWARD

AGENDA

BOARDMANS13

22

23

24

25

26

27

(1)

-

1

2

3

4

09-2

013

11-2

013

01-2

014

03-2

014

05-2

014

07-2

014

09-2

014

11-2

014

01-2

015

03-2

015

05-2

015

07-2

015

09-2

015

11-2

015

01-2

016

03-2

016

Real GDP (y-o-y %) Unemployment rate (%)

GDP GROWTH AND UNEMPLOYMENT RATE

5

6

7

8

9

10

11

03-2

014

05-2

014

07-2

014

09-2

014

11-2

014

01-2

015

03-2

015

05-2

015

07-2

015

09-2

015

11-2

015

01-2

016

03-2

016

4

5.5

7

8.5

10

11.5

05-2

014

07-2

014

09-2

014

11-2

014

01-2

015

03-2

015

05-2

015

07-2

015

09-2

015

11-2

015

01-2

016

03-2

016

05-2

016

EXCHANGE RATES

PRIVATE SECTOR CREDIT EXTENSION (Y-O-Y %) REPO AND PRIME RATE

Source: SARB & StatsSA

8

10

12

14

16

18

20

22-0

7-20

15

05-0

9-20

15

20-1

0-20

15

04-1

2-20

15

18-0

1-20

16

03-0

3-20

16

17-0

4-20

16

01-0

6-20

16

16-0

7-20

16

USDZAR EURZAR

14

MACRO BACKDROP

04%

05%

05%

06%

06%

07%

07%

08%Q

1:20

14

Q2:

2014

Q3:

2014

Q4:

2014

Q1:

2015

Q2:

2015

Q3:

2015

Q4:

2015

Q1:

2016

INFLATION

-20

-15

-10

-5

0

5

Q2:

2014

Q3:

2014

Q4:

2014

Q1:

2015

Q2:

2015

Q3:

2015

Q4:

2015

Q1:

2016

Q2:

2016

-5%

0%

5%

10%

15%

01-2

014

03-2

014

05-2

014

07-2

014

09-2

014

11-2

014

01-2

015

03-2

015

05-2

015

07-2

015

09-2

015

11-2

015

01-2

016

03-2

016

Retail trade sales Textiles, clothing, footwear and leather goods

75

76

77

78

79

03-2

014

05-2

014

07-2

014

09-2

014

11-2

014

01-2

015

03-2

015

05-2

015

07-2

015

09-2

015

11-2

015

FNB/BER CONSUMER CONFIDENCE INDEX

RETAIL SALES HOUSEHOLD DEBT TO GROSS DISPOSABLE INCOME RATIO

Source: SARB & StatsSA15

MACRO BACKDROP

EDGARS

EXECUTIVE SUMMARY



FINANCIAL REVIEW



AGENDA

16

FY16 Q1:FY17

• Retail sales ↓ 1.3% ↓ 8.1%

• Cash sales ↑ 5.3% ↓ 2.7%

• Credit sales ↓10.2% ↓ 15.6%

• LFL Sales ↓ 3.2% ↓ 9.8%

FY16 Q1:FY17

• Gross profit ↓ 2.6% ↓ 12.8%

• Adjusted EBITDA ↓ 1.7% ↓ 53.8%

• Drive to empower and motivate employees

• Implement chain specific initiatives to improve performance

• IT & supply chain initiatives

• Fast track of specific growth initiatives

Challenging economic climate

Margins impacted by higher input costs and increased markdowns

New strategy with a focus on empowering people, customer centricity & simplicity

SA

LE

SP

RO

FIT

SS

TR

AT

EG

Y

17

KEY FEATURES

KEY CONSIDERATIONS FOR FY16 & Q1:FY17

• Introduction of NCR regulations on

affordability in September 2015 impacting

credit sales by approximately R297 million

• Significant weakening of the Rand

• Costs continue to be well managed in all

areas

- Store costs increased by 3%

- Other operating costs decreased by 4%

• Net gain of R4 141m on conclusion of

Exchange Offer offset by significant FX

losses on notes

• Deleveraging of €298 million on conclusion

of Exchange Offer

18

Q1: FY17FY16

• New NCR regulations continue to

negatively impact credit sales

• Supply restricted due to credit risk by large

number of trading partners

• Business managed for cash flow

• Clearance of excess inventory which will

continue into Q2:FY17

• Significant vacancies in the office making

sales and customer focus limited

• Restructuring to chain profit & loss with

35% reduction in head office staffing

numbers, interrupted sales focus

• Majority of senior executives involved in

creditor transaction and daily cash

management

• Warm winter and an Easter shift

• Cash sales grew 8.2% while

credit sales reduced 8.5%

- Good performance from cosmetics,

homewares and menswear offset by weaker

sales from ladieswear

- Clearance markdowns

• Margin impacted by:

- Declining Rand increasing input costs

- Clearance markdowns and promotional

activity

• 49 new stores opened, with 79% of

capex spend on expansion

- 10 Edgars, 6 Boardmans, 14 Edgars Active,

5 Red Square, 1 Edgars sales store and 13

mono-branded stores

• 23 stores closed

- 7 Edgars, 4 Edgars Active,

6 Boardmans and 6 mono-branded stores

EDGARS DIVISION - FY16

YTD

FY16

YTD

FY15

Retail sales growth (%) 0.0 1.8

LFL sales growth (%) (2.8) (2.6)

GP margin (%) 38.5 39.5

Total number of stores 559 533

Capex spend (R’m) 263 577

Av space (‘000sqm) 846 809

34 stores · LSM 7-10


206* stores · LSM 6-10




MONO-BRANDED

STORES

*Includes 2 Edgars sales stores and 1 Edgars

Emporium

19

DISCOUNT DIVISION – FY16

• Cash sales grew 5.1% while credit

sales reduced 15.2%

- Menswear performed well

- Decline in sales from childrenswear &

footwear

• Margin well managed

- 10 bps increase due to competitive

pricing

• 39 new stores in the year, 90% of


- 24 Jet stores,11 Legit stores & 4 Jet

Mart stores

• 26 stores closed

- 19 Jet, 4 Legit store & 3 Jet Mart

stores

YTD

FY16

YTD

FY15

Retail sales growth (%) (2.2) 2.5


GP margin (%) 35.0 34.9



Av space (‘000sqm) 642 633




20

CNA DIVISION – FY16

• Cash and credit sales declined

by 3.4% and 17.9% respectively

- Decline in average trading space

of 6.2%

- Performance across all

categories impacted

• Margin impacted due to changes

in product mix

• Poor response to 2015 revamp of

stores

• Business requires new strategy

and engineering

YTD

FY16

YTD

FY15

Retail sales growth (%) (7.2) (5.6)


GP margin (%) 29.9 30.5



Av space (‘000sqm) 79 84


*Includes 9 Samsung stores

21

• Cash sales declined by 4.7%

and credit sales reduced 15.3%- Homeware performed well however

all other categories were affected

- Increase in markdowns

- Lack of stock from suppliers

- Easter shift

- Warm winter


- Weak Rand

- Markdowns

• 1 new Edgars store opened

• 4 stores closed (3 Edgars and 1

Edgars sales store)

Q1:FY17 Q1:FY16



GP margin (%) 40.4 43.0


Capex spend (R’m) 46 (5)1

Av space (‘000sqm) 731 717

203 stores* · LSM 6-10

*Includes 1 Edgars sales store and 1

Edgars Emporium store

22

EDGARS DIVISION – Q1:FY17

1Landlord contributions received in excess of capital expenditure.

• Cash sales declined by 2.4%

& credit sales reduced 20.8%

- Decline in sales across all

categories

- Stock availability from suppliers

- Warm winter

- Uncompetitive entry price points

• 6 new Jet stores in the year,

67% of capex spend on

refurbishment

• 7 Jet stores closed

Q1:FY17 Q1:FY16



GP margin (%) 32.0 33.9



Av space (‘000sqm) 586 586



23

DISCOUNT DIVISION – Q1:FY17

• Cash sales flat &

credit sales reduced 11.9%

- Good performance from cosmetics,

homeware, stationery, entertainment &

digital

- Ladieswear and cellular underperformed

- Stock supply

- Heavy clearance


- Weaker Rand

- Change in product mix

• 20 new stores opened, with 83% of


- 1 Edgars Active, 4 Boardmans, 3 Legit, 1

Red Square, 3 CNA (incl. Samsung) and

8 mono-branded stores

• 3 stores closed

- 1 Legit and 2 CNA stores

Q1:FY17 Q1:FY16

Retail sales growth (%) (3.6) 2.1

LFL sales growth (%) (7.8) 0.4

GP margin (%) 33.6 33.9



Av space (‘000sqm) 261 256

MONO-BRANDED

STORES







*Includes 10 Samsung stores


24

SPECIALTY DIVISION – Q1:FY17

KEY FINANCIALS

25

EDGARS

STATEMENT OF COMPREHENSIVE INCOME

26

FY15 FY16 % change (R millions) Q1:FY16 Q1:FY17 % change

27 510 27 147 (1.3) Retail sales 6 500 5 973 (8.1)

10 245 9 974 (2.6) Gross profit 2 470 2 153 (12.8)

37.2 36.7 (0.5)pts Gross profit margin 38.0 36.0 (2.0)pts

1 256 1 416 12.7 Other income 322 336 4.3

(6 277) (6 463) 3.0 Store costs (1 583) (1 703) 7.6

(4 666) (4 665) (0.0) Other operating costs (950) (1 248) 31.4

747 725 (2.9)

Share of profits of associates

and insurance business 161 199 23.6

1 305 987 (24.4) Trading (loss)/profit 420 (263) (62.6)

2 684 2 639 (1.7) Adjusted EBITDA 695 321 (53.8)

EDGARSJET

ADJUSTED EBITDA

27

FY15 FY16 %

change (R millions) Q1:FY16 Q1:FY17 % change

1 305 987 (24.4) Trading (loss)/profit 420 (263) (62.6)

1 079 1 004 Depreciation & amortisation 249 244

37 19 Net asset write off(1) 5 5

(42) (29)

Gain on sale of written down trade

receivables(2)

- 8 EBITDA loss/(profit) on brands exited(3) (1) 3

52 Rand depreciation adjustment(4)

305 598 Non-recurring costs(5), (6) 22 332

2 684 2 639 (1.7) Adjusted EBITDA 695 321 (53.8)

1) Relates to assets written off in connection with the closure of stores, net of related proceeds.

2) Relates to gains realised on the sale of a portfolio of written down trade receivables.

3) Adjustment to remove the EBITDA gain or loss achieved from certain brands being Express, Geox, Lucky Brand and One Green Elephant which the Group has strategically agreed to exit.

4) Foreign exchange gains recognised below the trading profit line which hedged the exposure in cost of sales as a result of the significant devaluation of Rand.

5) Non-recurring costs in FY2015 related to the sale of the trade receivables book in the amount of R73 million, employee restructure costs of R69 million and onerous lease charges of R137 million, post-retirement medicalaid buyout credit of R23 million, once-off lease adjustment of R49 million; and non-recurring costs in FY2016 related to employee restructure costs of R72 million, onerous lease charges of R123 million and R1 millionlease cancellation cost, post-retirement medical aid buyout cost of R26 million, once-off lease adjustment of R33 million, penalty costs of R57 million, transitional project related expenditure of R70 million and strategicinitiative costs of R216 million.

6) Relates to costs associated with the corporate and operational overhead reductions of R5 million in Q1:FY16, onerous lease reversals of R11 million in Q1:FY16, transitional project related expenditure of R78 million inQ1:FY17, strategic initiative costs of R246 million (Q1:FY16 R28 million) and a non-recurring of R8 million relating to our strategic partnership with Absa in Q1:FY17. RED SQUARE

OTHER OPERATING COSTS STORE COSTS

• Lower depreciation charge on non-store assets

• Reduction in accrued bonuses

• IT costs well managed

• Renegotiated contracts curbing costs

• Non-recurring costs increased due to various strategic initiatives

• Store costs increased by 3.0%

- improved stock control, reduced transactional fees, decrease

in asset write-offs, reduction in straight lining of leases under

IAS17, offset by an increase in security and utility costs

• Rental and manpower constitute 62.0% of total

costs for FY16 (59.6% in FY15)

- Rental and manpower costs increased by 11.4% and

2.0% respectively

(R millions) FY15 FY16

%

change

Other operating costs 3 804 3 650 (4.0)

Store card administration 557 417 (25.1)

Non-recurring costs 305 598 96.1

Total other operating

costs 4 666 4 665 (0.0)

28

COST ANALYSIS - FY16

BOARDMANS

OTHER OPERATING COSTS STORE COSTS

• Renegotiated contracts continue to curb costs

• Decrease in remuneration through head office head count reductions

• Non-recurring costs increased due to various strategic initiatives mainly driven by the transaction with creditors

• Store costs increased by 7.6% due to

increased rental costs, higher utility costs and

an increase in manpower costs

• Rental and manpower constitute 59.9% of total

costs for Q1:FY17 (61.8% in Q1:FY16)

- Rental and manpower costs increased by 10.2%

and 7.7% respectively

(R millions) Q1:FY16 Q1:FY17

%

change

Other operating costs 836 816 (2.4)

Store card administration 92 100 8.7

Non-recurring costs 22 332

Total other operating

costs 950 1 248 31.4

29

COST ANALYSIS - Q1:FY17

EDGARS

-292

1 955

-604

-88

-1 783 1 456 1 693

1 716

1 288

CASH FLOW - FY16

30

(271)

-49 28

Working Capital

Trade receivables,

other receivables &

prepaymentsa)

Inventories

Trade and

other payables

Opening cash

balance

Operating

activities

Net financing

costsTaxCapexWorking

capital

Closing cash

balance

Financing

activitiesb)

R’m

a) Includes R29m from proceeds of sale from trade receivables.

b) Includes a R1,532m for derivatives settlement and R3m for currency adjustments.

31

-135-173

-61 -280

-35

1 112

103

1 693

Working Capital

Trade receivables,

other receivables &

prepayments

Trade and

other payables

CASH FLOW - Q1:FY17

31

Opening cash

balance

Operating

activities

Net financing

costsTaxCapexWorking

capital

Closing cash

balance

Financing

activitiesa)

R’m

a) Includes a R1m for cash currency adjustments.

(163)

-171 199

Inventories

EXECUTIVE SUMMARY



FINANCIAL REVIEW



AGENDA

32 EDGARSEDGARS

BURNING PLATFORM 2: OPERATING PERFORMANCE

• Losing the battle for customers

• Significant market share loss

• Addiction to promotions

• Ageing inventory

• Worst-in-market sales productivity

• Dated supply chain

• Complex IT systems, not supporting the

business, costly to run and to maintain

• Banking centric credit offering

• Uncompetitive cost baseCOST

SALES & GP

GROWTH

ENABLERS

33 EDGARSBOARDMANS

CONTEXT – EDCON’S TRADING EBITDA (EXCL. C&FS) IN 4Y DECLINE

Note: Data also excludes Zimbabwe

2 710 2 850

2 364

3 061

3 408

2 511

1 666 1 461

1 324

-

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

EBITDA, R million

34

TWO KEY PRINCIPLES OF NEW STRATEGY

• Head office cost reduction and change in

operating model: eliminate rework, simplify

business, drive efficiency

- 35% reduction in headcount and cost

- Gives chains full financial and management control

• Introduction of a procurement team and tendering

processes for goods not for resale (GNFR), providing

a lower cost plus a simpler and well governed

strategy

• Immediate cessation of square meterage rollout

with no defined property strategy: leverage existing

space to enhance productivity and returns

• Enhanced buying prices through eliminating

excess use of agents and brokers; focus on local

sourcing

• Relentless focus on “customer service”: move

from focus on “transaction”, “efficiency” and

“checklists” to focus on customer experience and

reward (loyalty, NPS, aligned incentives)

• Move to margin enhancement: management on

“open to buy”, less reliance on and better planning of

promotion, control of markdown, “SKU”

rationalisation, focus on entry price points and

decluttering of merchandising & marketing

• Re-focus on a more profitable private label

portfolio with 3x the productivity of international

brands – better fit, exclusive, less impacted by ZAR

devaluation

• “Reverse” strategy to win at all costs on

international brands – onerous contracts, capex

hungry, high price perception, not “season” friendly;

R64m loss in FY16

• Focus on digital and Omnichannel as growth

engine35

IMMEDIATELY BRING

COST UNDER CONTROL

SET UP BUSINESS FOR

TOP LINE AND MARGIN GROWTH

NEW EDCON STRATEGY BASED ON 3 PILLARS

• Differentiated model with

service as competitive

advantage

• Proposition based on deep

understanding of target

customer base

• Embedded in corporate

DNA through tools (NPS,

loyalty) and processes

(communication, KPIs)

• Clearer accountabilities

and organisation structures

following HQ restructuring

• Simpler product proposition

with less brands

• Simpler way of working,

e.g. smaller vendor

landscape

• Recognise and empower

top performers

• Remove bottlenecks

created by past decisions,

e.g. empower people

through better IT and

Supply Chain

CUSTOMER CENTRICITY SIMPLICITY PEOPLE EMPOWERMENT

36

STRATEGIC INITIATIVES ADDRESS KEY ISSUES

KEY ISSUES INITIATIVES

GROWTH

ENABLERS

COST

•Headcount: inflated head office size, e.g. senior

management and support functions above benchmark

•GNFR: not systematically managed, e.g. no process

compliance, low levels of supplier consolidation

•COGS: high degree of indirect sourcing, with agents

driving up price paid

Lean HQ: headcount reduction and introduction of

new operating model (chains taking P&L ownership)

GNFR reduction: renegotiation/tendering of key

contracts, introduction of demand control measures

COGS: introduction of in-house sourcing function to

increase share of direct sourcing

3

1

2

•Edgars: significant loss of market share due to low

customer appreciation / loyalty vs competitors

•Jet: losing market share vs value competitors due to

insufficient value focus; too high cost for value player

•Specialty: broad portfolio of underperforming brands,

especially international brands

Edgars turnaround: tactical store performance

improvement (service, presentation, pricing); strategic

process changes (e.g. category management)

Jet lean discount re-positioning: store experience,

assortment simplification, EDLP pricing

Specialty portfolio strategy: decide which brands/

banners are part of future Edcon; optimise performance6

5

4

•Customer service: past focus on efficiency; no

infrastructure in place to capture customer POV

• IT: year-long underinvestment in IT leading to

competitive disadvantage, e.g. in data availability /

accuracy, customer experience, IT related risk

•Supply Chain: past focus on logistics cost reduction

leading to high E2E cost, and low stock availability

•Banking centric credit offering

NPS: introduce net promoter system across Edgars and

Jet stores including relevant feedback loops

IT strategy & renewal: determine required system

upgrades to manage risks and enable future growth

Supply Chain: developing end state and short-medium

initiatives to cut cost and accelerate performance

Drive new account openings and address average

account limits

9

7

8

10

37

LEAN HQ: SOLUTION AND FINANCIAL IMPACT1

*Includes R5M of recently approved employees (Bench candidates)

**Out of scope spend comprised of: Store FS (R47M); Call Centre FS (R134M); Store Cellular (R107M); IT (R41M); Securex (R23M)

***Out of scope savings includes Store Cellular (R16M), Store FS (R9M) and IT (R7M)

Note: Includes R60M savings on top gear bonus. Includes consulting and staff fees. Excludes potential retention bonus saving of R21M/yr for the next 3 years

FY16 baseline is FY16 remuneration budget adjusted to include spend on casuals, external consulting and staff costs; Includes 111 vacancies (R58M), excludes 11 bench candidates (R9M)

• Addressable

spend: R1,554M

• Out of scope

spend: R352M**

• Gross savings:

R422M* (27% of

addressable spend)

• R44M reinvested in

strategic growth areas

• Sourcing forex impact

(R20M)

• Out of scope

savings*** (R32M)

Net savings of R389M (after reinvestments)

38

EDCON NON-STORE LABOUR COST (FY16, RM)

GNFR: SOLUTION / KEY INITIATIVES

CATEGORY

FY17

IMPACT

ZARM

INITIATIVE

PROPERTY 28

• Renegotiate leases of stores coming up for renewal based on store

segmentation (Edcon vs landlord negotiation position)

• Renegotiate with biggest landlords across whole portfolio

ADVERTISING 121• Consolidate advertising suppliers: one parent agency per chain with strict rate

card based cost control on media buying and production

UTILITIES 49

• Introduce and enforce energy policy to manage demand, e.g. switching off

equipment over-night, revised temperature guidance for air-conditioning, use of

energy-saving lighting

SECURITY 18• Vendor consolidation: 2 vendors across entire network; potential additional cash

benefit from selling Securex (in-house security operation)

PROFESSIONAL

SERVICES24

• Tightened travel and communications policies

• Replacement of travel agent to enable better cost control

OPERATIONS (OTHER) 15• Optimise spend on stationary & wrappings and repairs & maintenance

• Selectively introduce shopping bag charge

OTHER 35 • Renegotiation and stricter management of selected other contracts

TOTAL 290

39

2

COGS

Where to

Source

from?

• Driving a “competitive” sourcing

model with effective utilization of

multiple country and channel options

Whom to

Source

from?

• Sourcing the “best fit” country /

channel / vendor options

considering cost, quality, and

reliability factors

How to

Source?

• Optimising placements with the

correct calendar share and lead

times (LLT / SLT / QR)

APPROACHBURNING PLATFORM

• Level of direct sourcing significantly below

potential

40

3

23%30%

45%39%

33% 31%

2015 2016

Edcon

-13%

+31%

Edcon Edgars Jet Speciality

I&T

DG

LR

Note: - Values exclude RPL

Source: OCR & Offshore Placement confirmations

30%42%

51%36%

19% 22%

2015 2016

Edgars

+38%

-28%

+14%

13%22%

51% 34%

35%44%

2015 2016

Speciality

-34%

+66%

+25%

20% 22%

39%43%

41%34%

2015 2016

Jet

+10%

+14%

-16%-3%INDIRECT + TH

DIRECT LOCAL

/ REGIONAL

DIRECT

GLOBAL

EDGARS TURNAROUND PROGRAMME UNDERWAY

INITIATIVES KEY ACHIEVEMENTS TO DATE

TACTICAL

INITIATIVES

Optimize marketing plan • New marketing plan with less promos

Optimize markdowns & clearance • New guidelines & tool to improve markdowns

Simplify store administration • Store communications drastically simplified

Drive financial services penetration • Financial Services pilots over-performing chain

Rebuild home offering • -

Improve store presentation • Strong sales uplift with service & VM pilots

• Significant NPS improvements in pilot stores

STRATEGIC

INITIATIVES

Improve customer experience

Review positioning of brands • Agreed adjustments to positioning & brands ptfolio

Improve category management • Repricing delivering very positive results

Cluster stores & localize offer • -

Improve leadership & engagement • -

a

b

c

d

e

f

g

h

i

j

k

FOCUS OF

STORE

PILOTS TO

DATE

41

4

INITIATIVES KEY ACHIEVEMENTS TO DATE

TACTICAL

INITIATIVES

Optimize Marketing plan• Refocus on EDLP & limited volume value driven promotions.

Maximising available marketing channels.

Refresh pricing strategy for CFA and General

Merchandise

• Increased focus on driving value message. New guidelines

established for SKVIs (~30% of CFA business) and General

Merchandise areas.

Reduce and optimize assortment• Summer ’16 assortment revised, ~10-20% reduction in options vs.

last year.

Align visual merchandising and layout to drive

value perception and improve store

experience

• Project in progress, 65 stores (~30% of sales) to be completed by

end-June. Sales & GP have improved in Initial 15 pilot stores (stores

currently out-performing Chain by 3.8% in sales & 8% in GP).

Grow Home offering • Strong performance in Home Softs (Bedroom growth YTD).

Optimise vendor base • Movement towards Short & Quick response model

Lean HQ and retail operations• Headcount reductions completed, marketing costs reduced by 15% to

date.

STRATEGIC

INITIATIVES

Improve customer experience• Quick wins identified and being rolled out. – new look & feel being

rolled out in line with new layout roll-out.

Increase stock turns to 5.9

• 3 year plan being put in place to achieve this. Quick & Short lead time

vendor base being developed e.g. >R15m placed with Eddels (away

from indirect vendors).

Optimise store footprint• 3 year plan being finalised on store closures and consolidations. New

store format revised

Leverage loyalty and club programs• New account offering and benefits being tested. Loyalty programme

will be re-launched in line with company initiative.

a

b

c

d

e

f

g

h

i

j

k

JET LEAN DISCOUNT PROGRAMME UNDERWAY

42

5

• Review and rationalise product assortment

• Improve value perception

• Fix poor store performance

• Capitalise on online sales growth as key contributor to overall sales growth

• Review product mix and assortment

• Improve shopping experience

• Capitalise on online sales growth

• Review and improve product assortment

• Improve store profitability

• Review and improve product assortment and value perception

• Improve in-store experience

• Improve stock turns to deliver better GMROI and improve fast fashion perception

• Review product assortment to ensure we have differentiated offer

• Fix poor store performance

• Review promotional strategy

• Improve existing business performance

• Grow data and airtime sales

• Review and enhance in-store service model and cross-selling

SPECIALTY KEY INITIATIVES

Cellular

43

6

CUSTOMER CENTRICITY: 3 PILLARS

CUSTOMER

SEGMENTATION & LOYALTY

NPS DESIGN

AND IMPLEMENTATION

CONTINUOUS IMPROVEMENT AT

THE STORE LEVEL

• Roll-out behavioral customer

segments across chains

• Adoption of customer-centric

thinking in all elements of chain

• Leveraging & improving existing

loyalty program to deliver chain

value proposition

• Testing NPS across stores through

proxy and inner loop pilots

• Activating the outer loop discussion

in the HQ

• Rolling-out NPS to all chains/

stores

• Creating a full understanding of

customer-centric issues at the store

• Prioritizing based on cost & benefit

and overseeing the resolution

together with ROMs & DOMs

INSTIL CUSTOMER CENTRIC CULTURE THROUGHOUT ORGANIZATION

• Embark on a culture change programme that places the customer at the forefront of business conversations –

Voice of the Employee included here.

• Bring the voice of the customer into Edcon meetings and decisions

44

7

IT: WHAT IS THE CURRENT STATE OF THE IT ENVIRONMENT AT EDCON?

• Today’s IT is far too expensive: 3.4% (2.9% excl. Financial Services) vs. Gartner’s benchmark of 1.5% for retail

• Running old equipment: 85% of tills are older than 7 years; 67% of store servers are above the average

refresh age

• We have a series of critical IT risks requiring mitigation and investment to de-risk the business

• We manage a bespoke and highly complex IT landscape adding cost and risk

• Our IT function is not constructed to enable business priorities

• We are too heavily outsourced (95% of our effort) which is well outside the Retail benchmark of 73%

• Our service delivery to the business is poor – too many systems issues and crashes, support services not inline

with business expectations and industry standards

• Our customers’ experience is significantly behind our competitors – long queues at tills with customers walking

away from purchases, no omni-channel capability

• Our people are forced to use workarounds and ‘stick plaster’ solutions which adds costs to the business

and IT, and reduces our speed to market

45

8

OUR IT STRATEGY

46

8

Fix the Operating Model

Renegotiate our Contracts

Deliver a new IT Architecture

Reduce Business & IT Risk

Fix the ‘Core’ IT Systems

Enable the Growth

1

2

4

5

6

3

Edcon IT Strategy

1

2

3

4

5

6

EDCON

IT STRATEGY

TECHNOLOGY INVESTMENTS WILL REMOVE COMPLEXITY AND RISK, DRIVE AGILITY AND SPEED

• Fragmented

• Point-Point

• Inflexible

• Fragile

CURRENT STATE

• Structured

• Scalable

• Flexible

• Agile

TARGET STATE

• Align IT Architecture delivery to business process /

activities

• Move from single point solution to enterprise wide

modular solutions

• Consolidate similar business capabilities

• Create single view of Product, Inventory, Customer

and Supplier data

• Use of single Integration Platform

• Build expertise of buying and integrating package

technologies

• Establish a common language across domains

• Support alignment of IT landscape to business ambitions

• Improvement in delivering business value of IS projects

• Reduction in operating costs through reduced delivery effort

and reduction in number of tickets

• IT budget re-allocated to strategic investments

• Reduce time to launch new services/ products with

changing business environment (e.g. Launch of

multichannel offering )

• Reduction in system support and maintenance costs (e.g.

less packages and interface to maintain )

• Improvement in service levels and business satisfaction47

8

KEY FEATURES OF TARGET ARCHITECTURE HOW IT WILL BENEFIT EDCON

SUPPLY CHAIN: BURNING PLATFORM

• Significant end to end cost base

• Stock not available to customers

• High lead time variability hinders planning

• High share of promotions and markdowns

48

9

SUPPLY CHAIN: POTENTIAL OPPORTUNITIES

BOOST AVAILABILITY AND SALES

Required

stock

allocation

Reduce lead

time

Reduce

stockroom

processing

time

Objectives

Drivers

What may have to change – emerging ideas

REDUCE END TO END SUPPLY CHAIN COSTS

Reduce

inventory

Reduce stock

room cost

Reduce DC

cost

Reduce

markdowns

Reduce

logistics cost

Ratio packs

Smoothen volumes

Higher delivery frequency

Floor-ready

Central stockroom / hold back stock

Improve DI

Smoothen volumes

Optimise staffing

Floor-ready delivery

Central stockroom / hold back stock

Optimise size & staffing

Optimise IST

Suppliers

Network

Process

Resources

Full potential (FY20+) gross benefits (preliminary)

~R100M (avoid

lost sales)

Cut lead time

by 3-4 days

Cut lead time

by 1-2 days

~140M (interest

reduction)

~R170M

(stockroom

rental &

staffing)

~R80M

(multiple

initiatives incl.

3pl)

~R40M increase

~R90M

reduction in

markdowns

Reduce stock

losses /

damages

Ratio packs

Floor-ready delivery

Central stockroom

Higher delivery frequency

Optimise IST

As per

markdowns

(duplicative)

Network optimisation

49

9

CREDIT SALES: BURNING PLATFORM

Source: initiative team assessment

• Bank centric new account strategies not

aligned with retail sales

• NCR affordability legislation negatively

impacts on credit sales

• Significant drop in new account application

volumes

• Even greater drop in credit limit increase

offers

50

10

CREDIT SALES: NEW ACCOUNT OPPORTUNITIES

NEW ACCOUNT VOLUMES

• Application volumes reduced by ~30% due to new NCR

affordability regulations

• Number of opened new accounts however increased due to:

• Introduction of Edcon funded portfolio in Q4:FY15

• Change in internal Bank employment confirmation policies due to

additional affordability documentation

• New account volume growth addressed

NEW ACCOUNT LIMITS

• New account average limits as much a 70% lower than

industry peers

• Conservative Bank centric lending strategy not aligned with Retail

business

• Negotiating amended new account flow volumes with Absa

• Increased new account flow to Edcon funded portfolio supported

with higher initial limits

• Higher new account limits to support short and long term credit

sales

11%

22%

7%

Increased flow of new

accounts to Edcon funded

portfolio will support Retail

aligned new account credit

limits

51

10

ROADMAP WITH 9 INITIATIVES

2015 2016

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Growth

Enablers

Cost

IT renewal implementation

Implementation

Implementation

Implementation

Implementation

Operating Model

COGS reduction3

Supply chain & logistics strategy9

Specialty portfolio strategy6

Customer centricity7

IT strategy & renewal plan8

Jet: Lean discount re-positioning5

Edgars turnaround / Customer centricity4

Lean HQ & Operating Model1

GNFR2

STATUS

• Savings delivery

underway

• Savings largely

achieved

• Savings delivery

underway

• Quick wins

underway, strategy

being finalised

• Pilot phase

• Pilot phase

• Strategy being

finalised

• Roll-out phase

• Strategy being

finalised

Implementation

Implementation

Implementation

52

EDGARS

EXECUTIVE SUMMARY



FINANCIAL REVIEW



AGENDA

53

PHASE 2 OF FAST TRACK WITH NEW INITIATIVES

AMBITION: EDCON FULL POTENTIAL TURNAROUND TO REALIZE VALUE IN THE NEXT 2 YEARS

3.1 GNFR: tracking and continuous

improvement

1.3 Results Delivery Office (RDO)

Fast Track support5

4.3 IT: overhaul infrastructure to bring

in line with chain requirements,

optimise cost base, minimise risk

1.1 Tactical initiatives: Focus on

trading optimisation1

1.2 Strategic initiatives: Focus on

customer experience and range

planning2

4.2 Property: strategy, incl. future

store formats/footprint

3.3 COGS: sustainable shift to direct

sourcing

4.1 NPS: system roll-out and staff

training (Edgars/Jet)

3.2 Supply Chain: restructure service

model to bring in line with chain

requirements

3.5 Omnichannel strategy

Governance – implementation and

orchestration of initiatives

Communication – plan and

implementation support

Change management – implement

sponsorship spine

Tactical program support

3.4 Loyalty: programme review,

deliver value

Operational ExcellenceHigh Performance

Infrastructure

Edgars

Turnaround

Jet

Lean discount repositioning

2.1 Jet lean discount

4.4 HR: Talent screening, assessment

and risk mitigation

1 3 42

Potential new

initiatives under

fast track umbrella

Potential new

initiatives under

fast track umbrella

3.6 Credit/FS turnaround

Future initiatives

54

EXECUTIVE APPOINTMENTS

EDGARS | WINTER 1655

• Richard Vaughan has been appointed as CFO, replacing Toon Clerckx

who has returned with his family to Belgium. Richard has been the deputy

group CFO for 4 years, is a qualified Chartered Accountant and has

significant experience in a diverse set of roles including with Goldman

Sachs and Deutsche bank.

• Andrew Levermore, the former Chief Operating Officer of the Edgars

Division has been promoted to Chief Executive of Edgars (Bernie

Brookes was previously acting in the Edgars Chief Executive role);

• Urin Ferndale, who has spent nearly 16 years at Edcon in various senior

management roles and has a wealth of retail experience, has been

appointed Chief Executive of the Jet Division following the decision by

Andy Williams to return to England for family reasons; and

• Andy Jury, who has significant retail and financial experience and was

previously Edcon’s Head of Strategy, has been promoted to Chief

Executive of the Specialty Stores Division following a decision by Garth

Napier, who had indicated that he would move once the Group advanced

the change in its debt position, has decided to pursue other interests

outside the Group.

EDGARS ACTIVE

THANK YOU

FY16 & Q1:FY17

CONSOLIDATED

RESULTS

For more information

Our website: www.edcon.co.za

Edcon contacts for more information:

General Manager Finance

Odet Hayes

[email protected]

EDGARS

consolidated results fy16 & q1:fy17 - …edcon.co.za/pdf/announcements/2016/fy16_and_...

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