Edgars stutters, as turnaround remains elusive

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Hilton Tarrant for Moneyweb

Credit sales slump at year-end as group tightens lending criteria….

Edcon’s sales in the most important quarter of the year for all retailers have surprised on the downside, with the group describing trading performance as “weaker than expected”. Early signs of a turnaround in the retail giant were, perhaps, premature.
Excluding Legit, the exit of unprofitable international brands – such as River Island, Tom Tailor and Lucky Brand – as well as accounting for the alignment of the quarter, group retail sales were down 3.8%, or R308 million, from R8.018 billion a year ago. (Comparing the periods directly is not wholly accurate as the prior year’s third quarter ran until Christmas Eve (24 December), while this year’s ran until the 23rd). Like-for-like group retail sales (excluding any store closures or openings) were even weaker, down 4.9%.

Jet, the group’s discount division (which now includes Edgars Active), fared okay. Sales were down “only” 1.3% year-on-year in the three months.But it is Edgars where the headaches remain. Retail sales in this division (which includes Red Square and Boardmans) decreased by 6.3% in October, November and December, when compared to the exact same period a year ago. Most of the pain came in December, with sales 2.9% lower year-on-year in October and November (combined), but down 11.4% in the last month of the year.
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* All figures in rand millions

* Source: Edcon financial reports

The group says sales in ladieswear and footwear grew for the third consecutive quarter in Edgars (ladieswear continues to trade positively in Jet as well). However, “cosmetics, menswear, childrenswear, homeware, cellular and active clothing retail sales decreased when compared to the third quarter [of FY] 2017”.

It continues to close stores in this division. At the start of FY2018 (from March 26 2017), it had 316 stores. In the first quarter, it opened six and closed 14. In Q2, it opened four stores and shut 21, while in the most recent quarter, it opened two and closed seven. That equates to a 9.5% reduction in the number of Edgars, Red Square and Boardmans stores in the nine months between April and December.

The group “tightened its credit scorecards” during the third quarter, which led to the 9.2% year-on-year decline in credit sales. Credit sales were down 9.5% in each of the Edgars and Jet divisions. Cash sales performed better, but were still negative year-on-year (-3.5%).

On the bright side, the number of active credit accounts seems to have stabilised at the 2.5 million mark (2.527 at end-Q3, versus 2.577 at end-Q2).
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* Source: Edcon financial reports

While Edcon says it has “made good progress in respect of finding a securitisation solution for the group’s own book”, this remains a handbrake on growth. With tighter lending criteria in place, its in-house receivables book was R790 million as at December 23. This is a sharply lower increase from the R660 million as at September 23, versus growth in previous quarters.

Its profitable ‘Club’ business continues to deteriorate. “Club fees decreased by R28 million as club membership exits continued across both the Edgars and Jet division, which were not offset by new club membership drives and finance income decreased by R5 million.”

Gross margins improved in both Edgars and Jet (to a comparable 41.4% and 35.1%, respectively). In the Specialty division (which includes CNA and the mono-branded international stores), gross margin improved to a comparable 34.9%.

Pro-forma Ebitda (aligned to Christmas Eve) for the quarter was R662 million, a 26.6% decrease from the R902 million a year ago.

Today, the group looks vastly different to the one which laboured under a huge debt load since being taken private in 2007. The restructuring of its debt last year saw this reduce from R26.7 billion to around R7 billion. But, R2.876 billion of this is due by September 30 (under its super senior liquidity facility and super senior credit facilities). It says it is in negotiations to refinance these, and has secured a number of waivers from lenders with regards to interest payments and covenants. It has asked lenders for consent to add additional credit facilities of up to R1 billion.
Author : Hilton Tarrant

Sticking to a fashion dream and making it come true

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Pfadzani Exodus hasn’t looked back since entering the dynamic world of high-end fashion design, writes Edward Tsumele

Author: Edward Tsumele. Source: Business Live

In 2009 Pfadzani Exodus resigned from her job as an engineer and started a new career as a high-end fashion designer. For years, her friends had been huge fans of her beautiful creations and they were even beginning to receive rave reviews from fashion writers.

The National Empowerment Fund, established by the government to help visionary entrepreneurs start their business, provided her with start-up capital. She hasn’t looked back.

She found a well-positioned retail space at the upmarket mall The Zone in Rosebank, where she launched the fashion boutique Exodus by Huyu Houz in 2012. Pop star and actress Kaybee performed at the launch to an audience comprised of journalists, fashion leaders, and local celebrities.

Born Pfadzani Mphanama, the fashion designer — who grew up in the village of Gondeni — adopted Exodus as a surname “because I simply prefer it”.

“For the first 12 months, Exodus by Huyu Houz did impressively well with regards to foot traffic, and for all intents and purposes, I was well set for a promising career as a clothing designer,” she says.
There are several interruptions during her interview as she interacts with her staff at her Doornfontein factory, who are under pressure to meet yet another delivery deadline.

The world of fashion is worlds apart from mixing industrial chemicals in a laboratory as an engineer.

“In my family, we are six children, and I am the one who always loved fashion. I even made fashion items from plastic as a child,” she says.

“When I was an engineering student at the University of Johannesburg, I was always referred to as that girl who liked dressing fashionably. Many fellow students thought I was a model.”

Exodus says life was good after she quit engineering and opened her boutique. Customers came to look at and buy her stylish outfits for men and women. “I was happy I was doing something that I actually liked,” she says.

But sales started to dry up and the business closed down towards the end of 2010.

“I ran short of stock, my customers started to complain, foot traffic dwindled and there were rent and salaries to pay. This is why it became important for me to own a factory so I could be in complete charge of the whole value chain,” she says.

Crushed but not defeated, she did not give up her dream of making it in the competitive fashion industry.

“I realised that instead of taking baby steps, I had decided to gallop, and that is not wise in this industry,” Exodus says.

“You cannot start at the very top, and that is the mistake I made. I had been aiming at the very top of the fashion industry, instead of starting at the bottom and steadily growing.”

When her first endeavor failed, Exodus used the experience to propel her to try again, vowing that she would work harder and smarter.

Business mentors

“After going back into engineering briefly and later television production, just to earn a living while taking stock of what had happened and what might have gone wrong, I came back into the fashion industry stronger and wiser in 2013,” she says.

“I had to look for mentors, and that is when I approached veteran fashion designers Pamela and Helmut Schweitzer, who owned Sew For Africa, a factory designing and manufacturing corporate clothing,” she says.

“I used to have my designs manufactured there while I was running my boutique. I gave them a proposal and they liked my idea. They suggested that I learn from them.

“They trained me in all aspects of the fashion business, from designing to operations.”

The British couple did not want the business to die and looked no further than one of their employees, Exodus, to keep their dreams alive.

They turned down higher offers for the business from other investors until Exodus raised the finance that allowed her to buy it.

“When they offered me the opportunity to buy the business from them I did not hesitate as I had been skilled in all aspects of the business and it gave me an opportunity to explore high-end fashion design again.

“Now I am wiser and more experienced and I am designing clothing for several clients including South African Airways, Bidvest and the City of Joburg’s Rea Vaya bus service.

“I am also supplying fellow designers including fashion icons David Tlale and Gert-Johan Coetzee.”

Sew For Africa was renamed Exodus International, and the company has a solid reputation as designers, manufacturers and suppliers of quality, durable clothing to companies wanting to improve their image, protect their staff and market their brands.

“We produce for retail, boutiques, corporate, hospitality industry, fashion houses, private and public sectors. We are famous for our quality output,” Exodus says.

“We are masters of pleating, and covering belts and buttons. We are the only company in Gauteng that does belt covering and our competitors are in Durban. Our pleating techniques date back to the 1960s and our competitors are in Cape Town with limited skills and techniques.

“Simplicity is difficult to achieve, but we strive for it continuously,” says Exodus.

For corporate wear Exodus International specialises in protective wear, dresses, skirts, trousers, shirts and trousers for women and men, while their high-end fashion includes suits, Cuban shirts, scarves, cushions, and belts.

“For belts and cushions, we recycle using off-cuts and we call this line of work Exodus Green. It is in line with the principles of the green economy increasingly practised by responsible companies globally to contribute to a clean environment, instead of polluting by throwing away fashion left-overs as waste,” Exodus says.
Article sourced from Business Live

South African apparel retailers fall afoul of tough trading conditions down under.

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This article was written by Germien du Plessis and sourced from Moneyweb

– tend to misjudge the labour market and regulatory environment.


South African companies expanding into Australia are again making headlines, this time with Woolworths announcing that it faces an impairment charge for David Jones of A$712.5 million (R6.9 billion). Woolworths acquired David Jones for R23.3 billion in April 2014, concluding the largest Australian deal at that time by a South African retailer. Now, with the Woolworths share price eroding, it seems that the company underestimated the “tough and unprecedented trading conditions, a cyclical downturn and structural changes that have impacted performance across the Australian retail sector”, the reasons cited for poor performance.

Woolworths is not the only leading retailer that has been amassing an Australian retail portfolio. Others include The Foschini Group with a A$300 million acquisition of Australia’s Retail Apparel Group in mid-2017, Pepkor, Clicks, Pick ‘n Pay, Steinhoff, and Mr Price.

Australia’s retail conditions have been tough for a while, and Amazon’s entry into the Australian market adds to the pressure. This is no secret. Yet South African retailers continue to pursue Australian deals. Australia shares a similar lifestyle and seasons with South Africa, and there are opportunities to capitalise on Australia’s proximity to manufacturing hubs in the East.

Retailers have accordingly been some of the earliest movers into Australia. Unfortunately, a number of these transactions produced less than stellar results,notably early forays by Truworths, Clicks and Pick ‘n Pay. And now Woolworths.

The perception arose in some quarters that Australia is a ‘difficult’ investment destination across the board. We believe this perception is simply not accurate. There certainly have been hard lessons learnt, but there have also been many successful Australian acquisitions by South African corporates. Retailers Metro Cash ‘n Carry turned Davids from a loss-making business into a market-leader. Bidfood Australia is ranked in Australia’s top 200 companies. Nando’s now operates more than 250 Australian stores. In financial services, Youi (owned by Rand Merchant Investment Holdings) has made big strides in the insurance sector. In the ICT sector, Dimension Data and Datatec have completed numerous successful acquisitions, and Murray & Roberts has led the way in mining services through their acquisition of Clough.

Australia offers investors hard-currency earnings and diversification. While Africa offers super-profits in some areas, the African expansion story is also often fraught with regulatory, political and logistical difficulties. The UK remains uncertain due to Brexit, and America, as a vast market with enormous competition, offers its own set of challenges.

Australia has been recession free for 26 years, with average GDP growth of 3.3% per annum since 1992, and the forecast Australian economic growth rate to 2020 is the highest among major advanced economies. The Australian economy is underpinned by an open and transparent business market supported by a highly educated workforce and progressive labour laws, and strong population growth. Australia maintains a triple-A rating from S&P, Moody’s and Fitch and has close ties to the fastest growing markets in Asia.

However, Australia doesn’t offer strong growth across the board and potential investment pitfalls need to be considered.

The Australian market is not as similar to South Africa as one would think. While we share a lifestyle and English as a business language, the Australian psyche differs significantly from South Africa, and the structure of the market is different. In addition, political dysfunction is leading to a governance stalemate, household debt is at record-high levels and wages are stagnant.

In looking at Australian opportunities, South African businesses tend to misjudge the labour market and regulatory environment. Australia is an egalitarian society, with a unionised labour market and significantly higher wages than South Africa; the minimum wage is currently at $18.29 / ZAR175 per hour. Australian regulation is also extensive, which creates a barrier-to-entry benefit when acquiring a business in a regulated industry, but also results in compliance obligations and associated costs.

South African businesses have also shown over-confidence in their turn-around abilities, leading to additional cost. Whilst South Africans have a good turn-around track record on home soil, it becomes significantly harder to attain the same results in a foreign environment, with a foreign workforce characterised by significant cultural diversity. South African management styles can be perceived as very direct, to the point of aggressive or arrogant. The retention of Australian management is therefore critical to business continuity.

When it comes to costs, commercial property is more expensive than in South Africa and rentals are significantly higher. Finally, having financial rather than strategic goals, including chasing ZAR diversification and dollar income at all costs – and over-paying in the process, can lead to transaction failure. An acquisition needs to be more than just a Dollar income stream.

With the above in mind, the choice of sector is key when looking at Australian investment. We believe that Australia offers a particularly good fit for South African ICT and financial services businesses, as well as industries that rely on technology, have a high degree of automation or have inputs that are import-related. In ICT and financial services specifically, a technology-savvy and solutions-driven customer base makes Australia a hub for innovation, and there are significant opportunities for investment.

For investors planning to establish or expand business operations in Australia as part of a diversification strategy, there are opportunities in the right sectors. But to maximise long term value, companies should ensure that they receive informed, local advice with an understanding of the South African investor perspective, so as to navigate the complexities.

Germien du Plessis is Bravura’s corporate finance principal based in Sydney.