Wrap Text
Business Update
Edcon (Proprietary) Limited
(Incorporated in the Republic of South Africa)
(Registration No. 2007/003525/07)
Company code: BIEDC1
(“Issuer” or “Edcon”)
BUSINESS UPDATE
Investment in strategic initiatives starting to show traction
Preliminary results for 13-week ended 29 December 2012:
Headline results down for the quarter
Tax settlement agreed with the South African Revenue Service
with no near-term cash impact
Commitment letters signed for approximately R4.0 billion
senior secured term loan facility to refinance short term
maturities
Background
Edcon would like to update investors on a number of recent
developments in our business. In particular, we would like to
describe our progress on certain of our key strategic initiatives
and provide investors with details on our recent tax settlement with
the South African Revenue Service (“SARS”). In addition, we are
providing investors with certain preliminary financial results for
the 13-week period ended 29 December 2012. We expect to publish
Edcon’s interim financial statements and quarterly report as at and
for the 13-week and 39-week periods ended 29 December 2012 on or
about 21 February 2013.
Update on Strategic Initiatives
Edcon would like to provide more detail on the strategic and
operational initiatives it has started implementing, and intends to
implement further, in order to meet the following four key
objectives:
deliver growth on a same-store basis;
deliver growth through the increase of our footprint;
improve our margins; and
increase sales through our private label store card programme.
Delivering growth on a same-store basis
We have recently initiated the process of refurbishing and improving
the assortments and selection of key merchandise in 72 of the
leading Edgars stores, with positive results so far. We invested
approximately R65 million in the first phase of this project, which
we initiated in May 2012 and completed in November 2012. Our sales
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in these 72 stores were adversely affected during the time they were
being refurbished but exhibited growth with respect to the
merchandise categories covered by our merchandising initiative of
approximately 6 percentage points higher than the remainder of our
Edgars stores since completion. We plan to implement the second
phase of this project, which includes rolling out “stores-in-store”
devoted to international brands such as Topshop, from April to
August 2013 across the same 72 stores. Total investment for this
second phase is budgeted at approximately R300 million.
We have implemented a new merchandising strategy in our Discount
division, and more recently in our Edgars division, aiming to
provide “fashion-right” offerings within our private label, with a
focus on key value items in our Discount division. We believe this
strategy resulted in the increased market share of our Discount
division in ladieswear.
Approximately 8.8 million of our customers are now members of our
“Thank U” loyalty programme, which will give us the opportunity to
promote our offerings through selective direct marketing, which we
expect should have a positive impact on our results. We are required
to record a provision equal to approximately 1% of our sales made
under our “Thank U” loyalty programme, which has a one-off impact on
our revenues for period-to-period comparability purposes.
Delivering growth through the increase of our footprint
We plan to continue our disciplined investment programme, targeting
on a long-term basis an average annual square metre growth of over
5%. Despite the impact of our store rationalisation programme, we
have increased the total number of our stores over the past six
years, from 909 stores at the beginning of fiscal year 2007 to 1,218
stores at 29 December 2012. We plan to grow our offering by:
(i) adding space to our existing stores, mainly to broaden our
offering through the opening of stores-in-stores; (ii) continuing to
add new stores with a focus on our speciality offerings such as
Legit, Edgars Active and Edgars Shoe Gallery; and (iii) promoting
our mono-brand offerings, such as Topshop. We also intend to
consider opportunities and selectively expand our presence in the
rest of Africa, where we have recorded positive results so far.
Improving our margins
We plan to enhance operating margins by continuing to: (i) improve
our retail price management; (ii) leverage our sourcing capabilities
and input price management while reducing markdowns; (iii) optimise
our store operations to improve merchandise availability and
effectively organise promotional schemes; and (iv) improve the
efficiency of our support functions.
We have extended our quality assurance and control functions to
China and Bangladesh, closer to certain of our suppliers, to reduce
our dependence on, and the costs associated with, intermediaries.
The amount of our purchasing done directly with the suppliers has
increased meaningfully for winter 2013. We have also increased the
number of South African and regional suppliers in support of our
“quick response” strategy. The amount of product ordered from South
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African and regional suppliers more than doubled between summer 2011
and summer 2012. Quick response allows stock to be ordered in
smaller, more customised orders, thereby allowing testing of
merchandise. This approach reduces fashion risk and the amount of
markdowns required based on a demand forecasting system.
Store optimisation initiatives, substantially rolled out in our
Discount division but just beginning within the Edgars division,
have contributed to productivity and the stabilisation of store
costs.
Increasing sales through our private label store card programme
We expect the recent sale of our receivables to, and our new
strategic relationship with, Absa will allow us to better focus on
our core retail operations. It will also improve our working capital
by changing our business to a cash business. We expect that this
ready access to credit will continue to draw customers to our stores
and help us to grow our customer base.
Trading update
Total retail sales for 13-week ended 29 December 2012 are expected
to be between R8,300 million and R8,375 million, compared to R8,386
million for 13-week ended 31 December 2011, a slight decrease
primarily due to the trading performance from the Discount division
as well as the impact of new initiatives in the Edgars division.
Gross profit margin is expected to be higher due to improved margins
in the Discount division, while Edgars divisional margin is expected
to remain stable when compared to 13-week ended 31 December 2011. On
a same-store basis, retail sales are expected to be lower by 3.4% to
3.5% over the period, primarily due to the trading performance of
the Discount division.
Edgars division retail sales are expected to be between R4,525
million and R4,560 million for 13-week ended 29 December 2012,
compared to R4,367 million for 13-week ended 31 December 2011, an
increase primarily due to the continued opening of Edgars Active
stores and increased promotional activity. However, we expect same-
store sales to be lower by 2.1% to 2.2% compared to the prior year
period due to temporary disruptions as initiatives were implemented
in Edgars stores. Promotional activity had a positive impact on our
retail sales.
Discount division retail sales are expected to be between R3,140
million and R,3,170 million for 13-weeks ended 29 December 2012, a
decrease compared to R3,368 million for 13-week ended 31 December
2011. Such decreases are primarily due to delays in stock delivery
and lower mobile phone sales, as well as the discontinuation of our
Discom brand. Margins continued to improve as the benefits of the
change in product mix and improved pricing and sourcing initiatives
materialised. We expect same-store sales to be lower by 5.8% to 6.0%
over the 13-week ended 29 December 2012 compared to 13-week ended 31
December 2011.
CNA retail sales are expected to be between R635 million and R645
million for 13-weeks ended 29 December 2012, compared to R651 for
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13-week ended 31 December 2011, a decrease primarily due to the
continued closure of CNA stores and lower mobile phone sales. Same
store retail sales remained generally stable over 13-weeks ended 29
December 2012 as compared to the prior year period.
We estimate that our Adjusted EBITDA for 13-week ended 29 December
2012, after giving pro forma effect to the sale of R 8.8 billion
aggregate amount of receivables under our private label store card
programme to Absa, would be 6% to 7% lower than for the 13-week
period ended 31 December 2011.
This information is based on our internal management accounts that
are not fully comparable with our audited consolidated financial
statements or unaudited interim condensed consolidated financial
statements. Such information has been prepared by, and is the
responsibility of, our management, and has not been audited,
reviewed or verified, nor have any procedures been completed by our
auditors with respect thereto, and you should not place undue
reliance thereon. It is subject to confirmation in our unaudited
interim condensed consolidated financial statements and quarterly
report for the 13 weeks ended 29 December 2012.
Tax Settlement
On 31 August 2012, SARS notified us that it was considering the
issuance of an income tax assessment primarily in connection with
our tax treatment of interest payable on the financing of the
acquisition of the Group by Bain Capital. We challenged SARS’s
position and we believe that we were in compliance with applicable
South African tax laws and regulations. Nevertheless, we perceived
it to be beneficial to engage in settlement discussions and we
entered into a settlement agreement with SARS in relation to the
matters in dispute on 14 December 2012 in order to avoid protracted
litigation with SARS.
The agreement addresses the tax treatment of the issues in dispute
for fiscal years since the acquisition of the Group by Bain Capital,
being fiscal years 2008 through 2013, as well as future fiscal years.
Pursuant to the settlement, no cash outflow in relation to tax
payments due will be required until September 2014. However, as a
result of the settlement, Edcon is likely to pay income tax earlier
than was anticipated prior to the entering into of the settlement.
We believe that our cash flows should allow us to satisfy the
additional income tax payments that may result from the settlement.
The main terms of the settlement agreement are as follows:
for fiscal year 2008 through fiscal year 2013, we agreed to
reduce our tax losses carry forward by approximately R9.0
billion;
for the period from the beginning of fiscal year 2014 until an
initial public offering or an issuance of securities
representing 20% or more of the Group's equity (if any), we
agreed to limit the deduction for tax purposes of interest
payable on our senior secured notes due 2014 and our senior
notes due 2015 or any refinancing thereof (the “Acquisition
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Indebtedness”) to 50% of such interest, on an aggregate
principal amount of indebtedness of approximately €1.3 billion
or the equivalent thereof in rand or U.S. dollars, subject to
certain adjustments. Interest on the portion, if any, of the
Acquisition Indebtedness exceeding such cap will not be
deductible for tax purposes;
for the period following an initial public offering or an
issuance of securities representing 20% or more of the Group's
equity (if any), we agreed that interest payable on the
Acquisition Indebtedness would be fully deductible for tax
purposes, up to an aggregate principal amount of indebtedness
of approximately €711.1 million or the equivalent thereof in
rand or U.S. dollars. Interest on the portion, if any, of the
Acquisition Indebtedness exceeding approximately €711.1
million or the equivalent thereof in rand or U.S. dollars will
not be deductible for tax purposes; and
for the period from and following fiscal year 2014, interest
payable on our subordinated shareholder loan, if any, will not
be deductible for tax purposes.
The settlement is without prejudice to future changes in applicable
South African tax legislation and does not relate to any matter
other than those in connection with the acquisition of the Group by
Bain Capital.
Funding Update
We are currently considering refinancing options for our senior
secured notes due 2014.
We intend to use a portion of the R8.8 billion proceeds received to
date from the sale of certain receivables under our private label
store card programme to Absa to refinance a portion of our near-term
maturities. We are in the process of consummating the sale of the
remaining R1.2 billion aggregate amount of receivables under our
private label store card programme.
On 3 February 2013, we signed commitment letters for a new rand-
denominated senior secured term loan facility for an amount of
approximately R4.0 billion to be made available by a syndicate of
South African and international banks. The availability of such
loan is subject to certain customary conditions, including
negotiation of definitive finance documents. There can be no
assurance that we will be able to obtain such facility on the agreed
terms or at all. We intend to use the proceeds from such loan to
refinance a portion of our near-term maturities. In addition, we
are considering other opportunities on the international capital and
financial markets to refinance our near-term maturities.
*********
This business update has neither been reviewed nor reported on by
Edcon’s external auditors.
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This business update does not constitute an offer to sell or the
solicitation of an offer to buy any securities of Edcon.
This press release may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future
results, performance, or achievements. Forward-looking statements
involve risks and uncertainties, including but not limited to
economic, competitive, and technological factors outside our control
that may cause our business, strategy, or actual results to differ
materially from the forward-looking statements. You should not place
undue reliance on forward-looking statements as a prediction of
actual results. For information about the risks and uncertainties
associated with our business, please refer to our annual report. We
expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements to
reflect any change in expectations or events, conditions or
circumstances on which any such statements are based.
END
4 February 2013
Debt Sponsor
Rand Merchant Bank (A division of FirstRand Bank Limited)
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