24 of 2020

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                                                              Newsletter No. 24 / 3 July 2020                             

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Mr Price reveals impact of SA lockdown and its plans to exit Nigeria

Mr Price Group has announced plans to shut Nigerian operations due to weak economic growth and other difficulties, and will focus on its local South African business in “a more concentrated way”.

Mark Blair, chief executive of Mr Price Group told analysts at the group’s full-year results presentation on Thursday that the company has hit too many roadblocks in the West African country.

“Quite frankly I’m not prepared to invest any further, whether it’s investment in time or in money, into a country that is volatile as it is.

“In the early days we were making money but now we just came up against too many roadblocks, whether it’s getting the money out, etc,” Blair said.

The group has closed four of its five stores in Nigeria and expects to close the final one in the coming months.

During the results announcement, Mr Price CFO Mark Stirton said the company now wants to concentrate more on its SA operations which is why it has also discontinued its operations in Poland and Australia in 2019.

On Thursday, the group reported a 2.1% rise in total revenue from continuing operations for the 52 weeks ended 28 March, to R23bn with retail sales increasing by 1.5% (comparable stores -1.4%) to R21.2bn.
The company said it expects “a lot of distress among retail peers” in South Africa.

It has identified R300m worth of cost-saving initiatives, which are largely related to employment costs and also include a 23% reduction in budgeted capital expenditure for the 2021 financial year. As part of measures of conserving cash, the company did not declare a final dividend.

April sales plummet almost 90%

In the month of April 2020, all the group’s South African stores were closed, with retail sales down 89.1% off a base of R1.9bn in April 2019. However, following the relaxation of lockdown restrictions to Level 4 from 1 May 2020, high levels of pent up consumer demand were experienced, Mr Price Group said.

Retail sales for the period 1 May 2020 – 20 June 2020 were up 12.0% (Mr Price Apparel, +16.1%, Mr Price Sport, +7.7%, Miladys, -13.8%, Mr Price Home, +1.3% and Sheet Street, +15.2%).

Pent up demand for apparel in May shifted to homewares in June, as lockdown restrictions on merchandise permitted to be sold were fully lifted, the company said.

Consumers continue to favour transacting in cash. In May and June combined, cash sales increased 16.7% while credit sales declined 9.4%. The group said it anticipates that the credit landscape will deteriorate further positioning it well to capture market share.

“Various factors over this period have led to unusually high levels of consumer demand: the need for winter & kids’ merchandise, increased SASSA grant payments, debt payment holidays, TERS claims and constrained spending under restriction Level 4 and 5,” Mr Price said.

The company experienced a decline in cash reserves of approximately R2bn during the five-week lockdown period, but these levels have since bounced back, with the easing of lockdown restrictions.

Online sales growth, shift in store location

“Online sales grew strongly and were up 90.1% over the period. Mr Price Apparel and Mr Price Sport sales growth exceeded 100%. It is still to be seen whether this is a permanent step change in consumer behaviour,” the company said.

In addition to the changing online consumer behaviour, Mr Price said a shift in store location has been notable. “Super regional centres lagged smaller formats due to reduced trading hours and customers preferring to shop at more convenient locations.”

“The combination of strong online sales and store locations which support customer’s needs positions the group well as a leading omnichannel retailer in this changing landscape.”
Mr Price said it continues to grow its footprint and opened 71 new stores and expanded 16 over the past year. After closing 16 stores and reducing the size of 28, total weighted average space was up 2.2%, taking total corporate-owned stores to 1,378.

New store capex was allocated mainly to micro, small and medium formats aiding group store growth of 4.2%. “This supports the group’s high trading densities and positions its store network favourably post Covid-19,” it said.

The group said that current and forecast spread of the virus in South Africa remains a concern given its impact on society due to loss of life and the devastating financial impact on businesses and citizens. “It is not possible at this stage to quantify the economic impact on the group, but ongoing operational disruptions and future uncertainty remain significant challenges,” the company said.  Bizcommunity

‘Granny entrepreneur’ ahead of the Covid Curve

The Covid-19 crisis has taught South African businesses several hard lessons, among them that global supply chains can break overnight and have a crippling domino effect.

The most obvious example is the impact China’s lockdown had. “The outbreak of Covid-19 initially reduced the supply of goods from China to the rest of the world, creating a concoction of knock-on effects that negatively impacted major industries globally,” Reinhardt Arp, environmental economist at WWF South Africa, recently wrote in Fin24. “Today, our ‘just-in-time’ supply chains cannot cope with the various lockdowns imposed across the planet.”

With industry heads and Minister of Trade and Industry Ebrahim Patel calling for all sectors to reassess supply chains as a result, businesses big and small are looking to diversify with a focus on what can be made and sold within our borders.

This is all old news to Florence Parnell-Ceylon, who started her SME PineApple Creations as a direct result of supply chain disruptions, albeit on a much smaller scale.

Based in the apple-growing town of Grabouw in the Western Cape, Parnell-Ceylon realised a few years ago that there was no affordable manufacturers of school-wear, industrial uniforms or protective-wear to service the Overberg and Helderberg areas. Although not far from Cape Town, if supply from “the big city” was interrupted, children simply did not have school uniforms.

The solution came naturally to the mother of four and grandmother of three, who developed her love of sewing as a child when she would accompany her mother to work and watch her mother’s employer sew.

Before starting her own business at the age of 47, Parnell-Ceylon was in a sewing collective of five, but split from the four other women in 2017 based on a hunch that niche textile manufacturing held more potential. Unbeknownst to Parnell-Ceylon, she was onto something; her niche has become a rising sector within the textile manufacturing industry in recent years. In the Department of Trade and Industry’s 2020 overview of South Africa’s clothing, textile, footwear and leather sector, “school uniforms, work-wear, protective clothing and uniforms for military and law enforcement” are listed among the top 10 investment opportunities for the sector.

Ironically, Parnell-Ceylon received no initial investment, but insists she’s “proud of the fact that the business has been growing without any financial help”. She currently works at least 50 hours a week, employs three people and prides herself in the role she’s played in job creation and skills-upliftment within her community.

After completing a business acumen course run by business incubator Fetola, PineApple Creations expanded beyond uniforms and work-wear to also offer sportswear, graduation cloaks, branded tracksuits and jackets and golf shirts. It’s an expansion that the entrepreneur believes was made possible by what she calls her “old fashioned” business principles: “we deliver quality work, and we aim to finish and deliver orders on time”.

Of course the Covid curveball hit her business hard, but she’s taken it in her stride. “When lockdown started we couldn’t make any schoolwear because the schools were closed and the shops where we get our materials from were also closed, so we pivoted and started making face masks and then sleepwear for winter,” she explains.

While PineApple Express has survived the early “make-or-break” years of any new business, it’s by no means high profit and there’s no chance the seamstress will be retiring soon, but a booming bottom-line is secondary for Parnell-Ceylon. Having grown up on a farm watching her own and other farm families struggle, her point of pride is that “thanks to PineApple Creations, schoolchildren and workers in this area have access to quality, affordable uniforms”.

Mr Price final results March 2020

Revenue for the year went up 2.1% to R23.0 billion (2019: R22.6 billion) whilst profit from operating activities remained stable at R4 billion (2019: R4 billion). Profit attributable to shareholders decreased to R2.7 billion (2019: R3 billion). In addition, headline earnings per share from continuing operations decreased by 11% to 1 049.9 cents per share (2019: 1 179.4 cents per share).

Dividend

No final dividend has been declared in order to preserve cash considering the uncertainty and future potential disruption, resulting in a decrease in annual dividends of 57.7%. The group experienced a decline in cash reserves of R2 billion during the 5-week lockdown period. However, a strong, cash-based performance since then has ensured that the current financial position remains sound, with cash resources and a debt-free balance sheet available to support current business operations and future uncertainty.

COVID-19

The current and forecast spread of the virus in South Africa remains a concern given its impact on society due to loss of life and the devastating financial impact on businesses and citizens. It is not possible at this stage to quantify the economic impact on the group, but on-going operational disruptions and future uncertainty remain significant challenges. The group anticipates an extremely constrained consumer environment. As a result, R300 million in budgeted expense reduction has been identified as part of group wide austerity activities and cash preservation initiatives have been undertaken, including a 23% reduction in budgeted capex for FY2021. No final dividend has been declared in order to preserve cash considering the uncertainty and future potential disruption, resulting in a decrease in annual dividends of 57.7%. The group experienced a decline in cash reserves of R2 billion during the 5-week lockdown period. However, a strong, cash-based performance since then has ensured that the current financial position remains sound, with cash resources and a debt-free balance sheet available to support current business operations and future uncertainty.

Opportunities

Amid all the uncertainty, the group is fully focused on efficiency, effectiveness, innovation and growth. The way in which the balance sheet has historically been managed has put the group in this unique position. Plans are well advanced in identifying organic growth opportunities, which may be augmented by acquisitions. On 20 May 2020 the group announced on SENS its intent to affect a capital raise of up to 10% of the company’s ordinary issued shares, at an appropriate point in time and as market conditions permit. The board and management are of the view that anticipated market conditions will allow strong companies to capitalise on growth opportunities whilst maintaining financial edibility. The group needs to be well positioned to respond with speed and agility to opportunities that may arise and seeks shareholders’ support in its growth ambitions

Wed 1 Jul 2020 – Steinhoff – media release

Steinhoff is continuing its journey to address past deficiencies, and to bring stability to the Group and its businesses.

While the road ahead remains difficult, the financial year ended 30 September 2019 was a pivotal period for the Group, during which we made tangible progress, most significantly with the completion of our financial restructuring following the implementation of the CVAs and the associated changes to our group structure and governance arrangements. Furthermore, the Group reclassified a number of businesses as discontinued operations or held-for-sale assets and adopted a number of new IFRS statements.

The final months of the 2019 financial year marked the successful completion of phase one of the three-phase recovery process, with the implementation of the Group debt restructuring. In the period that followed we have been concentrating on possible solutions to the litigation faced by entities within the Group and debt reduction initiatives. However, these remain demanding objectives.

Major milestones were achieved in May and June 2019 respectively when we published the delayed 2017 and 2018 Annual Reports. Thereafter, in August 2019 we satisfied all the conditions necessary to successfully implement the financial restructuring, the culmination of a major collective effort by internal and external teams over the preceding twenty-month period. This significant achievement secured a period of financial stability for the Group up to the end of December 2021, during which we can restructure our businesses, dispose of assets to reduce debt to more manageable levels and/or restructure the debt as part of our recovery plan.

The scope of work necessary to complete the financial restructuring was wide ranging, complex and highly technical, involving hundreds of creditors, specialist legal and financial advice and parallel processes across multiple jurisdictions. The sheer volume of announcements made by the Group in the lead-up to August 2019, on both financial reporting and restructuring activities, amply demonstrates the scale of these endeavours. However, after August, the Group moved into a different, and by necessity less visible, phase of the recovery process. Our determination to complete the job at hand is undiminished and work continues on many challenging fronts.

As in the previous financial year, the costs of these processes were substantial, and they had a significant impact on the reported results for the year. Advisory fees for the Reporting Period amounted to EUR158 million (2018: EUR117 million). The total included EUR16 million (2018: EUR24 million) relating to the forensic investigation and technical accounting support, and EUR67 million (2018: EUR43 million) relating to creditor advisor fees, which we are obligated to fund.

In addition, following the events uncovered during December 2017, the audits for the 2017 and 2018 financial years were extremely complex and time consuming, and required the restatement of prior year results. The audit work for 2017 and 2018 was completed over multiple periods and was expensed in both the 2018 and 2019 Reporting Periods. The majority of the 2018 audit was performed in the 2019 Reporting Period and has been expensed in the 2019 Reporting Period. The majority of the 2019 audit work was performed in the 2020 Reporting Period and will be expensed in the 2020 Reporting Period when billed.

Every effort is being made to limit advisor costs and, with implementation of the financial restructuring now behind us, we expect the total to fall in the 2020 financial year. However, legal advisory fees are expected to remain significant in the period ahead as we attempt to resolve and deal with outstanding litigation and seek redress against former executives and related parties.

Financial Performance
During the period Steinhoff was refocused as a global holding company with a broad range of interests in the retail sector. These businesses operate a number of strong local brands and are well diversified by geography and business line. Individual businesses, such as Pepkor Africa and Pepco Group (formerly Pepkor Europe), continued to perform robustly, while others remained in turnaround but reported more encouraging trade, such as Mattress Firm, or, like Conforama, remained at an earlier stage of their recovery journey.

Despite the many challenges we faced in the 2019 financial year, the Group reported a resilient performance, with strong results from certain businesses compensating for weaker outcomes from those still in turnaround. Total revenue from continuing operations for the year ended 30 September 2019 increased by 5% to 12.0 billion (2018: 11.4 billion), with strong contributions from Pepco Group (+12%) and Pepkor Africa (+4%). Further information on the performance of the Group’s individual operating businesses is contained within the accompanying Operational Review.

Financial Restructuring
The financial restructuring of the Group became effective on 13 August 2019 when the SEAG and SFHG CVAs were successfully implemented. Under the terms of the CVAs, the existing debt instruments in SEAG and SFHG were reissued with effect from 13 August 2019, with a common maturity date of 31 December 2021. No cash interest is payable by the Group in this period, as interest will accrue and is only payable when the debt matures, providing Steinhoff with a period in which it can concentrate on reducing debt and restoring value.

Remediation Plan
During the previous Reporting Period, the Management Board developed a Remediation Plan containing a wide range of measures to limit the possible recurrence within the Group of irregularities and instances of non-compliance with laws and regulations.

Significant further progress was made with the implementation of these remedial actions during the Reporting Period, with work concentrated on the completion of improvements to policies and procedures in respect of financial accounting, conflict of interest and supplier and contract management. Please refer to the Risk Management section of the Report of the Management Board for more information.

The Remediation Plan will remain an area of focus throughout the 2020 Financial Year.

Litigation
Litigation remains a significant outstanding challenge for the Group. It has been a major focus for management in the period since implementation of the financial restructuring in August 2019. In parallel with these various court processes, the Management Board, assisted by a litigation committee and the Group’s legal advisors, continues to work towards a resolution of outstanding claims against the Group.

In parallel, the Company is also evaluating potential claims we may have against third parties, and recoveries against implicated entities and individuals have been, and will continue to be, initiated where appropriate

Did you know……..

Surreal Fashion

Surrealist designer Elsa Schiaparelli opened a fashion house, the House of Schiaparelli, in 1930s Paris. She became famous for absurdist, surreal clothing such as gloves with decorated fingernails on the outside, ladies’ hats shaped like upside-down shoes, and dresses decorated with giant pictures of lobsters.

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