32 of 2020


                                                              Newsletter No. 32 / 28 August 2020                             

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Edcon signs agreement to sell parts of Edgars to Retailability.

Edcon announced that it has signed the purchase agreement for the sale of “parts of Edgars” to Durban-based competitor Retailability Pty (Ltd) for an undisclosed sum. The number of Edgars stores involved in the transaction have not been stated.

Retailability is a retail fashion holding company of retail brands including Legit, Beaver Canoe, and Style, operating in over 460 stores across South Africa, Namibia, Botswana, Lesotho, and eSwatini.

Edcon’s business rescue practitioners commented, “We are pleased that we have taken a step closer to closing this sales transaction, which not only indicates confidence in the Edgars business but augments Retailability’s already blue-chip level of retail expertise.

“The signing of the sale and purchase agreement is a positive step forward in meeting the objectives of the Edcon business rescue plan, which when successfully concluded, will result in the saving of a significant number of jobs and the continuation of a great iconic Edgars brand.”

According to Business Tech, Edcon employs almost 18,000 permanent workers and hires about 5,000 more on a seasonal basis.

In July, the administrators in charge of its Edcon’s restructuring explained that through this transaction, Retailability plans to “utilise Edgars’ unique value proposition, and large attractive target market, to ensure the growth and continuity of a proudly South African Edgars brand.”

The closing of the transaction is targeted for September 2020 and is still subject to various conditions precedent and regulatory approvals, including the Competition Authorities. The parties will now move to work on preparing the signing of the sale and purchase agreements for the Edgars business conducted in the rest of Africa.

Last week, Edcon concluded the sale of asset agreement with TFG for some of Jet’s assets. Bizcommunity

Farewell, Hextex!

By Tamsyn Jantjies

Under the pandemic, Hextex had to bend the knee against economic pressure

After 74 years Hextex will be closing down.

The company, registered as Winelands Textiles, opened its site in Raymond Pollet Drive in Worcester in 1946, and has employed many generations over the decades.

At one time the factory even received the contract to manufacture Air France’s seat covers.

One Facebook user wrote: “Our last working day at Hextex. One of the largest factories in Worcester is closing its gates. So many memories. Many of our parents, brothers and sisters worked here 76 years ago. Yes, my heart is very sore, and I believe it will be one of the saddest days. To all my colleagues, keep good courage. God will come through for us”

Peter Gaal, General Manager of Winelands Textiles, said trading had already started to become more difficult over the years due to the economic climate.

“Sadly, and with great regret, a decision was made to mothball the business and cease our operations by the end of July 2020,” he said.  “Over the past couple of years trading had progressively become more and more difficult in our economic climate, and we had already undergone major downsizing of Hextex at the beginning of 2018.  Regardless of the restructuring, we were still in a very difficult space within the industry.  We had a hard look at the business during the national lockdown due to Covid-19 and realised the viability of the business was seriously in question.  It was during Level 5 of lockdown, when realising the ramifications of the pandemic to our business, that we made a decision to close our doors for a period of time”

As a result, 180 people stand to lose their jobs. But Gaal mentions there may be future plans for the business.

“We are hopeful, in  that our stakeholder has plans to revitalise the business after a period of 10 to 12 months, with a view to introducing new products and processes.”   Standard

Great Zimbabwe University commissions PPE factory

The Great Zimbabwe University (GZU) has completed a state-of-the-art textile and garment factory at the Robert Mugabe School of Education in the Masvingo industrial area to manufacture personal protective equipment (PPE) and other materials for frontline health workers. The university is also producing hand sanitisers in the country’s fight against COVID-19.

GZU director for information and public relations Anderson Chipatiso said the new factory would also impart students of the school practical lessons in garment manufacturing, according to a report in a national newspaper.

“The factory will allow mass production of PPE, which we hope will go a long way in equipping our health personnel at the frontline of the Covid-19 fight,” he said.

The factory will bring down the cost of PPEs, making them accessible especially to workers at public health institutions.

The university is also at an advanced stage of building a proper hand sanitiser factory where it will mass produce the commodity, he added. GZU is currently manufacturing sanitiser at a makeshift facility at Zimdef Complex near Rujeko suburb.

Ethanol for sanitiser is procured from sugar factories in Chiredzi. F2F

Mr Price – trading update

The material disruptions stemming from COVID-19 had a significant impact on the group’s trading performance in the first 20 weeks from 29 March to 15 August 2020 (the “Period”) of the financial year ending 3 April 2021 (“FY21”). Despite this, performance exceeded internal expectations and the group has gained market share for four months in a row to June 2020, the latest period for which RLC data is available. The group’s rolling annual market share at the end of June 2020 was at its highest level in the last fourteen months. This is a strong signal that its everyday low price and fashion-value model has enabled customers to find value despite the extremely challenging economic environment.

As previously communicated on the Stock Exchange News Service (“SENS”) on 25 June 2020, all the group’s South African stores were closed for the month of April 2020 which resulted in retail sales decreasing 89.9% on the Corresponding Period. Following the lifting of the COVID-19 level 5 lockdown restrictions, in the period May to 15 August 2020 (“Post Lockdown”) a high level of pent- up consumer demand was initially experienced. Retail sales Post Lockdown grew 5.4% (RSA 6.0%) despite restrictions on the range of merchandise permitted to be sold in both the apparel and home segments.

Sales growth slowed significantly in the last week of June 2020, impacted by base effects relating to pay-day timing and school holidays. As anticipated, retail sales during July 2020 continued to slow as pent-up demand subsided, particularly in the apparel segment. Some stock shortages were experienced as a result of certain categories trading ahead of expectations. In the first two weeks of August 2020, inventory service levels increased and the group reported double digit sales growth.

Customers continue to favour cash as a tender type ahead of credit. Post Lockdown cash sales were up 8.9%, constituting 86.2% of total sales. Credit sales decreased 12.3%. Group online sales Post Lockdown were up 75.0% with average weekly sales above the levels reported in the week of Black Friday in 2019. The group’s early investment into this channel has allowed it to respond swiftly to the increased e-commerce adoption by consumers.

All divisions have experienced smaller convenience store locations outperforming major regional shopping nodes. Regional retail sales performance has correlated with COVID-19 infections, with the Western Cape and Gauteng most severely impacted over the Period. Historically, Gauteng makes the largest contribution to group sales. The group’s largest division, Mr Price Apparel, having effectively managed stock flow during the level 5 lockdown period, subsequently responded swiftly to over-trading categories, utilising its strong supply chain network. While not all the sales opportunities could be realised, performance exceeded expectations.

Mr Price Sport experienced high demand for fitness and equipment categories after the initial lockdown period. The division’s performance has been negatively affected by restrictions on school activities and team sports, as well as gym closures. Miladys’ more mature and conservative customer is avoiding regional shopping centres, which has impacted sales. Given its higher proportion of credit sales, this division is more affected by the general slowdown in the credit environment than the other divisions.

The Home segment is following global trends of increased spend due to a shift to work from home and customers wanting to update their living spaces. Cellular (handsets and accessories) recorded growth of 49.7% in the Period and are now available online, adding further opportunity for growth.

The group is satisfied with the ongoing improvements in its merchandise assortment and sold more full priced items due to lower markdowns, which contributed to its GP% being in line with the Corresponding Period. At the end of the Period, the group had low terminal winter inventory and is targeting double-digit negative stock growth by the end of H1 FY21.

Other income, excluding Cellular (handsets and accessories), is reported to 1 August 2020 due to the debtors’ book cut-off date and decreased 13.1% to R329m. Debtors interest and fees decreased by 9.9% to R151.1m, adversely affected by declining consumer credit health and the cumulative 300bps repo rate cuts since January 2020. The group believes that its historically prudent credit granting approach will benefit it during an expected prolonged period of credit weakness. Collections as a percentage of debtors’ book are down 8.7% on the Corresponding Period. However, focused collection strategies have resulted in collections improving each month since the level 5 lockdown and, in July 2020, were marginally ahead of the Corresponding Period.

Equity raise
At the general meeting of the company’s shareholders held on 29 June 2020, all the resolutions in the notice of general meeting attached to the circular dated 20 May 2020 regarding authority for a specific issue of shares for cash were passed. The purpose of the proposed equity raise was to strengthen the balance sheet in anticipation of extended COVID-19 lockdowns and resulting trade weakness, as well as to take advantage of opportunistic acquisitions. The group has six months to exercise the authority to raise equity up to the value of 10% of its issued ordinary shares. Fortunately, the group’s balance sheet has recovered well from the initial impact of the

level 5 lockdown. While the group continues to evaluate potential acquisitions, at this stage no specific targets have met its strict criteria (including appropriate valuations that comprehend the difficult forward trading environment). Consequently, the group has no immediate intention to action the equity raise.

Consumer health is anticipated to worsen as various government assistance measures come to an end over the coming months. Disposable income levels will weaken further as mortgage holidays end, emergency savings are depleted, unemployment grows and low to no wage inflation takes effect. In Q2 2020, the BER Business and Consumer Confidence Indices were at their lowest levels in 35 years. This signals that the economic and consumer environments are likely to be very challenging for the next 12 to 18 months.
Management’s focus is on dealing with the extreme volatility that is likely to continue for the rest of FY21. Erratic sales trends make forecasting challenging and the impact of the recent move into level 2 lockdown adds further uncertainty. Inventory sell off management remains key in order to avoid excessive markdowns and resultant margin pressure. The exchange rate will become a growing concern for the rest of the financial year and, while the group’s hedging policy is effective, margins will be put under pressure in H2 FY20. Managing this impact and carefully considering the ability of an already constrained consumer to absorb inflation will be a key balance to strike during the remainder of FY21.

Consumers will be highly constrained and seeking value and the group will endeavor to further entrench its reputation as ‘the people’s value champion’. The group’s fashion-value business model has proven resilient through COVID-19 thus far and it believes that it is positioned favourably to capitalise on current retail trends as well as continue to capture market share in the long term. As a predominantly cash retailer, the group is well- positioned to benefit in an environment where consumer credit is restricted. The group’s healthy balance sheet, combined with supplementary funding in the form of debt and/or equity if required, provides the necessary liquidity to pursue growth opportunities. Organic growth opportunities are being pursued, including the launch of several new merchandise categories in H2 FY21.

Trading statement
As per paragraph 3.4(b)of the JSE Limited Listings Requirements, shareholders are advised that the group’s interim financial results for the six months ending 26 September 2020 are likely to be at least 20% lower than those reported for the six months ended 28 September 2019, as follows:
Expected minimum difference 26/09/2020 cents :%
Basic earnings per share -88.7 : -20.0
Basic headline earnings per share -88.6: -20.0
Diluted earnings per share -87.3: -20.0
Diluted headline earnings per share -87.2: -20.0

There are six weeks of the 26-week H1 FY21 trading period remaining. Further guidance will be provided when management has a reasonable degree of certainty over the expected earnings numbers and prior to the release of the interim financial results ending 26 September 2020, which is expected to be on 26 November 2020. The forecast financial information on which this trading update and trading statement is based has not been reviewed and reported on by the company’s external auditors.

HomeChoice – updated trading statement

Shareholders are referred to the announcement released on the Stock Exchange News Service (SENS) on 3 July 2020, which provided an update on the impact on the Group of the Covid-19 pandemic and the national lockdown in South Africa.

As previously reported, the extremely difficult trading conditions over the first half of the financial year brought about by Covid-19 have had a significant impact on the results of the Group. As a result, despite strong digital sales, the retail business experienced a reduction in overall sales in the first half of the financial year compared to the same period last year. Loan disbursements in the financial services business were also significantly curtailed from the end of March 2020 to defensively preserve cash and manage credit risk. The 275 basis point cuts to the Repo rate since January 2020 further impacted revenues, with the rate now at a 50-year low.

As a result, total Group revenue for the six months ended 30 June 2020 declined by 4.9% overall, with total retail revenues declining 10% and groupwide finance income earned reducing by 0.9% when compared to the same period last year.

The Group’s liquidity and capital position has been proactively managed during this time through the tight management of working capital, aggressively reducing costs, reviewing and deferring non-critical capital expenditure and focusing on collections from the debtor books. As a result, the closing cash position for the six months ended 30 June2020 is strong at R379m compared to R121m for the six months ended 30 June 2019. Further, the Group concluded a refinance and upsize of existing commercial bank debt facilities to provide for operational requirements and to improve liquidity.

Shareholders were advised in the announcement released on SENS on 3 July 2020 that earnings per share (EPS) and headline earnings per share (HEPS) for the six months ended 30 June 2020 were expected to be more than 20% (45.98 cents) lower than the reported EPS and HEPS of 229.9 cents for the comparable period in the prior year.

The Group has reasonable certainty that EPS and HEPS for the six months ended 30 June 2020 will range between 100 cents to 110 cents, or between 57% and 52%, lower than the corresponding period.

The Group’s financial results for the six months to 30 June 2020 will be released via SENS on 31 August 2020. Any estimated financial information contained in this announcement has not been reviewed or reported on by the Company’s external auditors.

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