Financial review

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SPAR delivered solid financial results for 2014 notwithstanding a challenging trading environment characterised by unrelenting unemployment, distressed household debt and higher interest rates. Full details of the financial performance and financial position of the group are set out in the annual financial statements, together with the notes to the financial statements presented in the Annual financial statements section.

FINANCIAL PERFORMANCE

Turnover for the financial year increased by 15% to R54.5 billion (2013: R47.4 billion), bolstered by the consolidation of two months of turnover from BWG, which contributed R2.7 billion.

Excluding BWG, the group reported turnover growth of 9.2% to R51.7 billion.

SPAR and TOPS at SPAR contributed 84.8% of total turnover (up 9.2% from 2013) while Build it contributed R5.5 billion (up 8.8% from 2013).

Build it turnover slowed towards the end of the year following deflation in the price of cement as well as the unavailability of products such as sheeting material and door frames following the strikes in the steel industry. The division has, however, experienced good growth outside of South Africa in markets such as Namibia (+20%).

The upward movement in the gross margin for the group (8.3% in 2014 vs 8.1% in 2013) is the result of a change in mix of products sold – moving a higher portion of fresh produce through our distribution centres. This is emerging as a structural change to the business and we expect the trend to continue. A gross margin of 10.2% delivered by the business in Ireland, which is premised on smaller format convenience stores, further contributed to this performance.

Operating expenses increased 22.6% to R3.2 billion (2013: R2.6 billion) but this was significantly impacted by the BWG consolidation, which, if excluded, would reflect a more appropriate increase in SPAR expenditure of 12.3%. The increase can be attributed to three major expense items:

Ongoing support and maintenance following the investment in the SAP information technology system which we do not expect to repeat in the next financial year
Increased marketing expenses which we have offset through increased contributions from our suppliers
A bad debt impairment of R84 million which included the impact of the closure of a group of Build it stores in Botswana

Profit before tax increased 11.2% to R1.8 billion (2013: R1.7 billion), or an increase of 8.2% on a like-for-like basis (excluding BWG).

SPAR’s profit after tax increased to R1.3 billion (2013: R1.2 billion), an increase of 13.3%. SPAR in South Africa showed profit after tax growth of 9.2%, while BWG accounted for the remainder of the increase (R48.1 million).

The group’s headline earnings grew 12.8% to R1.4 billion (2013: R1.2 billion) with headline earnings per share showing a 12.5% increase to 781.8 cents (2013: 694.8 cents). The board approved a final dividend declaration of 345 cents per share (2013: 306 cents), amounting to a total dividend for the year of 540 cents per share (2013: 485 cents), 11.3% higher than in the prior year.

The group’s cash generated from operations remains strong and was supported by SPAR’s internal focus to enhance working capital levels. Cash used by the group for investment activities during the year exceeded R1.0 billion. This included capital expenditure of R226.9 million for operational requirements, R35.2 million for the acquisition of three local retail stores and the R798.6 million purchase consideration for BWG.

Retail performance

While SPAR stores reported retail turnover growth of 7.8% to R63.1 billion (2013: R58.5 billion), wholesale turnover increased 8.9% to R42.2 billion (2013: R38.7 billion), providing evidence that independent retailers recognise the value added by SPAR’s merchandising, distribution and logistics capabilities. Furthermore, existing stores continue to outperform the market, with turnover growth of 7.8%. Growth was again supported by high acceptance levels of SPAR’s house brands, which offer value to cash-strapped customers, with sales for this source increasing 14% to R5.8 billion. Net retail trading space increased 1.7% (2013: 2.2%) as 19 new stores were opened, taking the total store numbers to 875 at year-end. However, the group benefited from its ongoing initiatives to improve the quality of its existing store base with substantial revamps completed by retailers in 185 stores (2013: 155 stores) during the year in line with SPAR’s organic growth focus, which had a positive impact on turnover growth.

The offering and conveniently located retail format of TOPS at SPAR continues to entrench its position as the number one retail liquor brand and reported retail sales growth of 13.8% to R6.6 billion (2013: R5.8 billion). Same store growth was an impressive 12.6%, while wholesale turnover grew 13.1% to R4.0 billion. Combined food and liquor retail sales, which allows for a better industry comparison, increased by 8.3% and 8.2% on a like-for-like store basis.

Build it experienced a difficult year despite implementing restructuring initiatives. Build it achieved retail turnover growth of 9.5% (2013: 12%) to R9.1 billion (2013: R8.3 billion) with solid growth of 7.8% from existing stores. The wholesale turnover increased 8.8%, to total R5.5 billion (2013: R5.1 billion). It was encouraging to note that Build it’s house brand imports continued to gain support in the market, with total sales of R238 million, a 21.5% increase from the prior year.

The turnover reported by the corporate retail division amounted to R773.7 million. This reflects a decline of 7.5% on the prior year due to the sale of the Philippi SUPERSPAR and the closure of Stoneacres SUPERSPAR. The net profitability position of this business continues to be positive for the group.

SPAR Ireland

The results of BWG have been consolidated for two months and this has had a notable impact on the group’s results. While the net profit return in this business is lower than the South African group, this is expected to increase through the implementation of various initiatives. The revenue impact of BWG business will be even greater in 2015 when including a full year’s trading performance. The two months’ turnover included in the 2014 financial results, is however, not indicative of the turnover levels to be expected for the full year results in 2015 – the two months represent peak summer sales comparable to the South African festive season period.

Capital investment

SPAR’s seven distribution centres despatched a total of 210.8 million cases (2013: 203.5 million cases), representing a 3.6% year-on-year growth in volumes handled. In order to sustain growth, SPAR has reviewed its distribution capacity and is planning to embark on two major extensions that were put on hold in 2014. Work has already commenced at the KwaZulu-Natal perishable facility and SPAR expects to start construction of a slow moving storage facility at the South Rand distribution centre early in the new year. Both projects will be completed within the financial year. With regard to the new distribution centre planned in the Lanseria area, work continues towards finalising the acquisition of land. The budgeted capital expenditure in 2015 in South Africa is expected to be R540 million, including R170 million for Lanseria.

Loan facilities

The group has continued to advance or secure loan facilities for its retailers to enable them to purchase or revamp stores – the latter being a strong focus area for the past and next financial year.

The group has long-term borrowings and, when necessary, funds its operations from overdraft facilities. These facilities are in excess of forecast requirements and are subject to annual review.

Financial risk management

The identification of sustainability and financial risks for the group formed part of the enterprise risk management process. The SPAR Group is, among others, exposed to inflation, interest rate, liquidity and credit risks, which typically include trade receivables. These risks are continuously and proactively managed, and remain on a low risk level.

Accounting policies

The annual financial statements have been prepared in accordance with International Financial Reporting Standards. The group has considered and adopted all new standards, interpretations and amendments to existing standards that are effective as at year-end.

There has been no material impact of these amendments on the financial statements.

Going concern status

The board has formally considered the going concern assertion for the SPAR Group and is of the opinion that it is appropriate for the forthcoming financial year.

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Mark Godfrey
Financial Director

11 November 2014