annual report 2009
David Nurek
CHAIRMAN'S REPORT
HAVING TAKEN OFFICE ON 1 APRIL 2009, IT GIVES ME PLEASURE TO PRESENT MY FIRST CHAIRMAN’S REPORT TO THE STAKEHOLDERS OF THE FOSCHINI GROUP.
OVERVIEW
In the context of one of the most challenging trading environments experienced for many years, our group delivered a satisfactory performance.
The deterioration in the retail sector in South Africa which began in the latter half of 2007 continued into 2008. The downturn was particularly apparent amongst credit-based retailers – including apparel retailers – as our customers were impacted, inter alia, by steep increases in food and transport costs and relatively high levels of household debt.
Against this background, the group was able to grow headline earnings per share by 2,3% and diluted headline earnings per share by 2,8%. Whilst these results may appear modest when compared to prior years, this outcome is nevertheless well ahead of the market’s expectations.
Our performance may be attributed to a number of factors including the resilience and adaptability of our management team and our strong balance sheet. Moreover, the satisfactory level of ongoing cash flow has enabled us to maintain our final dividend at 170,0 cents per share resulting in the total dividend for the year also being maintained at 288,0 cents per share.
ECONOMY AND OPERATING ENVIRONMENT
In this financial year, the global financial and economic environment experienced its greatest turmoil in most people’s living memory. A number of the world’s leading financial institutions encountered severe challenges and many had to be rescued by government intervention. Some even have failed. These challenges were not confined to the financial world. The economies of many countries and regions began to slow dramatically and several have slipped into recession. Retrenchments have taken place on a large scale in many countries, affecting many industries. The retail sector has not escaped these events and a number of retailers in many parts of the world have reported significantly lower results.
Whilst the South African economy may not have been as badly affected by these global trends, we have not escaped unscathed. Current indications are that our economy has slipped into recession in the current year. Our consumer fundamentals are fragile. Food prices remain stubbornly high and consumer sentiment is negative.
In response to these circumstances, South Africa started reducing interest rates in December 2008, with rates having fallen 4,5% since then. Nevertheless, our interest rates remain relatively high and our expectation is that rates will continue to decline during the remainder of this year. Household debt as a percentage of total disposable income has started to reduce and is expected to moderate to 70% by the end of this calendar year, from its peak last year of 77%. The ratio of household debt servicing costs to disposable income has become more manageable at around 9,5%.
In addition, inflation is on the decline and is expected to dip below 6% by the end of this calendar year.
All of this may indicate that our economy is poised for a recovery towards the end of the current financial year or during the course of next year. Economic activity is likely to be sustained by a number of substantial public infrastructural projects, the 2010 World Cup as well as a number of other major sporting events.
The major threat to this positive scenario remains the risk of job losses in a number of industries which could impact upon our customer base.
STAFF AND DIRECTORS
Our group’s greatest asset continues to be its excellent management team. In this respect, we pay considerable attention to retention and succession planning in all facets of our business.
Doug Murray, who was appointed as Group CEO on 1 January 2008, has now completed his first full financial year in that position. Doug was appointed during an extremely difficult cycle in our business and I am impressed by the way he has developed and guided the group through the challenging times.
We are also very pleased to welcome Khanyi Dhlomo and Nomahlubi Simamane as independent non-executive directors. In addition to the special skills and experience that these appointments bring, the board believes that these changes reflect the Group’s commitment to transformation and gender diversity. We also welcome Peter Meiring as an executive director. Given the increasing importance of financial services to our overall business, Peter, as head of this division, will bring enormous value to our deliberations at board level.
Neville Goodwin, who had been a director of the group for many years, decided not to stand for re-election at the last Annual General Meeting. Neville played an invaluable role in the growth of the company and served as its Chief Executive for five years. Since retiring from his executive role in 1998, Neville has served as a non-executive director and his understanding of and insight into the group has been an invaluable contribution. We wish him well in his retirement.
ELIOT OSRIN
Eliot has been a non-executive director of the group since 1978 and has served as its Chairman since 1998. Eliot stepped down as Chairman and non-executive director on 31 March 2009, having been involved with the group for some 37 years. He has played an inspiring role in the growth of the group. Through his leadership he has given management the opportunity to grow and develop their skills, to exploit and build new brands and allow the business to become the great thriving future-orientated enterprise it is today.
Eliot is handing over a company, energised by his example, with clear direction for its future and its people who will continue to build great opportunities for the future.
So we say thank you to Eliot, meant with much admiration and respect for his unstinting efforts in the pursuit of Foschini’s success. We wish him all the best for his retirement, which he can do with the great satisfaction of a job exceedingly well done.
COMMUNITY RESPONSIBILITY
We remain committed to achieving a balance between economic performance and the part we play for our society and the communities in which we operate. We are mindful of the critical role that business has to play and for this reason we continue to invest in the development of society. We make charitable donations to more than 100 national and local non-governmental organisations, with our primary focus areas being education; skills development; arts, culture and the environment; special projects and combating HIV/AIDS, with specific emphasis on women and children. Full details of our CSI endeavours are covered in the sustainability report in this Annual Report.
TRANSFORMATION
Our Transformation Committee has the task of driving the group’s broad-based black economic empowerment (BBBEE) strategy into the future. Our various internal transformation sub-committees tackle, on a daily basis, the various issues underlying BBBEE in order to ensure that our group plays its rightful role in the advancement of historically disadvantaged communities. I am pleased to note that in the Financial Mail’s Top Empowerment Companies Report of 2009, our group has once again fared well.
GOVERNANCE
The directors consider responsible corporate governance to be integral to the success of the group, and our commitment to it is outlined in our corporate governance report, which appears elsewhere in this Annual Report.
Assessment starts at the top with a comprehensive annual peer review of the performance of all directors. The board’s various sub-committees, which cover the fields of audit, remuneration, risk, nominations and transformation, maintain diligent oversight of all significant factors within their purview. The group has formulated and abides by a code of ethics which includes a set of clear goals to achieve in its relationships with customers, suppliers, staff, the general public and the communities among which we operate. The increasingly complex field of compliance with the laws and regulations governing our businesses is another among the many issues on the governance agenda. Shareholders will be aware that the King III Code of Corporate Governance has recently been published for comment, and this, together with the promulgation of the new Companies Act, will necessitate a review of our current corporate governance practices.
LOOKING AHEAD
Despite the difficult environment, retail sales growth is expected to improve gradually this year due to a combination of additional interest rate cuts, declining inflation, an increase in real wage growth, as well as some tax relief. The build-up to the 2010 Soccer World Cup should assist in boosting retail sales. The hosting of one of the world’s most prestigious and popular events should provide a direct boost to economic activity in South Africa, especially bearing in mind the magnitude of the event in relation to the size of the domestic economy. Furthermore, the infrastructural investment programmes associated with the hosting of this event have been underway for some time. Unlike the case in advanced economies where stimulus packages are being planned to help provide a boost to economic activity at some stage in the future, South Africa’s infrastructural investment programmes are already well underway and are providing a significant counterfoil to falling growth in consumer spending.
The group’s long-term strategies in order to grow its market share and profitability are continuously being pursued and include:
- A more aggressive approach to the opening of new stores in selected formats which are under-represented;
- The repositioning and turnaround of our Foschini division which is already showing positive results;
- The continuation of our supply chain initiative, designed to significantly improve lead times and cut distribution costs; and
- The continued roll-out of 12-month accounts to new customers, as an alternative to the existing 6-month option.
The 2010 financial year is expected to continue to be difficult, particularly in the first half. However, our group remains in good shape and is well placed to maximise the benefits of any upturn in our economy.
THANKS
On behalf of the board I wish to extend deep appreciation and thanks to:
- all employees for their excellent performance during an extremely challenging year;
- our customers for their continued loyal support;
- our shareholders for their support and confidence in the future of the group;
- our suppliers, advisors and business associates for their co-operation and contribution to the growth of the business; and
- my fellow directors for their insight, guidance and valuable input.
David Nurek
Chairman
17 June 2009
