Full Year 2014/2015 Foschini Group Ltd Earnings Presentation
May 28, 2015 AM EDT
TFG.J - Foschini Group Ltd
Full Year 2014/2015 Foschini Group Ltd Earnings Presentation
May 28, 2015 / 03:00PM GMT
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Corporate Participants
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* Doug Murray
Foschini Group Ltd - CEO
* Anthony Thunstrom
Foschini Group Ltd - CFO-Elect
* Jane Fisher
Foschini Group Ltd - MD Financial Services
* Ben Barnett
Foschini Group Ltd - CEO, Phase Eight
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Presentation
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Doug Murray, Foschini Group Ltd - CEO [1]
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All right. Good afternoon, everybody. Can you hear me at the back there? I'm sure you can. All right. Normally somebody introduces myself and the team, but there's nobody here to do that today. I think you all know who I am. You will see from the agenda that there is a new team selection here. We're freshening up the squad as you have to do every so often. I think you saw in the announcement today and you knew about it previously, Ronnie is retiring at the end of next month, as is Peter. So they are both here looking quite relaxed because they are not presenting anything, but if we have any tricky questions we can always call in them. So this will be their last presentation.
Anthony who -- this will be his first time with us. He, I think, probably has met some of you, but he will be presenting the financial review. Jane, will be doing the financial services. You will have heard her talk during the interims in November. And I'd just like to introduce you to Ben Barnett, sitting over there. He is the CEO of Phase Eight based in London, and if I ask you to guess who is the guy from London it will be easy to pick him out. You will look at that tie off from one of these days but never mind. Right. Let me get straight into it.
It's quite confusing looking at the screen in front of me and you're looking at a screen there. All right, this is a general overview of the economy. We have mixed views on the global economy that is still in place. We have the positive impact of the oil price which had been, I think, good for everybody, but there are increased concerns over the outlook for emerging markets and on top of that the growth prospects for the developed countries other than probably the US have been downgraded.
From a domestic point of view, we have an improved current account position. We have continued rand weakness against the dollar. We still have a lot of industrial action in various sectors. Load shedding, I'm sure there'll be a lot of questions about that, load shedding is disruptive and it's going to be there for a long time to come. Interest rates are going to remain probably flat with a possible marginal increase, we think, in 2015. We have a CPI that's sitting at 4.5% sharply down at the end of April and that was probably driven by the fuel price earlier in the year and the inflation rates probably going to stay within the target range for this year and probably for most of next year.
We are seeing early signs of an improvement in the credit cycle, but that's clearly again as a result of the fuel price and this benign interest rate environment. Employment growth is just stagnant. In fact, unemployment seems to be on an increase and the net effect is that GDP projections are now down to probably, depending who you want to listen to, about 1.9%, 2.1%, I reckon it's going to be below 2%.
Just to give you some background on the load shedding, load shedding started right at the end of November. So really from December through to March we conservatively lost about ZAR71 million in turnover. We only measure the time that the stores are actually closed, so if a center goes down and people leave the center, it's unlikely that they come back in, but we only measure the actual hours that the store is actually closed.
Our stores do have the ability to trade off-line. So we can trade under those circumstances, but if you're in a shopping center and whole shopping center is closed you've got no chance. If you're in street location, it's possibly easier because you have some natural light. What we are looking at obviously going forward is to introduce invertors and batteries. It's a massive process. We've got to just try and prioritize quick stores, quick centers and then we've got to try and get the equipment and then we've got to try and get somebody to install. But we are going to do that because we do believe that load shedding is here for some time.
Once we do that, we do think it will mitigate again some of the load shedding because customers shopping behavior, their habits will change. They'll realize when they're in a shopping center that some of the stores are open would obviously talk quite significantly about that and they'll start to learn that they can still stay in shopping center or wherever it is and still shop, but that will take time and it's not going to happen in the next five minutes.
These are just some slides that really just back up what I was saying on GDP, on inflation and on the interest rate. And again business confidence has been floating around the same sorts of level, not great for a number of years now and then the other one just shows the steady decline of the rand against the dollar.
So when we look at this year for TFG, I think it would be an understatement to say that it's been a busy year for the Group. It's been extremely busy, but I think an extremely positive year for the Group. I think a hell of a lot has been achieved, a lot of things we've been working towards for a long period of time have come together. The disposal of RCS, we dealt with at the interim results, won't spend too much time on that, but suffice to say we did get in ZAR1.4 billion. And at the time we were talking about how we would deploy those funds and I'll come to that.
We launched our online selling in November. The first two brands were @home and Mobile, which we're re-branding as Hi. And then of course, we have the acquisition of Phase Eight in January. We're very pleased about that acquisition. We have the funds to deploy from RCS. At the end of the day, we are really keen to get a retail acquisition. It's never easy to have that happening at the same time and the other option at this time of the year if we haven't done something would have been just going into the market to buy back shares. We're much happier that we were able to buy or acquire a retail business.
And just to remind everybody, we were very specific on what we were looking for. It had to be a business with a very good track record, both in turnover and profit and had to have a very good management team in place that was going to stay on and commit to stay on and had to be a model that we understood and which we thought had good sustainable growth potential. And Phase Eight ticked all those boxes, so it was great to conclude that transaction.
Through the year we've had very strong cash sales, just under 20% growth in cash sales that comes on the back of just over 15% cash sale growth last year. The credit consumer, they are under pressure. There are some early signs of improvement. I mean, just the fact that we -- in the first half, we grew at 2.5%, second half we grew at 6.1%. It's encouraging. Jane will talk about the bad debt and the improvements we're seeing there. So, yes, there are some good signs on the credit, but we are keeping that very, very tight for obvious reasons.
The gross margins in all our product areas were maintained, and we're very pleased about that. Merchandise inflation was on average approximately 7%. It's hard to give definitive numbers there because we've got such a broad spectrum of merchandise category. We opened 195 new stores in the year which included 29 stores in the rest of Africa. The debtors' book is very well managed in this climate and there's a significant slowdown in the growth of net bad debts to 9.4%. You recall that it was just under 40% last year and we continue with the appropriate risk measures in place. We're not ready to open any types as yet. And I can assure you the book is adequately provisioned.
So salient features. The column on your right deals with the business excluding Phase Eight, and the column on the left is including Phase Eight. Phase Eight is only in for two months, and as we had always said, we would pretend we didn't see that they would have any material impact on the results that we have guided to for this year. So our turnover was up 10.8%, and if we included the two months of Phase Eight, 13.6%. The gross margin, up 46.7%, marginally up on last year, almost flat, it was 46.5% last year. The net bad debt to closing debtors' book at 13.6%. You will recall that we were guiding probably closer to 14% both at the year ago and also at the interims. So that's come in at a better level than what we had guided. We are pleased with that. Return on equity is at 23.4%, that's taking -- we have to take the entity as a whole there. And the debt to equity including Phase Eight 76.8%, and the recourse debt to equity is just over 56%, and I'll talk more about that just now as will Anthony.
So the big numbers I guess are that our HEPS for continuing operations are up 9.7% excluding the acquisition cost. What we're trying to do is simplify a set of figures. When you have a disposal of business after three months and then you have an acquisition two months before the year-end, the figures can get skewed. As we have done at the interim, we had guided that we would be looking at the continuing operations and that would drive what we were doing on dividend.
We have a final distribution of ZAR0.325 which is 10.9% up, and that will give a total dividend of 9.7%. Now we say final distribution because with that we are offering -- we're not offering, it will be a scrip dividend with an alternative to take those cash. So if anybody wants to take the cash it's a 10.9% increase. The scrip dividend is something that we wanted to introduce because with the recourse gearing of 56%, we have a targeted gearing as we have said in the past of 40%. We would like to get back to that quicker than just letting natural cash flow. Natural cash flow we'll get back there in probably about two, two and a half years. Going this way it will be quicker. And it's really driven by a thinking that one, we want to be prudent. We want to be careful in case there is another emerging market crisis. And secondly and more importantly, we want to be in a position that if we have another acquisition opportunity, we are in a position to take advantage of that. This allows us to do that. So it's really got nothing to do with any concern about cash flow or anything. It's more about putting ourselves in a better position quicker than normally be the case.
Right. Now, talking just continually you've seen this slide before, but I just want to bring it to your attention again. The Group is a home of leading retail brands. There is 18 of them now with Phase Eight in place. They are primarily our own brands and then we cover from the lower LSM value end right to the upper end. You'll see how we designate, which of our brands falls into upper, mid markets or those that transcend both upper and market on the left hand side. And of course, we do have a very broad range of categories stretching from clothing, jewelry, homewares, cell phones, cosmetics. So it's broad LSM appeal and it's broad categories. This is slightly different. Before we would only had our map of Africa where we gave our vision is really to be the leading fashion lifestyle retailer in Africa.
We've obviously now extended that obviously to say growing our international footprint with the introduction of Phase Eight. We now have over 2,700 outlets trading across 27 countries and South Africa is just over 2,100, rest of Africa 148 and with Phase Eight 444 across 19 countries. This is just for information, it's in your package, just explains where we are regionally within South Africa and regionally through the rest of Africa. So I'm not going to go into any detail on that. This obviously excludes Phase Eight.
In terms of the performance in the rest of Africa, we've opened 29 stores during this year. We opened five stores in Ghana during November. The turnover growth is just under 24% this year with comp store growth of 12.2%. This compares with last year's, I think it was 25% total growth and 15% same-store turnover growth. We have further expansion planned into Kenya. In October, we opened 10 stores there. And then we're looking at other territories such as Mozambique and Angola, but nothing is confirmed there. By 2020 we want to have somewhere around 375 stores in the Rest of Africa and again this excludes Phase Eight who do not trade at this point in time in any of these territories.
Looking at the merchandise categories, you can see the total sales at 10.8%, the comp store sales at 5.5%, and I think the key is that the clothing 10.2% and the jewelry and cosmetics all were up from the first half. In fact, clothing, I think was about 8.7%, if I'm not mistake in the first half. So a very good increase there. Cell phones came up marginally as did homewares, but the rest were all nicely up in the second half. And the only area where we include Phase Eight is in clothing, and you'll see that the 10.2% will then grow up to 14.4%.
On cash sales we got a 19.6% growth and a credit sales 4.3%. I've already spoken about them. But it now means that it represents about 46% of our business is done on cash, including Phase Eight, I mean it's a smaller number, it just takes that up to 47%. If we were to annualize Phase Eight for a 12-month period, our cash sale business would be around about 54%, 55%, which we will be very comfortable with.
Just to remind you that our clothing and footwear is about two-thirds of our business. And also just to break that down into a sport value and our exposure to fashion is about a third, 32%. Within that of course you have men's wear with Markham, Fabiani, G-star, you also have plus sizes.
It's really just to give an exposure to the international threat that everybody talks about, just where we're exposed, one on the fashion side and where we exposed on the particular -- more of the women's wear side and the potential impact on us. I think ladies retailing is probably the hardest area of retailing anywhere in the world, including South Africa. Between our ladies casual wear and smart wear it represents about 10%. So of the 32%, 10% of that would be represented by ladies clothing. And that includes DonnaClaire and there's not much coming in the way of competition on the larger sizes.
And just again in terms of the cash and credit, actually just to highlight here that the credit in the second half of the year moved from the 2.5% to the 6.1%. I am going to have to put my glasses on just not to have numbers get any smaller.
And if we include Phase Eight, you can see our 19.6% growth goes up to 26.3%. Again, it was only for a short period of time. Right, that's an overview of the results, the key numbers, salient features and I want to just hand over to Anthony who will take you through some more specific numbers from a financial point of view.
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Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [2]
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Thanks, Doug. I think Doug has provided an overview of our financial performance for the year. So what I'm going to try to do in the next 10 minutes is really unpack our income statement, our balance sheet, our cash flows for the year and then equally just highlight some of the key drivers that have underpinned our financial performance.
As Doug has already mentioned, our retail turnover grew by 10.8% during the year. We think that was really robust growth given what was a fairly tough credit environment, particularly in the first six months of the year. We maintained our gross margin increasing it I guess very marginally from 46.5% up to 46.7%. Our trading expenses excluding our net bad debt charge and our once-off acquisition costs, we believe were well controlled growing at 12.6%, given that our like-for-like cost increases were running at approximately 8% for the year. The net bad debt charge for the year grew by 9.4%. As Doug has already mentioned that has come down significantly from last year with that comparative growth rate was just under 40%. We'll talk about the book in more detail later on.
In relation to the Phase Eight acquisition, we obviously incurred a number of acquisition costs that totaled ZAR292 million and those have been expensed in the current year. Operating margin for the year I think pretty much flat, 17.7% in the current year versus 17.9% last year. All of that has really given us a 9.7% increase in headline earnings per share from continuing operations excluding those once-off transaction costs.
Doug has already mentioned the RCS transaction, but I think just to remind everybody about the timing of it, because that obviously impacts what was accounted for in the current year. The effective date of that transaction was 30 June, 2014 and this means that we've included three months of their trading results in our current year. It's been treated as a discontinued operation in our results and in our financial statements. The profit that we realized on the disposal of our share of RCS amounted to ZAR273 million and the cash proceeds or our share of the cash proceeds was ZAR1.4 billion, which were used in part to fund the Phase Eight acquisition.
Speaking of Phase Eight, that transaction was concluded effectively on 16 of January this year. The acquisition was concluded in the enterprise value of GBP238 million, and as I've mentioned this was funded partly through the proceeds of RCS together with cash resources that we already had within the Group. As a result, we've included two months of trading in our current year results, February and March, and as I've mentioned, the once-off costs of ZAR292 million have already been expensed.
Talking about headline earnings per share, this graph really just shows the movement in our headline earnings per share over the last five years running from 2010 through to 2015. On a compound annual growth basis, our headline earnings per share have grown by 15.3% and our dividends per share mirror that as it turns out the grants to again 15.3%. I guess in simplistic terms what this shows is that our headline earnings per share and our dividends per share have both more than doubled over the last five-year period.
I think in particular you can see last year, we were still seeing the impacts of that unsecured lending bubble and our HEPS grew at 4.9%. So I think to bounce back from 4.9% to 9.7% and to end up with a compound annual growth over that five-year period of 15.3% in still pleasing.
Just unpacking our overall revenue, we've spoken to the retail turnover of 10.8% already. I think we were particularly pleased with the growth in interest income that was up 19.1%, really driven by the growth in our book together with the growth in interest rates or the increase in interest rates, but we'll unpack that for you further.
And then other revenue which really comprises of the income that we earned from publishing, insurance, the cost recoveries in relation to our debtors' book and the income we derived from one to one mobile airtime sales was more muted. That grew at 3.3% and that really reflects the slowdown in the credit market and new accounts being opened.
New accounts really is what feeds us part of our business and I think as credit cycle turns we would certainly expect that to pick up and to get back to previous levels.
As mentioned, our gross profit has increased -- our gross profit percentage has increased from 46.5% to 46.7%. That's been maintained pretty much across all of our different merchandise categories. And then I guess looking forward in terms of our strategy, we would expect the TFG clothing margin to remain at pretty much these levels. Within that, I think we'd see a little bit of a mix and certainly we believe there is some upside in terms of Foschini, but at the same time, we consciously are looking at lower margins in the value end of our business in Exact and in Fashion Express. But overall, I think we'll see that say at a similar level.
I mentioned the interest income growth a second ago, really driven principally by the higher average book. Our book grew 7% year on year and that really contributed 11% of that total growth in interest income. At the same time, we've had high interest rates on average during the year compared to the previous year due to the two increases of 50 basis points and 25 basis points in January and July of 2014. Just as a matter of interest 89% of all of our balance is attracting interest, pretty much the same level as last year and certainly at the level that we would expect that to stay at for the foreseeable future.
Trading expenses, I mentioned we believe these are well controlled at 12.6%, underlying growth sitting at an average of 8% and the balance predominantly driven through new store openings. If we just unpack the major categories for you, depreciation of 12.9%, the balance of that again would be around new store openings and investment in CapEx, particularly around retail IT systems. Our employee costs were at 9.8%. Average increases was sitting at about 6% for the year. Again the balance of those costs is coming through the staff that we've employed for new stores.
Our occupancy costs were at 11.1%. We've seen rental escalations certainly soften during the year, but those are still sitting at currently about 7% on average. And again the balance of that 11% coming predominantly from new store openings.
Net operating -- net other operating costs went up significantly by 17.6%, and there I guess we probably got some positives and some negatives. I think on the negative side, we were really hit hard in the last year by armed robberies and burglaries. The cost of that to the business really spiked by 43%. It was really an unprecedented increase and I think this is something that's been observed across South Africa. We've all seen, I think spikes particularly in shopping center robberies and certainly some parts of our business, particularly cell phones, really were hit quite hard by that.
I guess the other negative is we've been exposed to well above CPI increases in utility costs. And our electricity costs, for example, year-on-year are up ZAR26 million and that's despite a number of measures to actually bring our usage down. I think it's just reflective of the environment that we're in.
I think on a more positive side though we continue to invest in a number of areas that have given income in the current year but that's equally positioned the Group for future growth. In particular, I'm talking about CRM marketing really growing our base of customers, I'm talking about our rewards discounts that obviously drive to an extent the retail sales we've achieved during the year as well as the people and the systems that we've invested in specifically to drive e-commerce and our Africa expansion. So I guess that's the kind of money we don't mind spending. We preferred to have less of the robberies and the double digits inflation on utility books.
The increase in our finance costs has really been driven by both an increase in the level of borrowings as well as an increase and our average cost of borrowing. Just the average borrowing levels are being driven by the investments in our debtors' book which as I said is growing by 7%, as well as the CapEx that I referred to largely again around IT systems and new stores. And then the high average cost of borrowings, I guess, is being driven by two things. Firstly, we took some term debt in the first half of the year, approximately ZAR1.4 billion. What that did is it certainly gave us a better liquidity mix in our balance sheet, but it does come at a cost, term debtors sitting at about 1% on average, more expensive than the short-term debt that we had in place beforehand. But certainly, I think we are happier with that balance from a liquidity perspective. And then equally as I have mentioned, we have those interest rates increases, the repo rate increases during the year.
I think what leaps out from our tax disclosure there is very simply the increase in the effective tax rate from 29% to 32.7%, that's really being driven by I think a very conservative approach on our side in terms of the fact that we've assumed that our transaction costs are non-tax deductible. When we get to doing our tax returns, we'll obviously go through that with a fine-tooth comb. Some of them may well end up being deducted, but certainly for the purpose of those, we believe we've taken the appropriate measure of it.
Just looking forward, in the next year we will be consolidating 12 months of Phase Eight's earnings. Phase Eight being UK based would obviously be exposed to a much lower tax rate, currently sitting at 20%. So I think we could look forward to that effective tax rate coming down significantly by the end of next year.
In terms of our debtors' book, this remains both our largest and our most important asset on our balance sheet. As I mentioned, it's grown by 7% year-on-year and is now sitting at just under ZAR6.2 billion. It's growing at a slightly faster rate than credits turnover. The book is linked in slightly, but when I say slightly, literally by three days on an eight-month measure. It continues to be very well and very closely managed, and that's something that we pay a huge amount of attention to given its importance to our balance sheet. Jane will be talking more about some of the metrics on that book in her presentation, but I think just to echo Doug's comments, we believe that the book is adequately provisioned.
In terms of borrowings year on year, our net borrowings up ZAR3.6 billion, principally driven by the acquisition of Phase Eight and the consolidation of the debt that's sitting on the Phase Eight balance sheet. That's non-reversionary debt to TFG in South Africa but on consolidation that obviously sits in our consolidated financial statements.
And looking at our consolidated position that takes our total gearing to 76.8%, looking at it on a recourse basis, that's sitting at 56.6%. That 56.6% is really what is comparable to where we were a year ago when our non-recourse debt was sitting at 36.8%.
As Doug mentioned, we are offering a scrip distribution and the shareholders get to linked with one cash flow scrip. Through those we are wanting to attract approximately ZAR1 billion in new equity. We would anticipate based on the kind of take up that we've seen in the market in South Africa over the last 12 months that this would typically be sitting at around a 70% take up and on that basis we would hope that we would raise this equity over the next two dividend cycles.
And if we are able to raise that ZAR1 billion within the next year, it would immediately drop our overall gearing levels back to 43%, which is very much in line with our medium term target of 40%. Just in terms of our cash flow for the year, we generated a cash EBITDA of ZAR2.8 billion very much in line with the same number last year. Clearly there we can see the proceeds on disposal from RCS the ZAR1.4 billion. And if we go down to the bottom half of that cash flow analysis, we see the acquisition of Phase Eight ZAR2.5 billion together with the own borrowings of ZAR1.6 billion, giving us a total Phase Eight's cash cost of just over ZAR4 billion.
I've mentioned CapEx a couple of times already in the presentation. This slide really just gives I guess a sense of where this CapEx goes and the level of CapEx in the Group. Doug mentioned the number of new stores that we opened on an annual basis typically growing our floor space between 6% and 7% per annum and the majority of our CapEx goes into those new stores. So in the current year that was ZAR360 million and we also invest on a continuous basis in IT specifically in retail IT systems, planning merchandise points of sale really to make sure that we tried as effectively and as efficiently as possible and that's really our second biggest area of CapEx in the Group.
In total, we spent just under ZAR650 million on CapEx during the year and that is roughly the kind of level that we anticipate spending in the next year and probably the year thereafter. And I think that, Jane, brings us to financial services.
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Jane Fisher, Foschini Group Ltd - MD Financial Services [3]
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(technical difficulty) the industry stats before we look at our own performance. In each quarter, of course, TransUnion which is the quarterly report, shows the state of the consumer credit health. And just to remind you of course the value of 50% is a breakeven point between deterioration and improvement of a consumer's credit health.
For the first time since 2011 we've seen a clear break above the 50% mark, and we are now at 54.3%. So whilst that's great and that's clearly showing some green shoots, it is only a modest improvement and consumers are still feeling indebted, but it is a good start.
We have also seen some improvements in the growth of our bad debts. And whilst there has been a big slowdown in the growth of our bad debt it is still growing. So this is consistent with our experience of seeing some good signs. Report also showed household cash flows. And the household cash flows have also improved in quarter one for 2015. The primary reason of increase is because of the lower petrol prices and these have subsequently been eroded since the budget announcements.
Credit regulation continues to add complexity to our environments. The affordability regulations are probably the biggest change to credit legislation since the NCA was implemented in 2007. The challenge will be how do we make this regulation as easy and as simple for our consumers as possible. Bear it in mind, the regulation states that the consumers need to produce three payslips or bank statements or documented evidence. And most people who come into our stores don't come in with the intentions to take out credit they are not likely to have this information to hand (inaudible). So how we are going to help them and how we are going to make these procedures easy for them?
If we look at our numbers, you can see our interest income has increased by 18.3% and Anthony explained this was due to a higher average book and due to the interest rates. Our bad debt and impairments, our net bad debt figure, there has been a slide down in the growth to 9.4%, half year when I presented to you it was 9.9%. And we think going forward this will continue to slide down, particularly by the end of financial year 2016. We are always asked about our impairments policy and our write off policies, [in the finished change] we're consistent, they are data banks, they are evidence, we've made no changes in this regard.
You can see our credit costs have increased by 19.2%. Why? This is primarily as a result of investment in new areas. We've launched of course two trading divisions on our online platform. The centralized group team that supports the e-commerce is part of these costs as well as a dedicated e-commerce call center. We've also invested in new account acquisition through our invitational mailings by improving the target and increasing the number of mailings. They are not insignificant costs and they are also in here.
Responding to the increase in this future transactions, we also invested in our forensic unit, both in tactical and strategic initiatives. So for example, if you walk into stores now, you've lost your card or you need a replacing, you'll have to go through an identification verification process first of all. That investments in those initiatives have given some great results and we're actually seeing this future transactions fall back now. Going forward this year, we think we have that under control.
A major part of our cost of course is our credit operations and collection is one of the biggest areas in there. And just to put it into context, our credit collections costs have increased by 5.5%. So overall, the credit cost line is all about investment. And when I come back here at half year for the new financial year, you'll see that figure increase slightly again as we invest in other areas. So looking at the actual book itself, our exit rates are marginally higher by just over 1%. But the number of applications we're getting through the door is flat with a slight contraction. So overall when we put that together, the number of active accounts that we have has only increased by 0.3%.
The credit sales and the turnover is 4.3% for this financial year which is where we expected it to be. The first half was 2.5% and the second half was much stronger at 6.1%. The key for us will be keeping that credit sales flat if not with some increase and there will be a significant increased focus on how to drive that credit sales up in the next financial year.
You put all those factors together with a slight lengthening the book, and I want to stress, when I say slight, three days is slight, the net book growth has grown to 7%. That is a slowdown from previously and as I explained at the last half year we will see that book growth slow down further going forward.
If we look at our net bad debt statistics, so we've had a much better collections result which has been fantastic. We've seen the bad debt growth slowdown. This is shown in our overdue statistics. That was a stat that we introduced at half year. Because we felt that the analysts wanted to compare us against our industry and we felt that this was a fairer statistic to use. So you can see that the overdue value has decreased down to 14.6% which is great.
With a better collections performance, you'll also get more people in a position to buy and that is now up to 80.9%. However, because the book has grown at a slower rate than the improvement in our bad debt, our net bad debt statistic of course has increased and this was explained at half year that we thought that this would be around the mid 13%s is exactly where we thought it would be. We actually thought it could have been slightly worse but because of the great credit sales growth we had in January, February and March this number has come in slightly better than expectations.
Going forward, however, we do expect this net bad debt statistic to reach the 14% and during financial year 2016, it will be mid-14%s and that's purely because of book growth. The bad debt numbers will continue to get better. The quality of our book is better now and it will get better going forward. Provisioning has increased in line with our net debt. We continue to be adequately provided. Our provisioning is data based, it's inherently based. When we see the data come through to show there has been improvements, further improvements then there could be some provision in release at year-end, which is what we expect to see.
However, if we look at customer value added products, they are essentially the publish and insurance and the one to one product into our credit base. So when credit is going through a cycle they may not open enough -- we are not opening new accounts, so there is not a great growth in new account growth and this area also takes a hit.
So you can see here that the publishing net income has only grown by 1.3% which actually is a good result. They have now at 1.8 million magazines in circulation. They recently launched MyKitchen which has been very successful and they will continue to launch magazines during the next financial year.
Insurance has had a slightly tougher time. They took a hit on their income of 1.8% growth. I just want to stress that the insurance is voluntary and that we do not do mandatory, but once along product however, you can see us taking a bigger hit and that's primarily because the NTN pricing contracts are not as competitive now and therefore not as appealing now to our consumers as they were previously. However, we still have a significant number of subscribers on this product, and it's still very profitable for us.
So, overall what does this mean, what's the outlook. So there are early signs that the credit metrics are improving. We think volumes of applications will remain flat for the forthcoming year coupled with the exact rates we think the account base will remain at current levels as to where it is right now.
We are expecting some improvements in the credit sales, particularly with the focus that we're going to apply and we think the payment rate will continue to stabilize where they are. So if you combine that together, we should see the net bad debts continue to fall going forward. And there may be some opportunity for impairment release. What do we need to focus on then, so we've got collections under control, recoveries under control, we've got the space under control. Those will continue to give us good results going forward.
What we need to focus on for the next 12 months is credit sales, how do we get the credit sales up. How do we use rewards to get the customers to come to our shops more often and spent. What new credit products should we be looking at, how do we stay relevant, so we want to research all the credit products which they will be offering adding to our stable.
We also want to look at how to optimize our costs in credit. So we've had some great results. But how do we achieve now going forward with the same results. So we want to look at things like workforce management and campaign management which are all about how do you optimize, how many agents that you need at any given hour of any given day for the volumes that you have.
And thirdly, the third big thing for this year is working within the regulatory framework and how do we deal with the legislation that's coming which is ever more complex. So those really are three big things this financial year. Thank you.
Hey, I'm going to hand over to you.
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [4]
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Great. So the plan is to take you through an overview of our customer, our brand, our reach to market and I guess also most importantly our avenues for growth. Basically it would be very helpful I could kick off with just a show of hands and know who here has been into a Phase Eight store of concession either in the UK or overseas. Okay, so smattering. Okay, very good.
Well, I'll kick it off really with an overview of customer. And so our customers are 35 to 55 year old women with very high disposable income. She is stylish and contemporary. I think she's also -- she is fashion aware, but she is not fashion led. So we're not producing cutting edge or directional fashion. I think that's very important. Also, as you can see the bottom left-hand chart, she's very loyal to the brand. So in a recent exit poll, over half our customers had shopped with us for over five years and she is very important to us. And in terms of the product itself, it's feminine, it's colorful and it's high quality and I think also it's got a point of difference so we aren't producing basics, we aren't producing fashion basics, we aren't producing -- we're not trying to be the lowest cost producer of clothing that we've got no interest in whatsoever.
And if you look at the bottom middle chart, you can see actually almost half our clothing is dresses and that's something that we have a real sort of strength in and focus on and that's what really led us into these international markets. On the far right-hand side, I think it's worth also pointing out our customer is completely multi-channel and so what does that mean? Well, she shops with us in stores. She shops our department store concessions. She shops us shop online. She shops on the iPad in our stores and she also shops at home on her desktop, on her iPad, whatever it may be and she recollecting those goods back in store.
And I think if you look at the bottom right-hand chart, you've got the evolution of our e-commerce sales, which have grown very rapidly, sort of 40% a year for the last five years and touched ZAR0.5 billion last year. I think that's very important -- a very important driver of growth going forward.
And thinking on a bit and just looking at sort of our last decade of growth, we had a very similar sort of evolution to TFG itself as a business. Our sales have grown at sort of compound growth rate of about 18%, our EBITDA at a growth rate of 22%, and I guess we've achieved this sort of consistent sales growth through a number of different channels. The first five years, so sort of 2005 to sort of 2009, was entirely UK stores and concessions and organic growth, in terms of like for like. But really it was UK stores and concessions that was driving it.
In March 2008 we launched our first web site and in April 2012 we launched our first international store, which is in Switzerland. And what is fascinating certainly to me is those two new channels, those channels that didn't exist until six years ago, online and international, accounted a third of our sales last year. I think that's every important in terms of looking we get through to the key avenues of growth, right, for the last slide, just important to bear that in mind. A third of our sales were through channels that didn't exist until six years ago.
So again taking the sort of various different steps that we've taken through from London boutique to sort of create this international brand, the bottom to again these sort of stores and concession rollout and that's something that we've been doing for many, many years, the online channel again, March 2008, it launched. So we had our first sales in sort of the year ended Jan 2009. It accounted for 20% of our sales in the UK last year. It accounted for over 26% of our sales in the year-to-date. So the growth in that channel is absolutely phenomenal. It's a very disruptive technology is online and it's huge opportunity for us as a business as we go international. We'll talk a lot more about that later.
The introduction of our test and repeat model which is a model that's very common in fast fashion, very unusual in our peer group, we've introduced through this for the three seasons starting with autumn-winter 2009 and that's really guided our EBITDA margin, driven it from 10% back in 2009 to over 15% last year. And again, I'll take you to it a little bit more about that later.
And range extensions, obviously TFG as a family of brands obviously has created sort of 18 different brands over the years. We followed a similar sort of path. Starting in 2011, we created Collection 8, this is sort of red carpet evening dress. This is GBP400, ZAR7,000 a dress. This is very expensive. It's right at the top end of our price point, it's very much sort of full glamorous Oscar wear and that was launched in 2011. Last year, we did GBP8 million in sales, ZAR120 million in sales in Collection 8 and actually the most interesting and most exciting launch for us is actually Studio 8 which is our plus size brand that Doug mentioned briefly earlier and that will launch later this year, both online in July and department store concessions in August and we are very excited about the potential for that and we'll talk more about that later.
And finally in terms of international rollouts, again, we launched in Switzerland in April 2012, a small store in Fribourg and two-and-a-half, three years later we've got 128 points of sale generating a very significant profitability and we'll talk more about that also.
But just to start with the operating models. I think this is the key part of our sort of consistent success within the industry. 2009-2010 we made these changes from a very traditional model and if I talk you through that, sort of 90% of your purchases are made ahead of season. So you hold back about 10% open to buy to back your bestsellers, generally speaking, through the course of that season. Now that is a traditional model. It's also got a lot of risk in it. The risks are sort of three-fold.
The first is if you're buying 90% upfront, six to nine months before your season starts and actually it's the fashion trend or color or trend that comes into play you don't have the flexibility to really back that in volume and that's really one. The second is if you've got a range of bestsellers, I don't know whether it's skirts whether it's dresses or it's a particular style, you don't have the funding to back that in the same sort of volume that you'd ideally like to, that's the second. And the final one is and most importantly because I think you see this in a number of other businesses, your 10% open to buy, it's a sort of a fictional number, it's based on an assumption of what you are going to have left in your budget, sort of, in terms of total sales for your season or your year. Now if your sales start to slip, your 10% open to buy becomes 9%, 8%, 7%, 6%, 5% and so forth and then you've got two choices, you either over stock and chase your sales or you deliberately miss out on winners that you know you can back in volumes. I think those are the differences, if you like, between the traditional model and where we are now which is instead of 90% bought ahead of season, we buy 60% ahead of season. So you'll see we changed our supply base significantly to allow that but the other 40%, 20% of it is bought in the preceding season which is based on the trends, if you like during that season and the transitional ranges that we put in place and the other 20% is held back for two things, firstly to back our winners in volume both for full price at also for sale trade, but also we are backing short lead time product, this is three to six weeks generally out of Italy, sometimes out of Romania, that we are then backing which again is more fashion, it's more on trend but also it's a product that we can get into very quickly when we know we've got something that's working.
In terms of our portfolio, just talking about briefly about the UK rather, so the UK we got 107 stores and these are very traditional 80 to 120 square meters, but we've also got 203 department store concessions. This is with brands that you know, this is the John Lewis, the Debenhams, the House of Fraser and so forth. And for those who don't -- haven't come across, if you like, a model previously the [prominences of] a very different business model with us. So rather than pay us a fixed rent as you would do with a landlord, we pay a variable commission on sales. So if we are providing the staffing in that department store, we'll pay them 18% to 30% on sales and if the department store is providing the staffing we'll pay them 30% to 50%. Now on a South African context that feels quite high, but actually in the context of our exit margin which is over 67%, that leaves significant scope for profitability and actually that fact combined with very low upfront capital, so we're talking about ZAR400,000, GBP25,000 to open one of these, gives a six-month payback and also ensures that all 203 of our UK and Irish concessions are profitable and that's very, very important when we look at rollout.
And actually international is really the place that we put the same strategy into play. So if you look at our 128 points of sales that we built over the last two-and-a-half, three years, 113 of these are department store concessions and so you are giving yourself much greater chance of success in international market because rather than opening a solo store in a mall imagine Sandton, you've got a door, somebody has to cross that door, they got to trust your brand, but they don't know it. Whereas when we are taking a concession in an overseas markets, say, Bloomingdale's in the US or the [Arlen's] in Sweden or whatever, they are walking over that door, it's a Bloomingdale door, they are comfortable with Bloomingdale, they spend money with Bloomingdale's, they're walking over a women's wear floor and on that floor they are seeing a dress, a garment that they are liking and they are trusting Bloomingdale's when they're buying our products. And so it gives you a much more rapid buildup of your customer base because you're building on the trust in the existing customer that that department store has already built.
I think that's really, really important. And so if you look at the scale of growth 18 markets in three years is pretty unprecedented actually and particularly given we generated levels of profitability or operating margin that are very similar to those that we have achieved in the UK, but we've done it because we've been able to leverage of that that very installed base of customers of our department store partners.
Looking at e-commerce again it's a same sort of story. There are two key parts to our growth. The dark blue line in our channel, Phase-eight.com. So this is us traditionally selling from our own website. But actually 60% of our online sales are not done through our own website. They are done through those of our partners. So again it's not same, the (inaudible) providing a David Jones and so forth, and this is very important for us because actually we can scale that much faster. So if you look at, for example, the (inaudible) family in the Netherlands we went in there less than six months ago, we were already on track to take EUR1 million in our first year, ZAR10 million in our first year online, just online. just in the Netherlands just with the (inaudible). I think that's if you like the power of online as a phenomenon, and also the way that we're able to grow that, that's like green bar, you can see which is gaining very fast at the top.
I think there's also a couple of other projects I've mentioned which I think worth talking about, collect from store we introduced less than 12 months ago, that now accounts for over 20% of our online orders. So, the 20% of online orders are being placed on an iPad, on a computer, but the collection in stores, the virtuous circle, if you like that's reinforced with our customer while she's shopping us in store she's liking it, she's going home, she is shopping us online, and she is delivering it back to store so then get the full experience again where the she has the service, and she is able to try it on and so forth and that's really important compared to some of the online pure plays that we have in the UK.
I think the only other one that's worth mentioning on this slide is we are kind of single stock pooler, one stock where, and we've only trialed this for a couple of weeks, but the results so far are really very exciting. The online shopper has access to our online DC and that's always been there clearly but she now has access to our offline DC and four of our larger stores and we're looking at rolling that out over the next six to eight weeks so then it encompasses at least 70 of the 107 stores. And so what you're getting is a complete visibility that online shopper has a complete visibility of stock that sits anywhere in your business, not just in your distribution center but also because our iPads in store or in every store they come for about 3% of the store sales, our iPads in store give complete stock visibility in (inaudible) Edinburgh and London to stock that's sitting anywhere in our business, anywhere in the UK anyway, I think that's really, really important. We see huge growth coming out in terms of like for likes next year on the back of this. I think we're very, very excited about that.
So in terms of five avenues of growth, I think we've touched a number of these already. International, we see the market potential is being really significant. We've got over 30 points of sale in Switzerland. Switzerland, when I map you can't even say it is so small. 30 points of sale in Switzerland, you got six in Singapore. We see the market opportunity for Phase Eight is significantly more than the 131 points of sale that we are currently operating. I think that's obviously number one.
E-commerce is a now a great opportunity for us. It's a very, very disruptive technology, but a fantastic technology for a brand like ourselves who already have very significant online penetration, we've got a very strong team and as we go into these international markets, we're able to take significantly more share than, if you like, in the days before the Internet where we have to open physical stores and try and trade that way. So, for us it's a significantly faster route for growth and it's very exciting. So, that's certainly the second.
Product extension is slightly different for us than it is within the sort of TFG context. For us, we try to create new product categories in large part to take space within our department store partners. So rather than have, say 60 square meters for a Phase Eight and one member staff, it will be 100 square meters with Phase Eight and Studio 8 and if we launch a third or a fourth brand, again we are leveraging our relationships with the department store partner, we are leveraging our staffing in store. It's again -- it's another opportunity, if you like, to take more share within that same pie, paying commission as a percentage of sales, not a fixed rent and that's very important.
The other piece I think within product extension, we are launching a new wholesale range, which the first wholesale range, as you saw there are 440-odd points of sale, company-owned and controlled. So, our first wholesale range will be launched in August for sale in January 2016. We've had a fantastic individual from a global brand who will start with this in the USA based in New York and we're very excited about updating on progress later this year or next year on that.
Next two pieces, brand acquisition and development, again is very important. The Studio 8 we talked about this plus size brand and because of the leverage -- the relationships we're able to leverage, we are going to be opening in 45 department store concessions in August, 45 across the UK, Switzerland, Germany, the Middle East. So, this is a global launch for a new brand when nobody has seen the product until literally last week. A week before last we had a press day in London. So again it's a huge opportunity for us. If we can put new products through that channel I think that really leads onto the second piece as Doug touched on it briefly earlier where we see a huge opportunity to leverage these department store relationships, if you like, this operating model to put an additional brand, a third-party brand if you like, through that and really drive the cost efficiencies and the gross synergies that we're able to do and we're obviously looking to do is Studio 8.
I think the final one and certainly by no means the least, there's a real opportunity to leverage and number of the brands that sit within the TFG family. So if you think about men's wear, jewelry, homewares, these are particularly interesting opportunities. We don't have that anywhere within our business, but actually if you think about John Lewis, Debenhams, House of Fraser, they tried all these categories. And actually, whether it's the TFG brand itself or whether it's a TFG product category being traded under the Phase Eight brand, there is a huge opportunity we believe to trade those categories internationally, obviously UK and overseas and that's again something we're keen to update in future. Thank you very much.
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Doug Murray, Foschini Group Ltd - CEO [5]
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All right. Thank you, Ben. (inaudible - microphone inaccessible) it's great to look at a business where we believe we're talking growth, we're not talking cost containment. So we're very excited about what is going on currently with Phase Eight and what is going to happen with that brand.
Right. Just a couple of slides to go. I'm just going to talk about strategy, our strategic objectives. I've done this before, I've shown you this before. There's not too much change other than the fact that we hook it around sort of four cornerstones being the customer, leadership, profit and growth. You heard me talk about our strategic objectives, look at the customer CRM, it's still there, its rewards. With leadership, we're talking about embedding a performance-based culture in our group which has been pretty much business as usual but we're bringing it to the forefront, but business as usual over the last two or three years that's very key in the group. With profit, that's all about the supply chain initiatives that we've got either on the sourcing side or on the logistics side. From a growth point of view, you can see that previously we've spoken about the omnichannel and Africa. Well, in terms of Africa, it's still to be the leading fashion lifestyle retailer in Africa, but growing our international footprint and that is obviously through Phases Eight.
Those are the key strategic drivers to get to what we consider a 2020 vision and key targets for that period. You can see there some of the key metrics. I'm not going to go through them all. They're fairly self-explanatory in terms of turnover. The gross margin, we're still confident that we can maintain that between 47%, 48%. It would be a combination of a little bit more growth coming through on the Foschini side, tempered by trying to get the right input margins on the value end of the business where we want to be a lot more aggressive. And the operating margin we think is at a good level, and we can sustain that between the 17%, 19% level.
The return on equity, we see getting up to around 30% by 2020. Space growth 6%. This excludes Phase Eight by the way. We are only talking the business excluding Phase Eight. We still have to unpack what that will be as we go forward. And when we talk about the number of rewards customers cash and credit, we're talking going up from ZAR3.6 million on the cash side to ZAR5 million and on the credit side ZAR3 million to ZAR3.5 million, but obviously also excludes Phase Eight. The net effect is that we believe that we will have just under 4,000 stores come the 2020 financial year.
Final slide, just giving some view on the outlook going forward. We do still continue to benefit from good cash sales growth. We're not expecting to grow at 20%, but strong double-digit growth we are expecting. The credit environment is still going to remain challenging. We have started to see some improvement. We have spoken about that here. And it is our intention to drive higher credit growth levels. We're getting -- a lot of focus going on at the moment in store on our credit rewards. We've done the cash rewards very successfully. We think we can do a much better job on the credit rewards.
We are confident about the gross margin being maintained. In terms of inflation for the period going forward, we think it will average around 8%. Always hard to really predict because we have so many categories. But we think around 8% is stating the obvious the script, we have very strong focus on costs.
Space growth I have mentioned, we have got signed up about 160 new stores at the moment for 2016, excluding Phase Eight, which approximates to about 6% floor space. And we have in excess of 100 Phase Eight outlets opening. Ben spoke about the Studio 8 launch. That is included within the 100, just over 100 outlets that we're talking about. There'll be a lot of focus still in all those key strategic initiatives I spoke about. We will continue with launching online e-commerce for our sports division, Totalsports, Sportscene, and Duesouth our launches in July and obviously other brands will follow. We are launching a twin brand called Soda Block, which will launch in August. We're excited about that.
The kids wear is an area in our group, which is probably underplayed. We think there is a big opportunity in the market.
Load shedding is expected to continue. We are going to mitigate against that. I did speak about that. And then in terms of retail sales, if we exclude Phase Eight for the first -- because I'm talking about the eight weeks, the first six weeks were pretty much in line with the last financial year and in line with management expectations. The last two weeks have just been a little bit lower. We can easily identify, but that's in clothing and is seasonal product and is just one of these things that happens when you have unseasonally warm weather is affecting all retailers at the moment.
We are taking the normal promotional activity early, we are not taking distressed markdown, but we are promoting product hard at the moment. We're not too worried about it, in any year you are going to get a couple of softer weeks anyway.
Phase Eight is trading ahead of last year and well within management expectations. That's the results, that's the outlook and I think at this stage I'd just like to open up the floor for questions which I will try to fend off or I will pass on to some of my colleagues to fend off.
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Questions and Answers
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Unidentified Audience Member [1]
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Just a few questions. Can you give some idea of what Phase Eight added to your bottom line number of [890]?
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Doug Murray, Foschini Group Ltd - CEO [2]
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At the time of the acquisition we indicated that it would be almost immaterial the number that would be added by Phase Eight in this number and we said it would -- for the first year it would be marginally accretive, which is to March 2016 and then beyond that we expect significant returns.
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Unidentified Audience Member [3]
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Okay. And then just locally with customer growth at 0.3%, what is the scenario (inaudible) going negative?
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Doug Murray, Foschini Group Ltd - CEO [4]
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Sorry, with what at 0.3%?
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Unidentified Audience Member [5]
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With customer growth locally (multiple speakers).
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Doug Murray, Foschini Group Ltd - CEO [6]
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I see the active number of customers.
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Unidentified Audience Member [7]
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Yes.
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Doug Murray, Foschini Group Ltd - CEO [8]
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Look, I think we are in a phase where we've been dealing with that this year, in fact and we would expect it to remain probably flat. We're going to obviously drive cash sales and we're obviously going to use our rewards program to get a higher credit sales out of the active database that we actually have. And it's not a great position to be in where we can't grow that active database, but we've been dealing with that this year and we think we'll be dealing with that probably through the coming year as well.
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Unidentified Audience Member [9]
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From my side it's just really a clarification question because my understanding of the Phase Eight acquisition was that you guys were trying to push up your cash sales and what you said earlier is that with your annualized -- if you were to take into account the Phase Eight acquisition annualized, it would go up to 55%. But then when Jane was speaking she was talking a lot about introducing strategies to increase your credit sales. Is that coming from the fact that you guys see an improving credit environment going forward? Can you speak about that please?
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Doug Murray, Foschini Group Ltd - CEO [10]
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No, no, I think there is maybe some confusion. I mean the Phase Eight business just naturally because it's outside of South Africa is always going to be cash and it will -- when we annualize that our cash component will go up to 54%, 55%, notwithstanding Phase Eight and all the good reasons that we want to grow that business the credit sales, because we know that it is going to be hard to grow the active data base of customers in this coming year we want to try and drive the yield from our current customers. Remember it's not the credit, all that said, credit is still very important in our Group and when the cycle turns it gives us a massive kicker. So it isn't something that we are neglecting in any way, it's still very, very key for us. It's a key component. So that's more a South African particular issue and Phase Eight is international which again I think from a group point of view just gives us better diversification and somewhat more defensive position.
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Unidentified Audience Member [11]
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Doug in the [past year] it look there was a very marginal negative operational gearing in the South African business, the conversion from top line to bottom line profits. Obviously in this environment, I would think that cost must be very difficult to control, well not difficult to control but there must be some cost pressures. Would it be reasonable to model kind of a neutral performance next year that you grow your bottom line in South Africa at the same rate as the top line?
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Doug Murray, Foschini Group Ltd - CEO [12]
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I would think that the way that we are looking at the moment same we would want to try and grow -- it would be fairly neutral we think. That's our outlook at this stage looking at our budgets slightly stronger on the bottom line is where we see it to the top line. That's where we see it, just in the South African context. Obviously the top lines will be very different when you bring in -- but you're right, it's obviously going to be a challenge.
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Unidentified Audience Member [13]
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Can you maybe just unpack the transaction cost and explain that number, first question?
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Doug Murray, Foschini Group Ltd - CEO [14]
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Can I throw that across to my financial gurus here.
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Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [15]
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You are talking about the ZAR292 million?
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Unidentified Audience Member [16]
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Yes, and when you are thinking about that --
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Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [17]
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Have you got them or do you want me to -- okay.
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Doug Murray, Foschini Group Ltd - CEO [18]
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I don't have a breakdown of the actual costs, but they remain illegal costs, the M&A guys were used in the UK and obviously our legal consultancy in South Africa and obviously bear in mind the majority were expanded in pounds multiplied by [18 and 18.5]. So I think in the circumstances I think we did reasonably well.
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Unidentified Audience Member [19]
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And then just a follow-up question. You have put up a medium target, medium-term target, 2020 target, a turnover target of ZAR34 billion, which seems -- which is effectively doubling from here over the next five years. Can you unpack that in terms of what would be organic and what would be acquisition?
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Doug Murray, Foschini Group Ltd - CEO [20]
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So I can unpack how we got there.
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Unidentified Audience Member [21]
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How do you envisage that growth over the five years?
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Doug Murray, Foschini Group Ltd - CEO [22]
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We look at that by actually doing a sort of top-down, bottom up. So it's done, for instance with Phase Eight in terms of the acquisition. We had obviously projections which I think were I think quite conservative to be absolutely honest, but we used those figures. We look at our own individual brands, we roll all of those up, we look at the number of stores and the turnover that we believe will get and like-for-like growth and from new stores. And we then try to see if there is a gap between the two.
When we've done all the sort of top-down, bottom up we arrive at a figure of around ZAR34 billion. But that would be -- and there would be probably quite a conservative number coming through from Phase Eight and I think the exchange rate we used for that exercise was $17. So, it's probably quite a conservative figure. We obviously will do -- that was done when -- essentially at the end of last year and we have just sort of worked it through. We will obviously be looking at that in more detail now.
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Unidentified Audience Member [23]
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Just a final question, can you maybe talk about like-for-like growth at Phase Eight? If I back out the sterling revenue and profits for that business, I get a flat performance for the last four years despite the growth in --
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [24]
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So in terms of like-for-like growth in the last 10 years, in terms of Group like-for-likes at Phase Eight we only had one year of negative like-for-likes and we've done about 2.5% in the year ending January 2009, which is (inaudible) and within that period we got a couple of years where we had a plus 13%, plus 16% like-for-like within that as well. So, now generally speaking, it's been 2%, 3%, 4% positive like-for-like at the Group level over that whole period. And so, in terms of the currency things are a little misleading, obviously it was converted at constant currency. It was converted at I think ZAR18 to the pound. If you actually did it at a proper rand exchange rate, you would end up with a growth rate that's obviously significant across the year.
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Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [25]
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And I think -- sorry just from a UK point of view, those are pretty good like-for-like figures. You've got to remember it's quite different to South African market. Did you want to --
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Unidentified Company Representative [26]
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Doug, this is some questions from the podcast from [Rod Samon]. 7% inflation and 5.5% like-for-like implies volume declines. Could you please explain, Doug, what effect this is having on the business and what the Company is doing to turn the volumes positive again?
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Doug Murray, Foschini Group Ltd - CEO [27]
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Well, it's bringing down our logistics costs so that's quite good. I as always, try to say to everybody we don't pay dividends and make profit in units. We do it in rands. So the fact that that's 7% and the like-for-like is sort at 5.5% that's not giving us any great concern. That's an averaging of course because every single business is different. So we would have to unpack that by every business. Some of the businesses are totally the other way with significant volume growth. So it's very hard to use an average figure there against our total like-for-likes.
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Unidentified Company Representative [28]
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Next question, is the Company looking at more acquisitions and if so could you indicate the maximum size and geography you are looking at?
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Doug Murray, Foschini Group Ltd - CEO [29]
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I think we're always looking for acquisitions. One of the reasons that we are talking about the scrip dividend to try and get the gearing down puts us in a position where if there are other opportunities then we'll be in a position to take them. That doesn't matter whether it's here in South Africa or whether it is in as it was with Phase Eight. I think the fact that we have Phase Eight, I think it probably opens up a whole new window there for us, but at the moment the first priority is to bed down Phase Eight and secondly just get our gearing to where we want it to be that allows us to take advantage of any potential acquisitions.
In terms of size, we would be -- obviously we're very conscious. We think that the size of any acquisition -- we think that the Phase Eight acquisition, its size to the size of our business at that point of time was probably exactly where we want it to be. Going forward, we would look at where we were that we are going to be in a year's time and we're not going to -- it just wouldn't be in our nature to go for a massive risk on our business, it's not in the thinking at this point in time.
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Unidentified Company Representative [30]
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Next question, how does Foschini intend to respond to the influx of foreign retailers into South Africa?
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Doug Murray, Foschini Group Ltd - CEO [31]
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Well, I think, I dealt with that in one of the earlier slides. The influx of the foreign retailers tends to be predominantly into ladies fashion and we have only a small part of our business that is exposed to that. A lot of our categories do not have international competition coming in whether it be jewelry, cosmetics, cell phones, homeware, furniture and even then we're not seeing -- certainly not seeing any impact in Fabiani for example performing very well, the top end of men's wear, G-star. So it's really in the ladies' wear and I guess to -- and Markham to a degree, and competition does one thing, it makes you raise your game and that's exactly what we're doing in all those brands. We are raising our game.
You want to go into Foschini store today, you'll see a brand which I think has moved on a long way from where it was two years ago, four years ago. That's what you do, you respond to the competition. Remember, international players come in doesn't necessarily mean because they are international, they are certainly going to do well, but it does challenge everybody to get a share of the customers' wallet. So, yes, it's something that we're very conscious of but I think that we are well positioned as a Group from that point of view and obviously we have Phase Eight overseas. So we're taking some of our brands to go over there to also play in their backyard. So, it works both ways.
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Unidentified Company Representative [32]
------------------------------
Here's a question for Ben. In Phase Eight, what is the difference in net profitability of online sales and the store and concession sales?
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [33]
------------------------------
It is an interesting one because if you just looked at the pure base figures, we make a higher margin when we trade online than when we trade in stores. If you look at the same sort of 68% exit margin, and if you look at the cost of fulfillment, we're paying maybe 13% or 14% sales to fulfill from own DC and we're probably paying our partners anywhere from 18% to 45%, 50% to the fulfill depending on the international market and so we make a better margin online than we do in store but actually -- and so when you look at an individual market like the Netherlands when we're going in, we're taking a much higher margin there than we would say for example in the UK. However when you've already gotten offline estate of course you can't shrink your offline estate, so if your customer migrates from an offline channel to an online channel ultimately it makes very little difference. You can't benefit particularly from a margin uplift because ultimately your store still needs a minimum of one member staff in it.
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Unidentified Company Representative [34]
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Here is a question for Jane from [Rod Saymond]. Jane, why would the doubtful debt provision as a percentage of the debtors' book increase when more customers are able to purchase and the credit cycle is improving?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [35]
------------------------------
Our provisioning model is a lock-up model which is based on the last 12 months worth of data. So it's purely a mathematical computation. So whilst we have seen improvements and that is great, you need to have it over quite a sustained period of time. And until we see a good 12 months of history that shows that the provisioning that comes out of that won't drop just yet. So just not enough data, not enough good months to really drop that provisioning statistic.
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Unidentified Company Representative [36]
------------------------------
Jane, there is another question also from Rod. Jane, what was the increase in the net bad debt write-off as a percentage of the debtors' book and the expected increase to 14.5% be due to opening up credit criteria which resulted in higher credit growth in H2?
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Jane Fisher, Foschini Group Ltd - MD Financial Services [37]
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Repeat the question again. Say again.
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Unidentified Company Representative [38]
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Wouldn't the increase in the net bad debt write-off as a percentage of the debtors' book and the expected increase to 14.5% be due to opening up credit criteria which resulted in higher credit growth in H2?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [39]
------------------------------
Okay. So, first of all, not opening up the credit criteria. That's already built into the assumption. So we previously tightened up some of our credit policies in the new scorecards. I think we talked about that in the last 18 months. They are remaining in place. We are not making any changes to any credit criteria at all going forward. The increase to 14.5% or the mid-14%s is purely because of the book growth. It is not because of anything else. But our book will not grow at a fast-enough rate. Even if I get my bad debt growth significantly down, which I will, it's still going to grow at a faster rate than I can get my book growth going. And that will just cause the net bad debt statistic to increase. It's just purely a season's impact. It's nothing to do with the change in any credit criteria.
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Doug Murray, Foschini Group Ltd - CEO [40]
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Yes. So the uptick in credit sales in the second half was not driven by any opening of the taps on credit.
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Unidentified Company Representative [41]
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Another question, Anthony, could you please give more color to the debt structure and cost we should expect for this year within Phase Eight now that the debt has been refinanced?
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Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [42]
------------------------------
Yes. The debt was -- the debt is being refinanced post acquisition. It's been done on terms far more favorable than the existing debt. I think the rate we enforce roughly LIBOR plus 3% and, yes, I think we did really well with the renegotiation. We've got consortium of four banks and I think we're pleased with the outcome.
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Unidentified Company Representative [43]
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And then a question from to [Genine] to Ben. Could you please elaborate on the reasons behind the margin contraction in Phase Eight, presumably that's in the last year and whether this was something you management were anticipating?
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [44]
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So I guess it's -- from a margin piece I guess we're talking about EBITDA margin (multiple speakers) because operating margin actually rose slightly last year. So, I think there are two key things and then the first, I think we're very pleased with actually last year's outcome. We opened nine new markets last year and actually in order to do that there was a whole lot of planning that took place 12 to 18 months earlier which is really putting in place a much more significant head office team. So we've now got from nothing 25 people or 30 people working out of 145 strong head office that are working on international. So international merchandising, international retail operations, international merchandising itself, international finance and so forth. So, putting this structure in place is very important before we went and did out of the markets we did last year. We probably added at least a million pounds worth of headcount specific to international. It's the first important point.
I think the second one was actually autumn-winter last year was a particularly poor one for UK retail. So if you look at September onwards you can get the sub-stories from UK retail, you can look online, you get no shortage of people complaining about that it was very poor weather pattern in September, October and then by the time it got round to -- the weather got more seasonal, people have already sort of forgotten about autumn-winter, so I think that are two key factors.
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Doug Murray, Foschini Group Ltd - CEO [45]
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So I'd just add to that. We at TFG we're very aware of those numbers. There was absolutely no surprise to us and Ben will mention it, but during the whole of last year him and his management team, which is a small team, they were owned by private equity business which was wanting to go down the route of an auction sales, so those individuals were totally tied up from about April-May last year and extremely distracted by that process and of course we were very involved with them from about November onwards as well. So then that team had quite a significant distraction over that period as well. So the numbers were absolutely no surprise to us at all. They had quite a period of distraction. Autumn-winter was definitely an issue and the infrastructure. So when we go looking forward, autumn-winter actually represents an opportunity in the business for this year. There's certainly no distraction from a sales point of view this year. So we're very confident on the numbers that were projected for us for this year and going forward.
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [46]
------------------------------
As Doug said actually if you look at what's happening in the next couple of months you have got the launch of Studio 8 happening in July, August, you have got launch of first wholesale brand in August and there is a lot of things that are taking place that are very exciting. I think it's some of these things would have taken place six to eight months ago I guess if we haven't been busy doing this.
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Unidentified Audience Member [47]
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Doug, what's the sales performance in core Foschini ladies wear division in H2?
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Doug Murray, Foschini Group Ltd - CEO [48]
------------------------------
In H2, it's funny, I probably don't have a definitive answer for that not because I am avoiding it actually. I actually am not sure of the exact number because we look at everything in clothing categories. I mean, we were upon clothing overall, I think for the second half must have been because we were 10.2% for the year, it must've been over 11%, 11.5% to 12% second half, those brands were ahead of that -- all the sports division brands were ahead of that sports in particularly ahead.
Markham was around that figure, around the 11%. G-star and Fabiani were significantly ahead of that number, then I think it was Foschini were probably in mid-single digits along with exact! and Fashion Express just behind that. So the net effect came to the 10.2%. I just don't have those numbers at top of my head, I'm afraid.
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Unidentified Company Representative [49]
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Then a question from [Zahir]. Is there an opportunity to reprice existing debt outstanding at Phase Eight. Zahir, I think Anthony has already answered that. We have already re-priced it post acquisition. And Doug could you please give a format split for over 116 new stores planned for this year?
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Doug Murray, Foschini Group Ltd - CEO [50]
------------------------------
I probably could. I had in my pocket, but I don't. Actually I don't have that. I mean, the figures, I have to tell you that is strong again, continues to be very strong on sports division. But the actual numbers are just 116 I don't have -- I don't have with me. But it's not -- there is not anything that's out of line with where we've been in the past two years, but the largest number of stores would be across the sports division.
Do we have those numbers here or not?
------------------------------
Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [51]
------------------------------
No.
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Unidentified Company Representative [52]
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Another question for Jane. How many new credit customers do you need to sign up on average on a monthly basis to keep your active account base flat?
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Doug Murray, Foschini Group Ltd - CEO [53]
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On average about 45,000. 45,000 to 50,000 is the number. You can work from 550 to 600 a year. Sorry, Jane, you were going to answer.
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Jane Fisher, Foschini Group Ltd - MD Financial Services [54]
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I was still computing the maths in my head.
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Unidentified Company Representative [55]
------------------------------
Jane, another question for you. Are you offering credit in the rest of Africa? And if you are, could you detail the percentage of the sales that are credits and what the book profile looks like?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [56]
------------------------------
So we don't offer credit extensively in the rest of Africa. We offer in those countries which are bordering South Africa. So we have in four countries, Botswana, Namibia, Lesotho and Libya and that's where the exchange rate is effectively one to one. We don't yet have the systems or the infrastructure to do credit in true rest of Africa and that's something that we may look at in the future but it's not on the plans right now to do.
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Doug Murray, Foschini Group Ltd - CEO [57]
------------------------------
And in those countries, it would be about the same sort of ratio. It'd be around 50%, just over 50%, 55% credit.
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Unidentified Audience Member [58]
------------------------------
(inaudible - microphone inaccessible) the new regulations in terms of opening customer accounts. It seemed from your earlier comment that you expect those to have a negative impact on your rate of new customer acquisition. Could you please provide a little more color on that? Is that purely due to administrative burden and difficulties with getting customers to provide those necessary documents or would there be any impact whatsoever in terms of your score card?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [59]
------------------------------
So we are compliant with the act that says we must be a responsible credit granter. We don't believe that the new regulations that are being implemented will change any of our decisions. So any of the information that we get now we don't believe will change any extent or decline on how much we offer. We have robust positioning right now. So the regulations for us are purely administration and we believe there will be quite an impact to the consumers. So it's how do we make it easy for the consumers knowing that it won't change any of our decisions. So we are not anticipating any scorecard changes and are not anticipating any set rate changes as a result of this. It's purely around how do we make it simple and easy for the consumers to give us that information.
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Unidentified Audience Member [60]
------------------------------
And are you able to comment on the value of the debtors' book rescheduled over the course of this year?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [61]
------------------------------
So you're talking about [re-ages] and we don't do anymore [re-ages]. We have not done any more re-ages this year than we did last financial year and re-ages are only evident to paying customers. We do not re-age if you are not a regular paying customer and it's an installment management for us. That's effectively what changes for you. So that is not increasing, we're not doing any more of that and that's not our intention to do more re-aging going forward either.
------------------------------
Anthony Thunstrom, Foschini Group Ltd - CFO-Elect [62]
------------------------------
It's a small number.
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Jane Fisher, Foschini Group Ltd - MD Financial Services [63]
------------------------------
Its quite a small number as well.
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Unidentified Audience Member [64]
------------------------------
So you're saying you are still doing re-aging but the value of re-aging in this year -- and will continue to carry on re-aging, but the value won't increase on a per year basis? Is that --
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [65]
------------------------------
Correct.
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Unidentified Audience Member [66]
------------------------------
Correct. Thank you.
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [67]
------------------------------
In fact it should decrease as our book gets better then the amount of re-aging will potentially decrease and we're seeing that, we're seeing some -- actually a decrease. This is a natural improvement in our book and the re-aging actually decreases.
------------------------------
Unidentified Audience Member [68]
------------------------------
Thank you. Perhaps a follow up question or two on Phase Eight. It looks like there's a fairly big Phase Eight roll-out this year, 100 stores that looks like something like 20% to 25% increase in your store base. Perhaps if you could just give me a sense of what the Phase Eight CapEx for this year would be because the earlier guidance excluded Phase Eight and secondly if you could give me a sense on what the Phase Eight trading space is likely to grow at this year. Thank you.
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [69]
------------------------------
In terms of CapEx across everything this is sort of growth CapEx, maintenance CapEx, head office stores and so forth, we are looking probably at GBP8 million I would have thought in total. We're opening -- targeting opening slightly over 100 actually in terms of stores and concessions, probably a dozen stores and 90 something concessions this year, but of course these concessions aren't particularly capital intensive whereas the stores we've opened one so far this year in Hong Kong, we opened another one in Hong Kong in a couple weeks time as we see slightly more expensive than those concessions.
In terms of trading space growth, we really don't -- we really, really don't look at that as a metric. So I'm not going to tell you how many thousands of square feet I occupied around the world.
------------------------------
Unidentified Audience Member [70]
------------------------------
Would it be reasonable to assume your space growth is going to be something like 20% given that you're rolling out about roughly 20%, 25% new stores?
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [71]
------------------------------
(multiple speakers) average store as being around about 105 square meters. Obviously the newer ones are larger, but there is a historic pool of those which is smaller, and you took an average concession to be around about 55 then you're probably not going to get far on multiplying out the existing base of 107 stores, 203 concessions and adding 12 stores and call it 94 concessions.
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Doug Murray, Foschini Group Ltd - CEO [72]
------------------------------
Talking just UK.
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [73]
------------------------------
(inaudible)
------------------------------
Doug Murray, Foschini Group Ltd - CEO [74]
------------------------------
I mean there is majority concessions and they average about 50 square meters and so they are -- and the cost of rolling them out -- we will regard the model as being capital light, just featuring that goes in -- when you go into a concession you also you're not locking up a five-year lease. So it's low risk and we can be quite (inaudible) as well. So I don't think that the CapEx spend is great. I don't think it's going to be as high as 20% because majority is concessions.
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Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [75]
------------------------------
I think it's also important to note you can't look at space growth and assume you are going to get the same density out of Mexico where we now have six or seven points of sale as you get out of Central London. So in terms of sales forecast for the year, it certainly will be more like 13%, 14%, 15% growth in sales rather than 20% or 18% or whatever the space number would be.
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Unidentified Company Representative [76]
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I think, Ben, there is another question for you. Can you quantify the first two months sales growth at Phase Eight beyond ahead of last year?
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [77]
------------------------------
I guess it was probably three months to April. Now we have obviously had April figures last week. We are probably going around about 10% or 12% in sales in terms of the period to April of which around about 1 point will be like for like and the remainder will be space growth. Why do we fill the year-end figure it will be probably a little bit higher than. We're obviously opening 48 points of sale from the end of -- last week in July through to the last week in August. This is the Studio 8 point of sale we mentioned and then a handful of sort of core Phase Eight brand opening. So we would expect to see quite a nice uplift on the back of that.
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Unidentified Company Representative [78]
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And then Jane, for credit statistics how is overdue defined that is how many payments need to be missed to classified as overdue and then the second question what is your credit's decline rate?
------------------------------
Jane Fisher, Foschini Group Ltd - MD Financial Services [79]
------------------------------
So let me answer the easier one of the two. So the credit decline rate is 55% for the current year. We tend to talk fixed rates, so we talk about 45% fixed rate which is marginally up from last year of 44%.
And the other question which is about overdue. So overdue is defined as the installment that is due which is in arrears. So that's what we use. We don't use the total balance. We use a portion that is actually overdue, okay. And to be qualified for that statistic, you have to be 30 days overdue. That's how that statistic is put together.
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Unidentified Audience Member [80]
------------------------------
I don't know why the young guys, Peter and Ronnie are retiring. With all the experience they have, are they going to stay on as non-Exec Directors or consultants, maybe?
------------------------------
Doug Murray, Foschini Group Ltd - CEO [81]
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We announced today that a couple of changes. Ronnie will when he retires remain on the Supervisory Board as a non-Executive Director and Peter will obviously always be available for any project work that we may throw at him and so that is the plan. We also announced that Michael Lewis is appointed as Deputy Chairman. So that was all in the SENS announcement.
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Unidentified Audience Member [82]
------------------------------
(inaudible - microphone inaccessible)
------------------------------
Doug Murray, Foschini Group Ltd - CEO [83]
------------------------------
Yes, it is.
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Unidentified Audience Member [84]
------------------------------
I may, at the risk of repeating yourself, it's late in the day, not sure if I heard everything, but what is the history of the company? I don't know how old Phase Eight is. Why is it called Phase Eight? And more important, I just want to get a sense of how come you guys do so well in the UK? It's such a competitive market. So many foreigners there, lots of foreign companies. What is it about your merchandising or the age group that you --?
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [85]
------------------------------
So I guess we're founded in 1979 by a lady called Patsy Hayes, at 8 Bellevue Road. So P Hayes, 8 Bellevue Road was Phase Eight Bellevue Road. So that was the history of the, if you like, the brand name. You're not the first to ask the question.
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Unidentified Audience Member [86]
------------------------------
It wasn't some marketing company that was paid a ZAR1 million (multiple speakers).
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [87]
------------------------------
So that was Patsy. In terms of why we're so successful, I think there's number of factors about the specific part in the market I think which is very helpful. Our customer that is quite insulated from a lot of the financial difficulties that have been experienced both in the UK, in the public sector, but also internationally. But I think also the stability of the management team in our business compared to any other business in the market possibly the exception is (inaudible) is quite exceptional. So our Managing Director joined the business in 2000 when we were turning over GBP10 million and making nothing. Our Brand Director [Julia] joined us in 2001, again a very small business. Our IT Director also joined us in 2001. I joined in 2007. So we're still making GBP5 million of profit. So I think we've been together as a team now for about eight years.
And I think it makes a difference. We're providing continuity. Our customer trusts us because we're able each season to provide clothing that's for her. I think we benefit also from a customer who is I'd say very protected as a (inaudible).
------------------------------
Unidentified Audience Member [88]
------------------------------
(multiple speakers)
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [89]
------------------------------
No, over half of our clothing in spring-summer is produced in Europe and just under half in autumn-winter. So if you look at Italy, Romania, Turkey, Portugal, very strong and that ties back to the point I made around test and repeat. So you can't repeat quite as fast out of China as you can do out of Italy or Romania and also the volumes you need to buy up front are much more significant in China whereas in Italy they are comfortable selling us 300 or 400 pieces and if it works, we can get back into10,000 pieces three to six weeks later and that is the key to the business model.
------------------------------
Unidentified Audience Member [90]
------------------------------
(inaudible - microphone inaccessible)
------------------------------
Ben Barnett, Foschini Group Ltd - CEO, Phase Eight [91]
------------------------------
Yes, a lady called Patsy Hayes. So she was with us from 1979 through to 2004, 2003-2004. So the current team effectively been running it since then.
------------------------------
Doug Murray, Foschini Group Ltd - CEO [92]
------------------------------
All right, are there any other web -- all right, if there is no more questions, there is drinks and snacks outside and of course as always we are available for any other questions you'd like to ask us upfront. Thank you.
------------------------------
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