Chairman’s report
Directors responsibility for the Integrated Annual Report
The Directors of Edgars Stores Limited are responsible for the preparation and fair presentation of the Group’s consolidated financial statements. The audited financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), in the manner required by the Companies and Other Business Entities Act (Chapter 24:31) and the Zimbabwe Stock Exchange listing requirements.
The principal accounting policies of the Group are consistent with those applied in the previous annual financial statements.
Cautionary – reliance on these hyperinflation adjusted financial statements
The Directors would like to advise users to exercise caution on their use of these financial statements due to the material and pervasive impact of the technicalities brought about by the change in functional currency in Zimbabwe at the beginning of 2019 and its consequent impact on the usefulness of the financial statements for subsequent reporting periods. This was further compounded by the adoption of International Accounting Standard (IAS) 29 ‘Financial Reporting in Hyperinflationary Economies’.
Whilst the Directors have exercised reasonable due care in applying judgements that were deemed to be appropriate in the preparation of these financial statements, certain distortions may arise due to the various economic factors that may affect the relevance and reliability of the financial information presented in economies such as Zimbabwe, that are experiencing hyperinflation.
Operating environment and overview
Throughout the financial reporting period ending 08 January 2023, the operating environment has remained volatile in comparison to the prior year. Despite the relaxation of COVID-19 restrictions, the impact of the lockdowns experienced in the prior period continued to affect the business operations. Arising out of the Covid lockdowns in 2021, the business lost 7 trading weeks, this included the winter season. As a result, there was a build - up of aged merchandise, which due to lack of desirability had slower than planned stock turn levels. The Board took a conscious decision to markdown inventory to its most realistic realisable value. This markdown has been recognised in the profit and loss and resultantly both retail chains have not been profitable. The markdown was implemented mostly during November ‘Black Friday’ trading and into December high season. Prior to this, forward weeks cover stood at: Edgars (16.4 weeks) and Jet (19.3 weeks). At the end of the reporting period the chains closed at 11.0 weeks and 13.7 weeks respectively.
The first half of the year saw a marked volatility in the availability of the foreign currency on the official platforms resulting in a widening gap between the official rate and the alternative market. A series of policy interventions was instituted in May 2022 and July 2022, with the effect of slowing down the rate of inflation and reduction of the gap between the official rate and alternative market. Whilst the interventions, particularly in respect of money supply and ZWL$ interest rates, achieved their desired objectives, they also brought an increased cost of borrowing for the business. This saw the finance costs rising threefold against a drop in credit sales flowing from reduced consumer demand.
The Russia-Ukraine war as well as the Suez Canal blockage resulted in disruption of global supply chains and increase in energy costs.
The business has benefited from the convenience of the multi-currency trading environment with roll out of the USD credit to mitigate value erosion.
Operating costs grew 65% over prior year, with occupancy, employment, intermediated transaction tax and fuel costs being the lines that contributed most significantly to the increased overhead. Management remains focused on recalibrating the business models in response to these price corrections to preserve value and build a strong balance sheet for the business.
Financial performance (based on inflation-adjusted results)
Notwithstanding the challenges in the operating environment, the Group managed to close the period with an improved performance over the year. The Group reported Revenue of ZWL35.9billion which is 51.7% up from that achieved in 2022 of ZWL23.7billion. The growth in real terms is attributed to volume recovery, replacement cost-based pricing, ongoing cost management as well as initiatives implemented by Management to ensure fresher stock availability in our stores, regardless of the supply chain challenges. Profit before tax of ZWL1.9billion was a decline of 5.7% from the prior period of ZWL2.0billion. Profit for the year was weighed down by higher finance costs emanating from the revision of the minimum lending rates to 200% as promulgated by the Reserve Bank of Zimbabwe. The result was the finance costs of ZWL$4.3billion, a growth of 117% on prior year of ZWL$1.9billion. The business was not able to recover these costs from our customers. Unlike FMCG, with speciality retail that Edgars is in, merchandise has to be ordered and paid for 6 months before it is received. Further to that, merchandise is then sold on a 6 month basis and clearly interest rates as alluded to above are not suitable for this type of business. The Group achieved basic earnings per share of 13.2 cents (2022: 335.12 cents).
Total Group units sold increased by 13.1% from 2.4million to 2.7million compared to the same period last year.
Trading in foreign currency since April 2020 has allowed our retail chains to improve stock assortments, which in turn has increased traffic in our stores. While a sizable portion of our cash sales are in foreign currency, we believe that this proportion can be increased through favourable and consistent application of regulatory policies around trading in foreign currency.
Gearing reduced to 0.58 in the current year from a prior year of 0.62. Funding was channelled towards growing the debtors’ book as well as store expansion initiatives. At the end of the reporting period, the company had USD134k foreign liabilities which it will be able to service from existing resources.
Retail performance
Total retail merchandise revenue amounted to ZWL26.2billion representing a 36.8% increase from prior year. The split between credit and cash sales for the ZWL was 48.8% (2022: 61.2%) and 51.2% (2022: 38.8%) while the USD sales had credit sales contribution of 71% and cash sales of 29.0%.
The Edgars chain recorded turnover of ZWL14.6billion up 41.6% from prior year of ZWL10.3billion, and the 1.16m units sold were up 21.1% from 956k in the comparative period. The split between credit and cash sales for ZWL was 54.5% (2022: 69.1%) and 45.5% (2022: 31.2%) while the USD sales had credit sales of 71.6% and cash sales of 28.4%. We revamped our Masvingo store in November 2022. Stock covers closed at 11 weeks (2022:20.5 weeks).
Total sales for the Jet chain were ZWL11.7billion up 35.58% from ZWL8.6billion achieved in the comparative period. The split between credit and cash sales for ZWL was 43.1% (2022: 45.5%) and 56.9% (2022: 54.5%) while the USD sales had credit sales of 70.3% and cash sales of 29.7%. Total units sold for the period were up 7.9% from 1.44m to 1.56m. The Chain increased its store count to 36 stores from 31 stores in the comparative period. Stock covers closed at 13.7 weeks (2022:16.2 weeks).
Jet achieved the second spot on the Marketers Association of Zimbabwe’s Superbrand awards thanks to our aggressive digital marketing campaigns. The focus of the entire year’s communications was to boost awareness of our fresh merchandise, engage customers, and cultivate a base of loyal customers.
Financial services
The gross retail debtors’ book closed the period at ZWL8.2billion up 24.0% from ZWL6.56billion in the comparative period with the USD debtors book ending the year at USD6.6million while the ZWL book closed the year at ZWL2.5billion. Active account growth for the USD book grew to 64k accounts attributed to various account drive initiatives. The asset quality as at 08 January 2023 was 90.4% for the USD book and at 61.5% for the ZWL book (2022: 84.6%) in current status. Expected credit losses (ECLs) as at 08 January 2023 were 4.0% of the book compared to 1.9% as at 09 January 2022, although this reflects Management’s prudent application of the related credit loss accounting standards, the ‘deterioration’ was fuelled by the increase in ZWL interest rates in July 2022 in line with Reserve Bank of Zimbabwe Government directives.
Club Plus Microfinance
The loan book closed at ZWL698million (2022: ZWL521m) representing a 34% increase from prior year. Asset quality remains positive with over 82% of the USD book being in current while the ZWL book was 54.5% in current with effect of the 200% interest rate adjustment still being felt. Improved efficiencies in loan approval and disbursement processes have resulted in increased turnaround. We have seen an increase on the uptake of loan applications through our digital platforms, which has provided our customers with added convenience.
Carousel Manufacturing
The Manufacturing Division recorded a turnover of ZWL2.4billion up 102% over prior year. Total units sold were down 12.66% to 141k (2022:161k). Revenue was adversely affected by depressed sales in the retail space. Management pursued alternative markets mostly in the local corporate wear sector and beyond our borders. This initiative resulted in an increase in sales contribution from the open market which accounted for 39% of total sales.
Effect of COVID-19
The Group will continue to implement best practice protocols to ensure the safety of its employees, customers, suppliers and all other stakeholders. Covid -19 brought about significant disruptions to international supply chains resulting in longer lead times and delays in shipping of imported merchandise, and challenges such as shortages of shipping containers and port space. There was also an impact on production and delivery of local merchandise due to delays in receiving imported fabrics and trims.
The effect of Covid-19 brought about new ways of doing business which has become the ‘new norm’. This is characterised by improved engagement with customers across social media platforms, including the setting up of online stores and convenient payment platforms.
Board membership
On 01 March and 16 June 2022 respectively, the Group welcomed Mr Christo Claassen, CA (SA), a seasoned retail specialist, who joined as a Non-Executive Director and Mr Sevious Mushosho, CA (Z), seconded by Sub-Sahara Capital Group.
The Group bade farewell to its longest serving stalwart, Mr Raymond Mlotshwa, who retired from the Board with effect from 01 December 2022. On behalf of management, staff and the Board of Directors, I wish to convey the Group’s appreciation for the years of dedicated service to the Group.
Outlook
Management continues to remodel the business to capitalise on opportunities that arise in the very uncertain operating environment. Cost containment remains a focus area so as to ensure long term viability of the business.
The Group seeks to expand its geographic footprint through the opening of new stores in strategic locations. Smart merchandise procurement and optimal inventory planning remain key focus areas to ensure that target margins are achieved without compromising the merchandise quality. We will continue to transform our customer experience through updating our stores to world class standards, offering widened merchandise ranges at affordable prices and flexible credit terms.
The recovery of the business is premised on the back of improved access to foreign currency through domestic sales to cover import requirements, a stable exchange rate and slower inflation.
On the currency front, the environment has remained turbid marked by the sharp depreciation of the local currency. Some measure of macro-economic instability has been noticed with increase in cost of basic commodities. The authorities need to step in and implement various measures to help stabilise the foreign exchange market and tame inflation.
Dividend
Regrettably, the Company will not declare a dividend for the 52 weeks to 08 January 2023. The position will be reviewed having assessed performance in the current year.
Appreciation
I wish to record my appreciation to Management and staff for their great effort in sustaining the business in a difficult operating environment. I also thank my fellow directors for their wise counsel and our customers, suppliers, and stakeholders for their ongoing support.
T N SIBANDA
CHAIRMAN
08 May 2023
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