Release Date: June 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue growth of 15.5% year-over-year, driven by strong performance across all divisions and acquisitions.
- Market share increased by 90 basis points in the second half, indicating strong competitive positioning.
- Gross profit margin improved by 160 basis points in the second half, reflecting better cost management and pricing strategies.
- Operating profit reached a record level of ZAR 5.3 billion, showcasing robust operational efficiency.
- Cash conversion ratio improved to 86.9%, indicating strong cash flow management and liquidity position.
Negative Points
- Expenses grew by 20.1%, driven by new store openings and increased security and backup power costs.
- Net finance expenses increased by 24.7%, primarily due to lower interest earned on cash reserves and higher lease liabilities.
- Homeware segment's operating profit declined by 23% for the year, impacted by sectoral discounting and competitive pressures.
- Credit sales growth was only 1.7%, reflecting a conservative credit posture in a challenging economic environment.
- Port disruptions and higher container and freight rates are expected to continue impacting short-term margins.
Q & A Highlights
Q: Can you comment on the improved performance in the homeware segment and the sustainability of the operating margin guidance?
A: The guidance for the operating margin in the homeware sector is based on current performance and long-term strategic planning. The sector has faced new entrants and increased competition, but the gap between our sales growth and the market has narrowed significantly. Internally, we are reinforcing our strengths, such as private label offerings, and making adjustments to merchandise assortments. Early indications from recent changes are positive, both in sales and margins.
Q: Credit sales growth was 1.7%, which is lower than some competitors. What is the outlook on the credit environment and the group's posture going forward?
A: Our conservative credit posture aligns with our strategy of prioritizing quality sales over volume. The macroeconomic environment, with pressures from food and fuel inflation and higher interest costs, makes an aggressive credit strategy challenging. We remain agile and will adjust our credit strategy responsibly if there are improvements in the macroeconomic conditions.
Q: With performance improving and variable incentives coming back in, how will cost control be managed in FY25?
A: Cost management is part of our DNA. We have several ongoing projects aimed at improving efficiency, such as supply chain integration, tech modernization, and the work of the advanced team on RPA, AI, and ML. We are committed to maintaining an expense-to-RSOI ratio of less than 28% and will continue to focus on operational excellence and cost-saving initiatives.
Q: How do you view the increased competition in the athleisure space with the entrance of JD Sports?
A: Studio 88's positioning is key, with strong brand partnerships with Nike, Adidas, and Puma. JD Sports is likely to target premium locations, whereas Studio 88's growth is not centered around these areas. We believe our positioning and private label assortment will help us navigate the increased competition.
Q: What is the impact of pureplay online retailers like Shein and Temu on your business, and what is your strategy to deal with it?
A: While these foreign e-com players have had an impact, our customers have shown a preference for researching online and shopping in-store. The aggressive pricing from these players is set to change with new import duties, which should level the playing field. We remain focused on providing value and convenience to our customers.
Q: How has congestion and higher container and freight rates at Durban port impacted the group's short-term margin outlook?
A: Port congestion and higher shipping costs are concerns, but we have increased lead times to mitigate the impact. New leadership and equipment at the port should improve efficiency over the next 12 months. We are also exploring various strategies to de-risk our supply chain.
Q: Could you provide more color on the interaction between landlords and retailers, and the returns on new stores?
A: We maintain strong relationships with landlords, negotiating renewals in the 5%-6% range. Our brands drive high footfall, which landlords value. We closely monitor store feasibilities and allocate capital to the highest-performing opportunities. If stores do not meet our thresholds, we divert capital to other high-growth areas.
Q: How do you plan to manage the impact of port disruptions on your supply chain?
A: We have increased lead times for imported components to mitigate the impact of port disruptions. New equipment and leadership at the port should improve efficiency over the next year. We are also exploring various strategies to manage shipping costs and ensure timely delivery of goods.
Q: What are the returns and margins on the 200 new stores planned for next year?
A: We are targeting around ZAR1 billion in CapEx, with a significant portion allocated to new stores. We closely monitor store performance metrics and ensure they exceed our internal thresholds. If stores do not meet these metrics, we will reallocate capital to other high-growth opportunities.
Q: How do you view the impact of global e-commerce players on your business?
A: While global e-commerce players have had an impact, our customers prefer a mix of online research and in-store shopping. The new import duties will level the playing field, and we remain focused on providing value and convenience to our customers. We are also enhancing our e-commerce platform to improve functionality and customer experience.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
