Diversified consumer brands company AVI added its voice to growing concerns among retailers and food producers about weak macroeconomic drivers of retail that will limit a revival in consumer spending.
A weak rand, rising interest rates, sustained drought condition across SA’s agricultural land and a slowing domestic economy impacted trading conditions for AVI.
“I certainly don’t remember a difficult financial year [like this one]. It wasn’t an easy environment for consumers,” CEO Simon Crutchley (pictured) said at AVI’s results presentation for the year to June 2016.
AVI pulled in operating profit growth of 12.4% to R2.1 billion on the back of revenue growth of 8.4% to R12.2 billion. Its operating profit margin increased from 17% to 17.7%, the highest growth since 2005. Headline earnings per share were up 10.6% to 464.1 cents.
To maintain volume growth, market share across its consumer brands and buffer against a weak rand, AVI increased selling prices across its consumer categories.
AVI’s footwear and apparel category saw the operating profit decline by 14.6%, while the operating profit margin decreased from 22.5% to 18.6%.
Underscoring how tough trading conditions are for the company, its upper-end apparel brands Spitz and Kurt Geiger saw a decline in volume growth of 2.1% despite selling price increases of 6.2% in 2015.
Crutchley said Spitz and Kurt Geiger started with a “fairly strong first semester” but came under pressure given the weak rand, as AVI sources merchandise in European markets.
“We debated long and hard about what sort of pricing we would need in order to maintain our gross profit over a two- or three-year period and we made those decisions aggressively. We expected the significant short-term volume decline,” he says.
While sales volumes at Spitz declined, lay-by sales (where consumers pay installments for merchandise) increased by 45% year-to-date.
Its footwear brand Green Cross, which plays in the middle-income consumer market, was impacted by store refurbishments and heated competition from other retailers.
Sasfin Securities senior retail analyst Alec Abraham said: “AVI’s management continue to invest in efficiency enhancing processes and raise prices without losing customers, which speaks to good management.”
The fact that AVI has extensive consumer brands, makes the company more resilient and gives them “more wiggle room”.
“It’s obvious how tough the market is as consumers are switching from durable goods (clothing and shoes) to essential items like food,” Abraham explained.
This trend plays well into AVI as its grocery division Entyce Beverages, with brands such as Five Roses, Freshpak Rooibos, Frisco, Ellis Brown and others, reported operating profit growth of 21.4% to R661 million. The division has benefitted from consumers looking for value for money and promotional activity said Crutchley.
Another grocery division Snackworks, with brands such as Bakers Biscuits, Provita and others, grew revenue by 7% to R3.6 billion while operating profit margins grew from 15.7% to 16.7%.
A problem child at AVI over the past five years has been its fishing business I&J, which has been in turnaround mode. Despite lower fishing rates and the cyclical catch of small size fish, it managed to grow revenue by 10.8% to R2.17 billion. I&J continues to benefit from lower fuel prices and its exports benefit from a weak rand.
“There will be a day when all these factors line up at I&J and it will make a lot of money there,” said Crutchley.
AVI’s personal care category, with brands like Yardley, Coty, Rimmel and others, grew revenue by 11% and its export business in markets such as Botswana, Zambia, Zimbabwe and others grew revenue by 9.4%.
SA Institute of Race Relations chief economist Ian Cruickshanks said despite the pressures the company faces, AVI still anticipated demand for their products. “Their basic brands keep pumping away. This is a management team that knows what to do when the going gets tough,” Cruickshanks told Moneyweb.
During the period under review, AVI had a capital expenditure of R881 million on its operations and saw a return on capital of 27.9%.
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