If South Africa’s economic environment does not “materially improve” over the next year, 2020 is set to be another tough financial year for AVI, the consumer goods group that owns big brands such as Five Roses tea, I&J frozen fish, Willards chips and the Spitz shoe chain.
This was the message from AVI Group CEO Simon Crutchley, speaking during the company’s 2019 full-year results presentation at the JSE on Monday.
“It’s a tough consumer environment in SA and you can see this in our results,” he said. “AVI is a business that depends on volume sales, and like-for-like volume sales are down compared to 2018. We expect the tough trading environment to continue with constrained consumer spending.”
AVI reported operating profit for the year down R34 million to R2.5 billion, however this was also impacted by R27 million in restructuring costs at its Green Cross shoe unit. The further write-down was related to the closing down of its Green Cross shoe factory in Epping, Cape Town, and contributed to the R36 million loss suffered by the division.
Fuel hedge hit
Another hit to operating profit was a R29 million loss related to fuel hedges in the I&J division.
AVI’s overall operating profit for the year to June 30 was down 3%. Headline earnings for the year were down 4.4% to R1.7 billion, while headline earnings per share decreased 4.9% to 516.6 cents.
Besides the woes in its Green Cross unit, AVI’s Spitz shoe chain also came under significant pressure, with operating profit down R50 million to R320 million. However, the poor performance of its footwear business was offset by growth in its food divisions, Entyce Beverages and Snackworks.
Crutchley says around 80% of the group’s profits come from its foods business. “AVI’s strong grocery business performed well, notwithstanding the tough economic and consumer environment.
“We have strong brands that are supported by relevant innovation and remain appealing to many consumers.”
He notes that the beverages division stands to benefit in the 2020 financial year from lower rooibos prices following good rains in the Western Cape. Lower butter prices are also expected to benefit its Snackworks division, which makes Bakers biscuits.
Crutchley says the group plans to invest R472 million in expansion projects. Most of this will be pumped into its foods business, while the focus on its footwear chains will not be on the opening of new stores but on the refurbishment of existing stores.
Commenting on AVI’s full-year results, independent analyst Anthony Clark says its performance shows how tough things are in the domestic economy.
‘Unheard of’ Heps decline
“If a bellwether company like AVI with strong consumer brands only shows a year-on-year increase in revenue of 1.2%, leading to a 3% decline in operating profit and an unheard of 4.9% decline in Heps [headline earnings per share], it is indicative of the consumer buying less and the dire straits of the FMCG [fast-moving consumer goods] economy in general.”
Clark notes the once-off costs at Green Cross and I&J, which negatively affected AVI’s performance. However, overall, the group’s personal care and shoe chains “went backwards”.
“This shows that in a tough economic environment the consumer is quite happy, due to necessity, to buy food or the occasional treat. However, they will put off buying shoes or perfumes,” he says.
AVI’s share price was up 3.5% to R87.46 at close of market on Monday, however the stock is trading more than 15% down year to date.