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KWIK SAVE RESULTS
7th November 1996 -- Kwik Save Group
plc, Dairy Farm International Holdings Limited's 29% held associate,
today announced a profit before tax and exceptionals of £90.3
million for the 53 weeks ended 31st August 1996. An exceptional
provision of £87.5 million has also been made in respect
of store closures and associated costs. The closures are part
of a three year programme for the rationalization and repositioning
of Kwik Save's store portfolio and follow a comprehensive review
of the company's business strategy. Full details of the programme
are set out in Kwik Save's announcement.
Dairy Farm's share of Kwik Save's results
for the current year, after taxation and the exceptional provision,
and allowing for the amortisation of goodwill, is a loss of
US$12 million. The carrying value of its investment in Kwik Save
will be reduced to some US$200 million.
Commenting on the announcement Dairy Farm's
Group Chief Executive, Mr Chris Nelson, said "As announced
earlier in the year, Kwik Save commissioned outside consultants
to assist them in conducting a fundamental review of the Group's
business operations to ensure they are fully responsive to customer
needs in a changing food retail environment. Kwik Save's rationalization
programme is designed to address those needs."
For further information, please contact:
Preliminary Results Announcement
Kwik Save, the UK's leading discount food retailer, today announces
preliminary results for the 53 weeks ended 31 August 1996.
Chief Executive Graeme Bowler said:
"New Generation Kwik Save signals a major cultural change
in the company designed to ensure that we have people, systems
and skills responsive and flexible enough to compete effectively
whatever tomorrow s trading conditions may bring."
"Our new style will be rooted in our long standing commitment
to providing unbeatable value. But it will be more customer-focused,
using a marketing-led approach to equip us with the systems and
technology to know what shoppers want, and to get it to them quickly
and efficiently."
Further enquiries:
Kwik Save Group Plc
With no respite from the fiercely competitive trading conditions
which have characterised the food retailing industry in recent
years, profits and earnings were depressed. The results also reflect
the costs of laying the groundwork for New Generation Kwik Save,
a programme designed to make the group a highly flexible and competitive
business - whatever the future trading conditions.
Sales were a record £3.51 billion, up 8.8% on the previous
year. However, profits before tax and exceptional items fell by
28% to £90.3 million. Earnings per share before exceptionals
were 37.68p. A maintained final dividend of 14.05p, making an
unchanged total of 20p, reflects the directors' confidence in the
group s ability to sustain earnings over the medium term.
Background to change
The food retailing environment has changed dramatically over recent
years. Competition has become increasingly fierce from the superstores
and the continental discount groups, which have encroached on
Kwik Save's traditional customer base, both geographically and
through aggressive pricing.
The resultant setback to the company's financial performance over
the past two years is an indication that Kwik Save needs to adapt
more quickly to the changing demands and rising expectations of
our customers.
In February, with the help of Andersen Consulting, the group began
a comprehensive review of all its business operations. Every aspect
was examined through extensive interviews with customers and staff,
detailed studies of the performance of stores and merchandise,
as well as in-depth analysis of our competitors' strategies.
This review clearly showed that the core of Kwik Save's retail
philosophy - the provision to customers of quality brands at discount
prices from accessible stores - remains just as valid today as
ever. At the same time it demonstrated a need for us to concentrate
on improving our existing stores and intensifying investment in
staff, products and technology.
New Generation Kwik Save The way forward is clear. New Generation Kwik Save: still committed to providing unbeatable value, but even more responsive to customers' service expectations and their desire for innovative products. New Generation is customer focused, using a marketing-led approach to ensure we know what shoppers want and to equip us with the systems and technology which can deliver it quickly and efficiently.
The key elements are:
Equally important is to lock in a low-cost operating base. Our
aim is to make savings which more than offset the costs of the
programme, so that savings can be passed to customers in the form
of better value and to shareholders in improved earnings.
Phased programme
With 979 stores in the portfolio, the scale and complexity of
the task at hand is immense and the key elements of the programme
will be phased over three years to minimise disruption to the
business.
Benefits have already begun to show and will accelerate over time.
We are testing key elements of the product proposals, such as
fresh food and range changes in a number of stores. These will
be introduced into more outlets over the coming months, at the
same time as systems and technology are being upgraded and other
aspects of the programme refined.
Success depends on the full commitment of staff and management.
Apart from plans to provide staff with new skills, the group is
strengthening its management team. Two new directors, Philip Smith
and Jonathan Smith, bring proven skills to marketing and to the
distribution and supply chain areas respectively. Further appointments
in the areas of buying and human resources will follow shortly.
Such a major programme of change does not come without cost. To
ensure that New Generation Kwik Save builds on a strong base,
it is proposed to close 107 underperforming stores within the
1996/97 financial year. Every effort will be made to relocate
affected staff within the company. There is an £87.5 million
provision before tax in the results to cover store closures, asset
write downs and associated costs.
Our aim is to make the business more efficient, with improved
sales and profitability. New Generation Kwik Save represents the
way forward to a rewarding future for the company and its customers,
shareholders, staff and suppliers.
Financial and operating review
Like-for-like sales rose by 0.3% by value, with average selling
price inflation of 2.5%. Stores acquired from Shoprite contributed
3.1% and other new stores (net of closures) contributed 3.5% of
the improvement in overall sales. The additional week of the 1995/96
accounting year contributed 1.9% to the sales growth.
Excluding one-off items which affected the 1994/95 figures, the
underlying year-on-year gross margin was down 0.1% - a better
result than anticipated at the half year. Pricing pressures peaked
during the middle of the year.
Overheads increased by 1% of sales during the 53 weeks, excluding
the £23.7 million of the total store rationalisation provision
which was treated as an exceptional overhead cost. Wage costs
increased by 0.3% of sales, reflecting our programmes to improve
customer service and increase staff training in newly converted
stores. The higher proportion of leaseholds acquired in the past
18 months, plus higher business rates and increased depreciation
and repair costs on major refits and refurbishments, accounted
for 0.4% of the rise. Higher spending on systems development and
security contributed 0.3% to the increase.
Rents from concessionaires and tenants, together with National
Lottery commission and other income, rose by 17%.
Distribution
The new 335,000 square foot multi-temperature distribution centre
at Wellingborough is reaching planned capacity. In the future,
we will exploit the benefits of composite distribution in terms
of improved availability of products in the stores, lower stock
levels and reduced stock handling. In the year under review, however,
profits were reduced by about £4 million due to the run-down
and closure of distribution operations at Frogmore, St Albans,
the build-up in volumes at Wellingborough and the termination
of a third party distribution contract.
Shoprite stores
Completion of the conversion of the stores acquired from Shoprite
saw 86 units trading as Kwik Save stores by the end of the year.
Sales improved steadily in the second half, but overall sales
per square foot in a number of stores remain well below the company
average and there was an overall £4.9 million operating loss
within the acquired stores.
As part of the analysis of all stores within the group, 25 loss-making
Shoprite stores have fallen well below trading expectations and
are included in the store rationalisation plans. Sales per square
foot in the remainder are closer to the overall Kwik Save average.
Conversion of these stores to the New Generation Kwik Save concept
will provide a firm platform for growth in Scotland.
Small stores conversion programme
Seventy seven stores were converted at a cost of £23 million
to the new format introduced in 1995 to improve the ambience and
product range in older and smaller stores. Sales growth averaged
7% in the first year. Although these levels of improvement were
not always sustained, these stores would have seen a significant
fall in sales without conversion. The physical improvements already
in place provide a sound base for further development beginning
in 1997 as part of the New Generation programme.
Store portfolio
During the year, 34 new Kwik Save stores were opened, including
12 re-sites, and 22 were closed. The total number trading at the
year end was unchanged at 979. Net selling space increased by
3% to 9.6 million square feet, including 2.3 million square feet
allocated to concessions and tenants. The slowdown in store development,
particularly in the second half, reflects the changed focus towards
investment in existing stores, business systems, technology and
distribution.
Restructuring provisions
Following the in-depth review this year of all stores' performance,
we have provided for the costs of closing 98 loss-making stores
plus a further nine which are only just profitable, but which
cannot justify further investment.
Provisions for the cost of disposing of a further 66 non-trading
sites have been increased and, following review, the carrying
values of 81 stores have been written down. The total pre-tax
provision for store rationalisation is £87.5 million, of
which £63.8 million appears as a provision for loss on disposal
with the remaining £23.7 million included as an exceptional
item within overheads. Total provisions comprise cash costs of
£41.6 million and £45.9 million in asset write-downs,
net of anticipated disposal proceeds. We estimate that the cash
costs will be offset by about £18 million from disposals,
as well as by tax relief. An estimated £18 million in further
costs for the change programme are expected to be incurred over
the next two years and will be dealt with in the group's accounts
as and when they arise.
Capital expenditure Group capital expenditure for the year was £117.5 million (£199.7 million in 1994/95 including some £27 million goodwill purchased). Spending included £85 million on modernising the existing stores, on information technology and on completion of the new Wellingborough distribution centre, of which the latter accounted for £16 million. New store development accounted for £29.4 million with 34 new stores opened.
Capital spending is forecast at £50 million for 1996/97,
with investment focused on key elements of the New Generation
programme - information technology and distribution capabilities
plus essential investment in existing stores. Expenditure will
double to £100 million the following year as we roll out
our new concept into existing stores.
Funding and taxation
Net borrowings at the end of the period rose to £81.3 million,
resulting in a 21% ratio of debt to shareholders' funds. The amount
of indebtedness reflects £39 million in additional payments
of corporation tax delayed from the previous year, as well as
the capital spending programme detailed above. Borrowings are
expected to rise as store rationalisation programmes are implemented
and the New Generation initiatives introduced. Underlying borrowings
are expected to be at gearing levels up to 35% over the next two
years, but declining thereafter.
The effective tax rate for the year was 35.0% before store rationalisation
costs and the related tax credit, compared to 36.3% in the previous
year.
Current trading and prospects
In the first eight weeks since the year-end, total sales have
risen by 2.1%. Like-for-like sales by value have risen by 0.2%
and selling price inflation is around 2.5%. Trading conditions
remain competitive, although gross margins are broadly in line
year-on-year. The Board believes that actions taken under New
Generation Kwik Save should provide shareholders with a recovery
in earnings over the medium term.
Annual General Meeting
The Annual General Meeting of Kwik Save Group plc will be held
at St David's Park Hotel, St David's Park, Ewloe, Nr. Chester,
Flintshire, CH5 3YB on Thursday, 19 December 1996 at 12 noon.
The Report and Accounts for the year ended 31 August 1996 are
expected to be posted to shareholders in the week commencing 25
November 1996. Copies of this announcement are available from
the Group's headquarters at Warren Drive, Prestatyn, Denbighshire,
LL19 7HU, or at the offices of Dewe Rogerson, 3 ½ London
Wall Buildings, London Wall, London EC2M 5SY.
Payment of dividend
If approved by shareholders at the Annual General Meeting, the
final dividend will be paid on 9 January 1997 to shareholders
on the register at the close of business on 26 November 1996.
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