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KWIK SAVE GROUP PLC The following is the summary of a press release issued today by Dairy Farm's 29%-owned associate, Kwik Save Group plc. The full announcement can be obtained from Ludgate Asia Limited (4/F Capitol Plaza, 2-10 Lyndhurst Terrace, Central, Hong Kong; Tel: (852) 2543 5413) or Fleishman-Hillard Hickson (103 Beach Road, #07-01 Premier Centre, Singapore 189704; Tel (65) 339 1066).
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Full text of the preliminary results for the 52 weeks ended 30th August 1997 can be accessed through the internet at "http://www.irasia.com/listco/sg/dairyfarm" and is also available through "First Call".
Preliminary Results Announcement
Kwik Save, the UK's leading discount food retailer, today announces preliminary results for the 52 weeks ended 30 August 1997.
Chief Executive Graeme Bowler said "Much has been achieved in the 12 months since we launched the New Generation strategy. We set ourselves challenging milestones within the first year and have made good progress against these. New Generation stems from Kwik Save's commitment to be the lowest priced family food shop in Britain. It is designed to ensure we provide outstanding value in prices for our customers on an improved product range, sold in stores that are welcoming and easier to use. It is also about investing in systems, technology and people to deliver this vision, while retaining a low-cost operating base. This first year of the New Generation programme has been about establishing a firm foundation from which to develop and introduce more tangible changes to our customer offer in the future. As we enter year two, we will continue to focus on making the core business secure while building momentum for fundamental improvement throughout the chain."
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Kwik Save Group plc Preliminary results for the 52 weeks ended 30 August 1997 In the financial year 1996/97, a decrease in like-for-like sales was largely offset by improved gross margins. However, the cost of the change programme has inevitably had an adverse effect on our profitability. In building Kwik Save for the long-term we have incurred additional overheads, particularly in the areas of information technology and external consultancy, which together increased by £14 million compared to the previous year. As a result, profits before tax and prior year exceptional items were down by £16.6 million to £73.7 million. The Board has recommended that the final dividend be held at 14.05p, thereby leaving the full year dividend unchanged at 20p per share. This will be payable on 8 January 1998 to shareholders on the register at 28 November 1997. New Generation - the first 12 months Kwik Save's New Generation strategy was announced in November 1996 and signalled the beginning of a process of significant change. The first year of the programme has now been completed and we are pleased to report that progress has been made against the milestones set for it. We will continue to build on these foundations with the objective of returning to earnings growth. Key features :
As explained last year, we appointed Andersen Consulting to provide the specialist capabilities to help us review our operations and to develop and launch the New Generation programme. Since then, we have made new management appointments which have broadened and strengthened our in-house skills. Andersen's involvement is reducing as planned, and will end by the New Year.
Balancing short and longer term priorities Our strategic initiatives have been undertaken from a difficult trading position in which our sales performance has been depressed. We have been taking a number of actions to rebuild sales, chief among which is the active display and promotion of those core lines our customers most want to buy. Every month we are also offering even lower prices on at least 200 products in the relevant pack sizes and varieties customers want to meet their family needs. Whilst in the eight week trading period since our financial year end our like-for-like sales are 6% lower than the comparable period of the previous year, a number of positive signs are beginning to emerge. These include a sharper competitive price position, a stabilisation of month on month sales volumes and rising customer transaction numbers month by month. Our gross margins remain healthy, helped partly by the successful launch of the Kwik Save brand and the gradual refinement of our product mix. We are re-balancing the mix of products we sell and refocusing our pricing and promotion policy. Our aim is to preserve healthy margins while reinforcing shoppers' loyalty to Kwik Save as Britain's lowest priced family food shop. We are in the process of a major exercise to review and update our product ranges and will continue to focus on improving service and presentation standards throughout the store chain. On the systems and technology front, we have made considerable progress, the highlight of which is the commencement of the implementation phase of our core systems replacement. Over the next 12 months we will be introducing the new systems, starting with merchandising, finance and warehouse replenishment. We expect to see the first benefits in 1998 with the new systems providing us with a more complete picture of our merchandise, together with significant improvements in the quality of management information. We have been working hard to develop our people and organisational capability, by promoting values based on performance, customer focus, people excellence and team working. We have restructured buying and marketing, retail operations, information technology, supply chain and human resources. We have also acquired new skills and expertise through the recruitment of a number of additional senior managers to the team, and have initiated a wide range of training and communication programmes. Promoting our price message Retaining the loyalty of Kwik Save shoppers to Britain's lowest-priced family food store in the face of aggressive competition from other food retailers is essential to our success. In July we launched a programme to ensure the stronger display of the core lines our customers most want to buy. And in August, we introduced special four weekly promotions designed to highlight the everyday value for money Kwik Save provides. Each month we offer even lower prices on more than 200 products including national brands, Kwik Save Brand and No Frills products. Perceptions of our price competitiveness are improving in line with the real widening of our price gap. By careful management of our product mix, we have achieved this without detriment to our gross margins.
Calls Cut Costs In recent weeks we have also launched a campaign inviting shoppers to help us keep our low price pledge. "Calls Cut Costs" provides a 24-hour dedicated phone line which shoppers can ring if they find lower prices elsewhere. We are following up each call and, where necessary, cutting our prices in response. Our research tells us that customers are delighted to have a say in the prices they pay. Own label outperforms New Generation Kwik Save shoppers have responded enthusiastically to the launch of our high quality Kwik Save brand. Since April, we have introduced more than 300 Kwik Save products. We priced our products well below those of other major retailers and our shoppers have noticed the price gap. Sales on the first release launched in April are running almost 25% higher than the ranges they replaced in our stores. Our prices are highly competitive and they are still delivering a higher margin to the business. At least another 300 products will be introduced in 1998 and we are on target to have nearly 1,000 Kwik Save brand products on our shelves by the end of the following year. In addition we will continue to fine-tune our No Frills price-fighting range. Model store Our piloting of the New Generation model store format has provided us with double digit growth in sales compared to pre-conversion levels. There have been significant increases in both fresh produce and meat sales through concessions, reflected in an increase in Kwik Save's rental income % to sales. We have also seen a small but positive improvement in gross margin. Physically, the newly converted stores aim to provide four key benefits to our customers :
We are now combining the results of our findings into 19 stores by the end of November 1997. The performance of these stores will be closely monitored for a three month period during which time additional learning points and refinements will be incorporated into the planned roll-out programme. Our target pre-tax return on capital is 20%. An appetite for fresh foods Key to the New Generation programme is making sure our shops stock a broader range of fresh foods offering consistent value and quality, in a customer-friendly format. Through our new integrated management structure, we have been working to improve the quality, pricing and display of fresh fruit, vegetables, meat and deli. products in 600 of our larger stores with fresh food concessionaires. We are also providing buying and technology support to help improve sourcing and delivery, and have doubled the number of fresh food controllers who work closely with the concessionaires.
We have also introduced a new pre-packed produce offer into 150 smaller stores which are too small to justify a full-time concessionaire. This will be rolled out to another 100 stores by next spring. We will test a new pre-packed meat offer for our smaller stores during the course of the year. In the trial New Generation stores, we have brought together all our fresh food initiatives including improved quality products, new display fixtures and positioning in the shop and a single point of payment inside the tills. Our customers are getting the message - in these stores sales of fresh foods have increased dramatically, in some cases more than doubling. Year two plans Our major priorities for the business as a whole in 1998 are to continue to :
In parallel, we plan to have converted around 100 New Generation stores accounting for around 20% of total sales. Furthermore, during 1998 we plan to adapt the New Generation model into a smaller store format and test it within a number of stores. The roll-out of full concept into our other stores will continue thereafter, and our target is to have completed the conversion of the entire chain within five years. Board changes Sir Timothy Harford retired from the Board on 31 August 1997 after 24 years as a non-executive Director, including six years as Chairman. John Murphy retired as an executive director in January 1997 having been a member of the Board for the last ten years, including three years as Deputy Managing Director. Ron Fulford joined the Board as non-executive director on 6 May 1997 and was appointed Deputy Chairman on 31 August 1997. Mr Fulford served for eight years until 1996 as Chairman of Imperial Tobacco and is currently Chief Executive of Liggett Group Inc. Jonathan Smith, Supply Chain and Distribution Director and Phil Smith, Trading Director formally joined the Board in November and December 1996 respectively. Financial Review Total sales in 1996/97 were £3.3 billion (1995/96 £3.5 billion) within which the like-for-like sales by value declined by 4.0%. In November 1996, we set out our plans to close 107 underperforming stores, during the course of 1997. This exercise has proceeded according to plan, with the loss of sales in these stores accounting for a reduction of 3.2% in sales compared to the previous year. A further 1.7% of the sales decline is attributable to the fact that last year was a 53 week accounting period containing an additional week of sales. Sales in stores opened within the last 12 months contributed 1.5%. The overall decline in the total value of sales was 7.4%. Gross profits Against a sector background of gross margin stability, Kwik Save's price leading position relative to its major competitors has continued to improve, in line with our commitment to be the "lowest priced family food shop in Britain". Over the last twelve months, the general trend within the UK food retailing sector has been that of modest increases in the underlying gross margin. Much of this increase is as a result of the gradual easing of intense pricing pressures on basic commodities, which has reduced the negative margin impact of below-cost selling prices to a lower level than in the previous year. Consequently, underlying gross margins have increased by 0.9% as a percentage of sales. The introduction of the new Kwik Save brand range of products has allowed us to widen the price differential versus comparable competitor products, whilst at the same time enhancing overall margins. With over 300 products launched in 1997 we will continue our three year programme to develop the Kwik Save brand to more than 1,000 products, offering our customers an outstanding mix of price and quality. Shrinkage and wastage levels have been reduced as a result of "quick-win" New Generation programme initiatives designed to focus on short term operational improvements. This has provided a further benefit of 0.2% to the gross margin. Warehousing and distribution costs included in cost of sales were running marginally below last year's levels. Overall reported gross margin was up by 1.1%. Overheads Kwik Save's low-cost operating ethos will remain at the heart of our business strategy going forward. However, achieving and sustaining a momentum for change requires an essential up-front investment in our business infrastructure and organisational capability. The fast mobilisation of the additional highly skilled and experienced resources, has been an expensive yet vitally important investment in the future of Kwik Save. The cost of this is reflected in the consulting fees and expenses paid to Andersens during the year of £8 million. Overall store wage costs were unchanged year on year, but rose by 0.4% of sales reflecting the maintenance and improvement of service standards against a backdrop of lower sales. On the Information Technology front, we began our planned investment to support the required pace of systems development, which is aiming for the replacement of all our major strategic systems within three years. Computer costs, which mainly related to the strategic systems development programme, were up by £6 million. Store portfolio Last year we announced a programme of store rationalisation involving the closure of 98 loss-making stores together with a further 9 stores which were just marginally profitable. Good progress has been made against this objective with 92 stores having been closed during the year. We expect to complete this programme during the next 12 months. The number of stores trading at the year end was 882, with 2 stores having opened during the year. Provision utilisation In the 1995/96 accounts, provision was made for the cash costs of the store closure programme of £41.6 million. To date we have disposed of 74 properties within the 107 store closure programme. At the financial year end we had utilised £8.5 million of the £41.6 million cash provision. Our view is that the balance of the provision is adequate to cover future costs. Capital expenditure With the New Generation programme in development and trialling mode, the level of capital investment has been very tightly controlled and largely restricted to essential infrastructure and New Generation pilot investments. We have also expensed certain costs such as systems development, which some other companies would have capitalised. Total capital expenditure for the year was £17.2 million (1995/96 : £117.5 million). We will continue to adopt a measured approach to the commitment of this investment, which will involve pausing for three months after the initial 19 store conversions. During this period, we will measure the performance of the stores and refine aspects of the programme going forward. When we have confirmed achievability of trading objectives we will proceed to accelerate the roll-out programme. Funding Incremental tobacco stock purchasing prior to manufacturers' price increases, led to a temporary additional working capital funding requirement of approximately £35 million at year end . Net reported borrowings at the end of the period were £86.8 million, with underlying borrowings of circa £60m reflecting gearing (net debt to shareholder's funds) of around 15 per cent. Looking ahead, we will seek to balance capital spending requirements and the pace at which New Generation programmes are implemented against our ability to fund spending from cash flow. Capital expenditure will rise next year but underlying gearing is forecast to remain within the range 15% to 25% over the medium term. Outlook Kwik Save enjoys a huge customer base with over 8 million people, representing nearly 40% of UK households, shopping with us each year. They choose us because of our outstanding prices and accessible stores - that's our marketing positioning - the name "Kwik Save" says it all. However, even our heaviest spending customers buy slightly less than half their weekly shop from us. That's the challenge - to earn the loyalty of our shoppers in the future. All of our actions going forward - whether rolling out New Generation initiatives throughout our stores or refocusing our business operations to adapt to changing trading conditions - will be centred on :
Each and every step we take will continue to be measured against our commitment to be Britain's lowest priced family food shop - week in, week out. That was the philosophy on which Kwik Save was launched nearly 40 years ago and it remains just as valid today. The New Generation programme is wide ranging and the full gains can't be realised overnight, but we have made considerable progress and the initiatives described above will provide increasing benefits. However, in the short term there will be offsetting costs, in particular the start-up costs associated with the roll-out of the New Generation concept during the current financial year. The New Generation strategy is about providing an improved customer offer delivered in the form of keen prices and high quality products from a business operation which has its eye on the bottom line. We do not under-estimate the challenges that lie ahead and have been encouraged by the progress made so far. We believe that New Generation is right for our customers, staff, suppliers and shareholders. 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 18 December 1997 at 12 noon. The Report and Accounts for the year ended 30 August 1997 are expected to be posted to shareholders in the week commencing 24 November 1997. 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 1/2 London Wall Buildings, London Wall, London EC2M 5SY. Consolidated profit and loss account
Consolidated balance sheet
Reconciliation of movement in shareholders' funds
Consolidated cash flow
Notes to the Financial Statements Note 1 The financial information set out above does not constitute the Group's statutory accounts for the year ended 30 August 1997 or 31 August 1996 but is derived from those accounts. Statutory accounts for 1996 have been delivered to the Registrar of Companies, and those for 1997 will be delivered following the Group's Annual General Meeting. The auditors have reported on those accounts : their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985.
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Note 5 Earnings per share
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