Edgars reported a slight drop in sales for the half year ended 11 July 2015 on the back of the apparent liquidity squeeze in the economy and the consequent decline in disposable income. Sales in the Edgars chain decreased by 11.2% from prior year comparative while profitability decreased by 8%. The drop in the Edgars Chain was, however, compensated by 43% sales growth in the Jet Chain which now contributes 27.1% to turnover against a contribution of 18.8% prior year comparative. Management believes the Edgars Chain lost some market share to the Jet Chain which retails value offerings. The growth in the Jet Chain was achieved through granting of credit facilities to customers throughout the Chain.
Trade and other receivables for the period under review grew to $31.3 million from $22.7 million in line with the shift in strategy to offer credit in the Jet Chain. As a results of the shift, the average debtors to credit sales ratio moved to 90.09% from 66% prior year comparative. The 81.71% increase in debt collection costs, to $3.1 million, signals the deterioration of consumers’ ability to pay.
Gross profit for the period came down to $13.75 million from $14.0 million resulting in gross margins coming down to 46.99% from 47.49% for the comparative prior year. The Group reported a trading loss of $1.78 million against a profit of $0.69 million prior year. EBITDA for the period was also negative and we believe this indicates that the business has fundamental problems with both profitability and cash flow. With a negative EBITDA, the Group funded part of its operations and capex with borrowings. The loss position at both trading level and EBITDA level was due to most expense lines growing at a much faster rate against the minimal growth in revenue and the decline in sale of merchandise. With a negative EBITDA the company is likely to encounter financial difficulties and will have to rely on borrowings.
|Net Profit Margins||3.54%||4.04%|
Negative Cash Flows
The company has a negative operating cash flow of $1.59 million something which can signal the mismatch between the company’s operating expenses and cash inflows. In our view the negative operational cash flow signifies a collections problem, something which is supported by the 81.71% growth in debt collection costs to $3.1 million. We, however, cannot rule out an element of growth in the debtors book following the introduction of credit sales at the Jet Chain. Remedial strategies will have to be implemented to make sure that the negative cash flows do not end up eating away at the total net worth of the company. In the period under review, the company had to rely on borrowings to fund operations and acquisition of plant and equipment, and this puts pressure on profits.
Interest bearing borrowings went up by 67% to $12.5 million, from $7.4 million prior year, as the Group funded operations and capex with borrowings. This resulted in a 43.20% growth in finance cost to $1.3 million. The weighted average cost of borrowings was at 12%.
Positive bottom line
The Group however reported a net profit of $1.18 million up 13.01% from $1.04 million prior year. This was due to a 173.45% growth in finance income to $4.99 million. The growth is indicative of more customers migrating to the 12 month payment terms, which attracts interest on account balances. We would like to believe there is also a portion of that coming from penalties on overdue accounts.
Edgars Limited Information table as at 14/09/15
Edgars Stores Limited info table is from Sep 15th, 2015 | All prices are in US cents unless otherwise stated.