Connection Group reported accelerating profit growth in the 15 months to August, even though it has cut the prices of many of its products by between 25% and 40%.
SA`s leading IT retailer recorded headline earnings for the 15-month period of 68.7c per share. Connection Group is reporting for 15 months because it has changed its year-end. Against the comparable 15-month period headline earnings were up 43%.
Group revenue of R1.012 billion declined slightly from the comparable period mainly as a result of the deflationary effect of the strengthening rand and high interest rates in the first six months, which depressed consumer spending on expensive durable goods.
Connection Group recorded its fourth year of high real earnings growth and furthermore announced a dividend of 18c per share.
During the same period, the Connection Group successfully repositioned itself as a focused category specialist retailer and transferred from the IT to the retail sector of the JSE.
The group achieved operating profit before interest and depreciation of R52.3 million owing to much higher earnings from Incredible Connection and an excellent turnaround in Enterprise Connection.
Tangible net asset value increased by 14% to 117c per share.
Due to the stronger rand, prices of imported hardware fell by some 30% across the board, which depressed Incredible Connection`s turnover as the benefit was passed onto the customer. While unit volumes did grow by between 25% and 40% in key categories it was not enough to compensate entirely for the drop in unit prices. In the long-term, lower priced technology products auger well for Incredible Connection as the product becomes more affordable to a wider market.
Incredible Connection continued to entrench its position as the dominant IT retailer in SA. Firming of margins and excellent expense control contributed to operating profit growing by 40.2% for the 15 months to August.
As the rand stabilised and interest rates declined revenue growth for June through August increased by 16%, 19% and 27% respectively.
Four new outlets were opened in Windhoek, Polokwane, Klerksdorp and Kolonnade. Gross trading space, however, remained constant as older oversized stores were reduced in line with productivity requirements. The total number of stores now stands at 30 with two outside SA`s borders.
After a successful turnaround and 20 consecutive months of profitability, Enterprise Connection was sold to a black empowerment company and management consortium. The transaction was concluded for a cash consideration at a premium to NAV.
The group earned interest of R2.7 million in the current year compared to an interest charge of R0.6 million in 2002. The R3.3 million turnaround was due to strict working capital management and the benefit of the proceeds on disposal of Ultimate Connection.
The group spent R10.7 million opening the four new outlets as well as upgrading its IT infrastructure. The group also spent R17.2 million on shares for the employee share scheme. The full dilutionary impact of the share scheme has now been covered by the group`s holding in the share trust.
In addition, the group acquired 8.1 million treasury shares for R19.7 million which represents 17.4% of the issued share capital. Despite this expenditure, the group still had R81.5 million of cash available at 31 August.
Connection Group also announced a number of changes to the board. Toni Fourie resigned as the chief executive officer to pursue new challenges in an unrelated industry and he has been replaced by Grattan Kirk, the current financial director. Paul Susan has been appointed to the board as chief operations officer responsible for merchandising, marketing and store operations. Susan is a 30-year retail veteran, having held executive and board positions in numerous large national and international retailers. Pamela Barletta has been appointed to the board as human resources director.
Stephen Mulholland, the group`s chairman, commented: "We are extremely fortunate to have a person of Grattan`s ability and close knowledge of the business to replace Toni, who has done a remarkable job for which we are all very grateful and we wish him well. The appointment of Paul Susan and Pamela Barletta, with careers spanning many decades, bring a wealth of retail experience to the group."
Mulholland further commented: "We are very confident of our medium- to long-term prospects as computer penetration of SA households is still low, constantly evolving technology compels upgrades and because products today are more affordable, thereby making them accessible to many more households. For these reasons, Connection Group expects to show real earnings growth in the next financial year."
Kirk added: "It is a privilege for me to continue the group`s good work now as its chief executive. Connection Group will pursue a growth strategy over the next three years driven by both organic and acquisitive initiatives, balanced by ongoing cash flow to shareholders. Furthermore, the group will continue to grow Incredible Connection`s store base in order to further consolidate and entrench its dominance in its category and geographical locations."
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