Bata’s Chairman George Sokota was delighted to present the annual report to the shareholders at their 55th AGM. He acknowledged that government played a huge role in ensuring viable economic policies and for creating an enabling and peaceful environment for doing business.
George declared that rural stores were their key value drivers. However, due to the drought of 2015 which impacted many people domicile in those communities who depend on revenue from the agric-value chain, saw purchasing capacity fall resulting in Bata suffering a 6% fall in revenue (coupled with a 7% drop in overall gross profit). However, in a tail of two halves, the first and second quarters of the year produced better performance compared to the last two quarters albeit a tail-end improvement fueled by a good shoe line collection for the festive season as well as early rains (their Rain Master Gumboots are popular when the heavens open).
Product diversity is their chosen strategy (product differentiation) as they brought on board a plethora of new shoe options which pleased consumers. At the close of 2016, they boasted a record 120,000 Bata loyalty program members. They are creating a love mark with customers. Harvesting data from customer’s shoe purchase preferences will be interesting going forward. In addition, they signaled a completely new marketing strategy and an overhauling of their retail approach that has been put in place with a complete revolution in new ladies shoe line (Zambian women are sorted).
Decoding their financial statements showed an interesting picture. Although revenue slightly fell as well as operating cash flows (OCF) reducing by 13.2%, their earnings before interest tax depreciation and amortization (the coveted EBITDA) rose by 8.8%. The fall in OCF meant a marginal 4.7% reduction in operating profit for the year 2016 compared to 2015. Curiously, profit before tax (PBIT) rose by 12% thanks to finance income from matured fixed deposits of K340, 274 being added to the income statement (interest income was earned from placing funds in a fixed deposit account). This signals an astute CFO who understands the money markets and financial instruments. This is the reason the company posted a better earnings per share (EPS 28.6% higher) in the year under review. Evidence of financialization in Zambia.
Value continues to be locked in inventory with a marginal 3.2% increase. Working capital performance showed an improvement in the receivable days (company collecting money quicker). However, the company now holds inventory for 9 days longer than the previous year on average. This has inevitably lead to an increase in its working capital cycle days (how quickly the company turns goods into hard cash).
Liquidity indicators show some improvement with cash in bank increasing by over 500%. In addition, there is improvement in the company’s acid test as it slowly approaches 1 which will mean there will be no stress on it meeting immediate obligations (current liabilities falling within the year) hence the 1 day improvement in paying debtors. The company continues to pursue a debt free strategy hence no gearing to pose risk.
Return on Capital Employed and Return on Equity experienced a zero-sum with ROCE reducing by 1% and ROE increasing by the same amount. The companies return on sales was also in the 1% improvement trend with fixed asset and inventory turnover remaining flat for 2 years in a row. Shareholders will be pleased with the 100% improved dividend indicating consistency in dividend policy amidst challenging business conditions.
Going forward, prospects are interesting with the company seeking to lure more women into their stores. They target 500,000 loyalty customers as their 2017 milestone. This could possibly be fueled by women if the products in the shops are right (women and shoes. No comment). Furthermore, they seek to continue with in house development of staff. Increased rainfall will fuel sales for their boots. From a macro perspective, they will need to keep an eye on movements in the mining sector as mining companies signal scaling up operations.
