FINANCIAL REVIEW BY MANAGEMENT
Headline figures
H1
2005
PLN000
H1
2004
PLN000
521,095
521,095
483,217
8,137
491,354
7.8
6.1
Net (loss)/profit from continuing operations
Net loss from discontinued operations
Total net (loss)/profit for the period
(2,042)
(2,042)
2,326
(2,265)
61
-
Net loss from continuing operations
excluding non recurring items
(2,937)
(11,271)
74
(Loss)/profit attributable to equity holders
(2,040)
46
3,537
3,404
3.9
(0.0187)
0.0006
-
Revenue from continuing operations
Revenue from discontinued operations
Total
Average number of employees
(Loss)/earnings per share
Net debt/total capital employed *
Gearing *
Net (debt)/cash at year/period end *
Capital expenditures:
Development
Maintenance
Number of outlets at end of period
Number of outlets added during period
20.3 %
25.4 %
Change
%
-
-%
-%
-
(60.9) m
3.1 m
-
33.0 m
27.4 m
5.6 m
13.6 m
5.0 m
8.6 m
-
216
14
204
3
-
100,300
85,700
-
8,900
1,900
-
Retail area at end of period (m2)
Retail area added in period (m2)
Estimated number of customers
visiting stores
*
14.6 million
11.9 million
Note: This compares the balance sheet figures as at 30 June 2005 with 31 December 2004.
22.9
FINANCIAL REVIEW BY MANAGEMENT
1. Economic environment & market trends
1.1 Consumer behaviour and spending patterns
According to market estimates, GDP in Poland increased by an estimated 2.5 – 2.8 %
during the second quarter of 2005 on a year on year basis compared with 2.1 % for the
first quarter of 2005. According to GUS (the Central Statistical Office), retail sales
fell by 1.9 % in the first half of 2005 (in fact, the sector to which the Group belongs,
as recorded by GUS, saw a decrease of 15.4 %) compared with a significant increase
in 2004. This has been blamed on weakening consumer demand this year when
compared with the period last year when there was a significant increase in spending
both before and after Poland joined the European Union in May 2004.
The June 2005 economic outlook showed a decrease in the unemployment rate and an
increase in average salary in Poland, which should establish a benign environment for
the rest of the year. GUS and economic commentators believes GNP will pick up in
the latter part of the year to 3.6 % per annum compared with 5.3 % experienced in
2004 with unemployment projected to decrease and continued growth in average
salaries.
1.2 New commercial real estate developments
It has been noted that Poland will see over the next few years the largest development
of shopping malls in Europe. The Group believes it is well placed over the coming
years to benefit from this trend.
As announced at the beginning of the year, the Group is intending to open 40 to 50
new stores with a total new retail area of over 18,000 to 25,000 m2. There are a
number of significant shopping malls which are envisaged to be opened in the latter
part of this year, such as the Silesian Business Park in Katowice. The Group has noted
some delays in projects and one major project, Lodz Manufaktura, has been deferred
until next year. The Group is actively seeking credible replacements in specific
locations to meet its objective of a value generating rollout of its stores in Poland.
1.3 The impact of foreign exchange rates on the business
Around 35 % of the Group`s purchases of goods are foreign currency based with a
significant proportion accounted for by EURO and US $ denominated purchases. A
significant proportion of the Group`s building costs are also EURO denominated.
The Group has taken steps to hedge its principal foreign exchange exposures during
2005.
2
2. Results for period – group level
2.1 Sales development
Total sales, excluding the discontinued operation, increased in the first half of 2005
by 7.8 % compared with 2004.
Overall, retail sales, increased by 7.9 % compared with 2004. The Group opened 14
new stores with new retail area of 8,900 m2.
Our wholesale operations increased their sales by 10.4 % as compared with last year`s
first half.
2.2 Gross margins development
Group management monitor the gross margins earned by its various operating
subsidiaries as a means of assessing their financial and operational performance.
Gross margin is defined as income from sales less: the cost of purchasing goods and
merchandise, as increased by applicable taxes and customs duty, franchise payments
and royalties, bad stock, the change in provision for unsellable inventory as well as,
in the case of language schools, the cost of teachers` salaries and school textbooks,
and, in the case of the wholesale operations, the cost of transporting merchandise, and
is then treated as a % of income from sales.
Gross margins on continuing operations amounted to 40.1 % in the first half of 2005
(2004 – 37.7 %).
The key factors which have influenced margin were:




In part, the change in the average EURO exchange rate which was 4.08 in the first
half of 2005 compared with 4.73 in the comparative period of 2004; thereby
making imported goods cheaper. However, it should be noted that a significant
proportion of our purchases are PLN based and an element of foreign purchases
are made at fixed rates, due to hedging.
Better markdown performance in the fashion business in the first half of 2005
when compared with the period in 2004 which led to a reduced markdown cost.
The continuing shift in purchases from overseas where the Group, particularly in
respect of Smyk and Galeria Centrum, has continued to increase its sourcing of
goods from Turkey and China rather than Poland and other EU countries in order
to benefit from the weakening US $ - the average US $ exchange rate was 3.18 in
the first half of 2005 compared with 3.86 in the comparative period of 2004, as
well as obtaining products at competitive prices. We envisage further shifts to
sourcing from these regions and that this should result in a sustainable increase in
the Group`s profitability.
Better purchasing conditions due to our developing sales and by virtue of our
significant market share in our segments.
2.3 Cost development
The cost base of the Group has developed slower than our increased sales and our
new store openings. Employee costs increased by 6.4 %, in part due to the existence
of the holding company after 16 March 2004, but also new store openings during the
first six months. Building costs have remained virtually unchanged, despite the new
openings, due to the beneficial exchange rates noted above.
2.4 Net results for the first half of 2005
Typically, seasonal businesses, which account for a significant proportion of the
Group`s business, will generate a loss in the first half of the year due to the following
factors:


Lower sales in the first half of the year than in the rest of the year.
The higher proportion of markdown sales, which take place in January/February
and June, which drive down gross margins.
The Group`s net loss for the six months, after income tax, was PLN 2.0 million (2004
- PLN 61,000 (profit)). However, the 2004 result includes the loss of a discontinued
operation of PLN 2.3 million - the Group decided to dispose of its photoprocessing
chain in the Czech and Slovak Republics, E – Foto sro in September 2004). A key
measure for the Group`s overall financial performance is the result from continuing
operations.
The net loss from continuing operations for the six months ended 30 June 2005
amounted to PLN 2.0 million compared with a profit of PLN 2.3 million for the
comparative period in 2004.
The net loss from continuing operations however includes non recurring
items/exceptional gains, net of tax, in the first half of 2005 of PLN 0.9 million (2004 PLN 13.6 million), as noted below. Therefore, the net loss from continuing operations
in the first half of 2005, excluding non recurring items and their related tax effect,
amounted to PLN 2.9 million compared with the prior year first half loss of PLN 11.3
million - an improvement of PLN 8.4 million.
Depreciation and amortisation increased in the six month period of 2005 compared
with 2004 by PLN 2 million to PLN 15.3 million due to the new openings in the latter
half of 2004 and new openings in 2005. Finance costs increased by PLN 2.2 million
over the comparative period in 2004 to PLN 3.3 million due, in part, to the interest on
the Medium Term Notes as well as the absence of significant foreign exchange gains
in the period. The tax charge decreased by almost PLN 800,000 to PLN 2.5 million
due to the lower tax rate, the absence of significant gains in the period and deferred
tax movements.
4
Non recurring items
Non recurring items in the six months ended 30 June 2005 and 2004 can be analysed
as follows (in PLN million):
2005
2004
Sale of real estate to Dawtrade
Sale of retail perfumery
stores to Sephora Polska
Compensation for
Galeria Centrum
Impairment of fixed assets
Sale of minority shareholdings
Total
0.2
1.0
2.6
1.0
(0.4)
0.1
0.9
10.0
13.6
Empik disposed of a number of its properties in March 2004 to Dawtrade Sp z o.o.
The PLN 0.2 million item in the first quarter of 2005 reflects the revaluation gain on
the receivable.
The Sephora item represents the revaluation gain on the receivable.
In 2004, Galeria Centrum received compensation of PLN 10 million and a PLN 2
million rent adjustment for the reduction in space in its Sawa store in Warsaw for
several months beginning in June 2004 caused by refurbishment work. Management
has estimated that the lost margin in the second half of 2004 caused by the disruption
to the store amounted to between PLN 4.1 million and 6.1 million, and have assumed
an average loss of margin of PLN 5.1 million. This, together with the provisions in
fixed assets and inventory of PLN 0.9 million, resulted in a cost to Galeria Centrum of
PLN 6 million, which was therefore compensated by the abovementioned PLN 12
million for the full year ended 31 December 2004. The PLN 10 million above reflects
the sole financial impact in the first half of 2004.
The impairment charge reflects the cost of outlets i.e. stores, closed by Empik and
laboratories by Empik Foto.
The Group achieved a small gain on the sale of certain minority interests belonging to
the National Investment Fund.
3. Segment performance
Fashion & Beauty
The Fashion & Beauty segment`s sales increased by 4.1 % to PLN 220.5 million
(2004 - PLN 211.8 million).
Based on management`s information, Galeria Centrum`s sales in the first half of 2005
decreased by 2.8 % when compared with the first half of 2004. This was caused by
the reduction in retail space of the Marszalkowska store which took place during
2004. The sales in stores, other than the main Marszalkowska store, increased by 4.8
%.
Ultimate Fashion`s sales in the first half of 2005 increased by 19 % when compared
with the first half of 2004. In the first half of 2005, the entity opened two stores in
Krakow Kazimierz and Promenada which contributed over PLN 1 million of new
sales from their opening.
Young Fashion`s sales in the first half of 2005 increased by 12 % when compared
with the first half of 2004. In the first half of 2005, the entity opened one store in
Krakow Kazimierz which contributed over PLN 2.1 million of new sales from its
opening.
As at 30 June 2005, Galeria Centrum had 12 stores, Young Fashion had 8 stores and
Ultimate Fashion had 27 stores.
Optimum Distribution Poland`s sales in the first half of 2005 increased by 3.2 % with
sales of both cosmetics and optics increasing by 11.7 % and 1.5 % respectively
offsetting decreases in sales of sports clothing.
Optimum Distribution Czech`s sales in the first half of 2005 decreased by 1.2 % in
PLN terms while in Czech Krowns, sales increased by 5.8 % to Cz Kr 161.4 million.
This was caused by the strengthening of the PLN over the period when compared with
2004. Sales of cosmetics (in Cz Kr) increased by 8.1 % while sales of optics increased
by 2.7 %. The Company changed its wholesale distribution base in May with
minimum disruption to its customer base and on going business.
As noted earlier, this segment, more than the “Media & Entertainment” segment,
typically generates losses in the first half of the year due to its greater exposure to the
factors set out in section 2.4 above.
In the first half of 2005, EBITDA for this segment amounted to PLN 6.1 million
(2004 – PLN 3.3 million) and the loss from operations of this segment amounted to
PLN 151,000 compared with a loss in the first half of 2004 of PLN 2.9 million.
Of these amounts, Galeria Centrum`s EBITDA (negative) in the first half of 2005
amounted to PLN 5.5 million (2004 – PLN 2.6 million positive) and the net loss
amounted to PLN 9.4 million (2004 – 1.3 million loss). The loss has arisen due to the
decrease in sales in the period combined with the absence of one off items such as
compensation for the Sawa store as noted earlier above.
Excluding one off items, the net loss of Galeria Centrum amounted to PLN 9.4
million compared to PLN 11.3 million in 2004, which is an improvement of PLN 1.9
million.
Media & Entertainment
The Media & Entertainment segment’s sales in the first half of 2005 increased by 10.7
% to PLN 300.6 million (2004 - PLN 271.5 million).
Based on management’s information, Empik`s total sales, including Empik Foto,
increased by 7.2 %. Despite decreasing music sales, there were healthy increases in
the sales of the other categories such as books and press. Empik opened six new
stores during 2005 in Krakow Kazimierz, Warszawa Promenada, Poznan King Cross,
Poznan Plaza, Bytom Plejada and Katowice Trzy Stawy which contributed PLN 5
million of new sales.
6
Sales at Empik language schools decreased by 11.3 % to PLN 23.2 million in the first
half of 2005 due, in part, to the closure of two schools from June 2004, as well as
reduced student numbers. Following a strategic review of the business and market, the
Group decided to undertake an acquisition in this sector with a view to playing a
leading role in the consolidation of this otherwise fragmented sector and to avail itself
of multimedia learning products as well as direct selling skills to reinforce its market
position. Details of the Group’s actions are set out later in this review.
Smyk`s total sales increased by 22.3 % in the first half of 2005 to PLN 61.5 million
(2004 – PLN 50.3 million). The overall performance was assisted by the strong sales
contribution made by stores opened last year as well as the five new store openings
during 2005. Smyk opened five new stores during 2005 in Krakow Kazimierz,
Warszawa Promenada, Poznan King Cross, Poznan Plaza and Katowice Trzy Stawy
which contributed PLN 4.5 million of new sales.
As at 30 June 2005, Empik had 64 stores and 42 Foto outlets, and Smyk had 25
stores.
In the first half of 2005, EBITDA for this segment amounted to PLN 14 million (2004
– PLN 17.2 million) and the profit from operations of this segment amounted to PLN
5 million compared with 2004 of PLN 10.1 million. The EBITDA and profit from last
year included one off gains such as the sale of properties to Dawtrade, as noted above.
4. Loss per share
The loss per share are based on the results recognized in the consolidated IFRS
income statement.
The loss per share has arisen as a result of the net loss in the first half when compared
with last year.
5. Financial condition
5.1 Liquidity and capital resources
The consolidated cash flow statement illustrates that there was a decrease in cash and
cash equivalents in the six months ended 30 June 2005 of PLN 49.4 million (2004 –
PLN 25.9 million - decrease).
Net cash used in operating activities amounted to PLN 49.0 million (2004 – PLN 50.5
million) due mainly to payments to our suppliers in January following the busiest part
of our year in November/December 2004. The slightly smaller usage in 2005 than in
2004 was due to the improvement in credit terms with suppliers
The Group invested PLN 33.0 million in capital expenditures and other investing
activities, of which more is noted below.
The Group`s cash as at 30 June 2005 amounted to PLN 36.3 million (31 December
2004 – PLN 86.4 million). Following the disbursements to suppliers during the first
month or so, as well as capital expenditures, the Group`s overall position, as expected
given the nature of our business, is net debt of PLN 60.9 million (31 December 2004
– PLN 3.1 million – net cash), as set out below in PLN millions:
7
5.2 Asset and capital structure
Equity and gearing
The Group`s capital structure as at 30 June 2005 and 31 December 2004 is as follows:
2005
2004
36.3
86.4
(90.6)
( 6.6)
(74.2)
(9.1)
(60.9)
(239.8)
(300.7)
25.4 %
20.3 %
3.1
(242.7)
(239.6)
-%
-%
Cash and cash equivalents
Less:
Non current borrowings
Current borrowings
Net cash/(debt) position
Total equity
Total capital employed
Gearing
Net debt/total capital employed
As can be seen, the Group has a reasonable level of gearing and debt as at 30 June
2005 given it has settled, from its own cash, a significant amount of trade creditor
balances arising from the 2004 year end which is the busiest part of the year for the
Group, as well as the use of debt finance to fund the capital expenditure programme.
This has led to the use of long term finance as opposed to current borrowings which
reflect the projected timing of cash inflows from the new stores opened.
Included in non current borrowings is the loan from ING Bank of PLN 40.4 million
which is fully secured on the long term receivable in respect of Sephora (see note 17
of the 2004 year end consolidated financial information). Therefore, the actual debt
position is PLN 40.4 million less than that stated.
Profile of debt
The profile of the Group`s debt finance is as follows:
Current
Bank loans payable within 1 year
Finance leases payable within 1 year
Other
Non current
Long term bank loan
Finance leases payable over 1 year
Medium Term Notes
Other long term borrowings
Total
2005
2004
94
6,551
6,645
136
7,572
1,361
9,069
40,401
22,315
25,000
2,866
90,582
40,790
30,323
3,100
74,213
97,227
83,282
As can be seen, the Group has increased its level of indebtedness as at the period end
due to seeking Medium Term Notes to partly finance its capital expenditure
programme. The Medium Term Notes (“MTNs”) are to be repaid in periods from two
to four years.
In addition, in the first half of 2005, the Group undertook repayments of finance lease
principal and other loans of PLN 4.6 million but, in turn, obtained PLN 11 million,
under finance leasing agreements arranged with landlords as part of the capital
expenditure programme. As noted above, the actual level of borrowings is PLN 40.4
million less due to the ING bank loan being fully secured on an asset of the Group.
It should be also noted that, on 29 April 2005, NFI EMF SA and its subsidiaries,
Empik, LEM Sp z o.o, Polperfect Sp z o.o, Young Fashion Sp z o.o, Ultimate Fashion
Sp z o.o, Galeria Centrum Sp z o.o. Optimum Distribution Sp z o.o. and Smyk Sp z
o.o, signed an agreement with ABN Amro Bank to renew the PLN 39.1 million
overdraft facility which it entered into on 26 May 2004 on the same terms and
conditions as before. This facility is to provide the Group with temporary financing to
overcome the usual peaks of trading such as payments to suppliers in the less busy
parts of the year.
5.3 Capital expenditure
The Group incurred capital expenditures on its segments of PLN 33 million in the first
half of 2005 (in the first half of 2004 – PLN 13.6 million). Development expenditures
amounted to PLN 27.4 million (2004 – PLN 5 million) of which PLN 14.3 million
(2004 – PLN 1.1 million) was spent in the Fashion & Beauty segment and PLN 13.1
million was spent in the Media & Entertainment segment (2004 – PLN 3.9 million).
In the “Fashion & Beauty” segment, in the first half of 2005, Ultimate Fashion opened
two stores while Young Fashion opened one store. Total new retail area added in the
six month period amounted to almost 2,000 m2 and total area in this segment
amounted to over 45,000 m2 as at the period end (31 December 2004 – 43,000 m2).
In the first half of 2005, both Empik and Smyk opened six and five new stores
respectively with a total area of almost 7,000 m2. Total area in the segment amounted
to over 55,000 m2 as at the period end (31 December 2004 – 49,000 m2).
The Group incurred maintenance expenditures of PLN 5.6 million in the first half of
2005 (2004 – PLN 8.6 million) of which PLN 1.6 million was spent in the Fashion &
Beauty segment, and PLN 4 million was spent in the Media & Entertainment
segment.
6. Employees
The average number of employees in the Group has increased to 3,537 in the first
half of 2005 from 3,404 in the first half of 2004 due to new staff taken on for the new
shops in both 2004 as well as in 2005, offsetting the reduction of 92 employees
arising from the disposal of the E Foto sro operation in September 2004.
9
7. Outlook
As noted in the year end review, over the coming year, the Group intends to open 40
to 50 new stores with a total new retail area of over 18,000 to 25,000 m2. To 30 June
2005, the Group has opened 14 new stores with a total new area of almost 9,000 m2.
In July, the Group opened a further Smyk outlet in Zabrze with 700 m2 of new retail
area.
In the third quarter, it is further envisaged that further Empik, Smyk and Ultimate
Fashion outlets will be opened in Sadyba Best Mall in Warsaw as well as in
Wroclawek.
On 5 July 2005, the Extraordinary Shareholders Meeting of NFI Empik Media &
Fashion SA adopted a resolution on the purchase of up to 10 % (10,940,561) of its
own shares for redemption. On 12 August 2005, based on the authorisation included
in the above mentioned resolution of the Shareholders Meeting, the Management
Board adopted its resolution setting out the purchase price per share for the public
tender of PLN 5.92 per share and announced the public tender for the purchase of up
to 10,940,561 of its own shares for the purpose of redemption. The subscription
period commences on 22 August and will conclude on the 30 August.
The purpose of the share redemption is to return windfall gains to shareholders, i.e.
significant value one off gains, including the sale of a stake in Young Fashion Sp. z
o.o. (“Young Fashion”)(see next paragraph), which are not needed to finance the
business in view of existing finance available e.g. cash generated from operations and
proceeds from MTNs. The share redemption is likely to have a beneficial impact
going forward on the earnings per share – one of the measures identified by
management for monitoring the enhancing of shareholder value. The redemption of
the purchased own shares shall be carried out in accordance with the provisions of the
“Code on commercial companies”.
On 14 July 2005, NFI Empik Media & Fashion SA signed an Investment and
Shareholders Agreement with Inditex SA (“Inditex”), the owner of the Zara brand,
regarding the sale to Inditex of a stake in Young Fashion. On 10 August 2005, Inditex
purchased 51 % of the shares from NFI Empik Media & Fashion SA in Young
Fashion, the franchisee of the Zara brand in Poland. The price for the 51 % was
determined by reference to the results of Young Fashion for the first half of 2005 and
amounted to EURO 10,177,870. A further 29 % shares in Young Fashion can be
acquired by Inditex not earlier than February 2008 for EURO 4,350,000 – in this
respect NFI Empik Media & Fashion S.A made an offer to sell the 29% shareholding
to Inditex. The remaining 20 % of the shares will be subject to a “put/call” mechanism
which cannot be triggered by NFI Empik Media & Fashion SA earlier than April 2008
and by Inditex not earlier than 1 February 2011. In addition, NFI Empik Media &
Fashion SA has established for the benefit of Inditex certain rights over the exercise
of the 29 % shareholding in Young Fashion and, Inditex prepaid an amount of EURO
4,350,000 for the future purchase of said 29%. The transaction has led to the assets
and liabilities of Young Fashion being disclosed in the balance sheet as at 30 June
2005 as “Non current assets classified as held for sale” and “Liabilities directly
associated with non current assets classified as held for sale” – see note 9 of the IFRS
Interim Condensed Consolidated Financial Information. The gain on the disposal will
be reflected in the third quarter’s results.
On 5 August 2005, NFI Empik Media & Fashion SA announced that its subsidiary,
Empik Sp z o.o, (“Empik”), will contribute its 38 language schools to Learning
Systems Poland Sp z o.o. (“LSP”), the operator of seven language schools trading
under the name “The Orange School”, in return for 65 % of the shares in LSP. In
addition, NFI Empik Media & Fashion SA acquired 36 shares in LSP from TCA
Marketing Partners SL for PLN 3 million, to be paid upon the registration by the court
of the contribution in kind by Empik as referred to above. The transaction requires the
consent of the Office for Protection of Competition and Consumers (UOKiK). Under
the Investment Agreement signed on 4 August 2005 between NFI Empik Media &
Fashion SA Empik and the current shareholders of LSP, NFI Empik Media & Fashion
SA (or Empik) shall have the right, or, under certain circumstances the obligation, to
acquire the 34.36 % of the shares of LSP it does not hold, directly or through Empik,
by the end of 2011 under an agreed formula, based on the results of LSP. As noted
earlier, this transaction reinforces the Group’s position as one of the leading providers
of educational services in Poland.
11