In the year ended 28 February 2017 the Spanish economy continued to show signs of improvement, which began in 2015, with respect to the economic decline experienced in prior years, which had a particular impact on consumption. The easing of tensions in the European markets, together with the supranational institutions' recognition of the efforts made internally, have led to an improvement in the confidence of the players in the Spanish economy. Even though the signs of change in the main economic indicators have been positive, the political uncertainty throughout most of 2016 had a slowing effect on the economy.
GDP growth in the Eurozone (the main market in which the Group operates through its own stores) was 1.8% in 2016, compared with 1.6% in 2015. In Spain GDP growth stood at 3.2%, continuing the growth observed in 2015.
In 2016 there was a 1.8% increase in consumption in Spain as a result of the decrease in the unemployment rate, which fell to 18.7% from 21.07% in 2015, and the improvement in the consumer confidence index. However, the political uncertainty throughout most of 2016 led to slower growth compared with 2015. To a greater or lesser extent this trend was observed in all sectors of the retail trade (food, personal goods, household appliances, etc.). In this connection the year-on-year growth of the personal goods trade was 2.8%.
Specifically in Spain, the textile retail industry continues to perform at levels below those of 2006, with a slight decline in 2016 after two consecutive years of growth. In 2016 the textile trade fell by 2.2% in global terms.
Additionally, the stability in terms of Euro/Dollar parity and the improvement in the exchange rate of the Russian rouble had a positive effect on the Group's business performance.
2016/17 was a turning point, especially in the second half of the year, as a result of the measures implemented by the new management team, in which:
- The international business, both in own stores and franchises, performed positively.
- Women Secret continued to record an upward trend in results both in terms of like-for-like sales and contribution margin.
- The digital business continued to grow with significant margin protection and a multi-channel offering.
- Cortefiel and Pedro del Hierro successfully implemented their repositioning, which became effective in the last quarter of 2016 and will continue to be implemented in 2017/18.
- Springfield refocused its strategy in order to strengthen its commitment to its traditional target public.
- In the second half of 2016/17, restructuring took place at all levels in order to:
- Speed up the strategic repositioning of Cortefiel and Pedro de Hierro.
- Improve profitability of the store portfolio, with closure of the unprofitable stores.
- Generate efficiency and increased productivity at store, chain and corporate department level.
- Implement new processes to safeguard profitability and avoid, to the extent possible, volatility of the fashion business.
Against this backdrop the Group obtained a 3% increase in income. The Group's like-for-like sales increase was 0.2%. In Spain, the Group's main market, sales fell by 0.25%, whereas in the international market they increased by 1.73%. The Women Secret chain's increase in sales offset the decrease in sales recorded by the Springfield and Cortefiel chains, which in 2016/17 underwent a price and offer repositioning process. The market trend in recent years was consolidated with an across-the-board shift of sales in the industry to the sales seasons and an increase in special offers.
After a difficult first quarter, especially for the Cortefiel chain, the third and fourth quarters showed signs of improvement and began to reflect the first results of the measures implemented by the new management team.
The accompanying consolidated financial statements, prepared under International Financial Reporting Standards as adopted by the European Union, reflect the performance of the companies that make up the Consolidated Group of Cortefiel S.A. and subsidiaries for the period from 1 March 2016 to 28 February 2017.
The detail of the income included in the consolidated statement of profit or loss for the year ended 28 February 2017 is as follows:
|Thousands of Euros|
|Wholesale and franchise sales||115,715|
|Other operating income||11,539|
Based on the information available on the market share in Spain, the Group's main market, Women Secret continued to lead its sector, with a slight 0.2% decrease in its market share, whereas Springfield Man, which recorded a decrease of 0.1%, continued to be the leader for the 20-39 year-old segment, and was the second brand for the 20-29 year-old segment. Cortefiel recorded a slight decrease in the men's segment and a slight increase in the women's segment.
The Group's international performance, through both own stores and franchises, was positive. The international business represented 32% of the Group's sales and 51.7% of its EBITDA. The Group continued to expand in Russia, Mexico and the Balkans area, with significant improvements in both revenue and contribution to consolidated EBITDA, while the growth of the business in Portugal was consolidated in the year.
Additionally, Group sales via franchises increased by 8.5% compared with 2015/16, with a particularly notable performance in the European and MENA markets. The EBITDA contributed by the franchise business was EUR 37.7 million. Sales to franchisees accounted for 30.3% of the Group's international business.
Sales via the internet grew by 27.3%, with a 39.1% increase in consolidated EBITDA, although this sale channel's contribution to profits is still small as it is in the development and expansion phase. The internet business is one of the cornerstones of the Cortefiel Group's strategy.
The Group's margin fell (to 57.26% in 2016/17 from 58.61% in 2015/16) amidst a scenario of high competitiveness in prices and adverse weather conditions at some point during the year. The margin was affected by the Cortefiel brand strategy during the first few months of 2016/17. The decisions made by the new managers in the second half of 2016/17 had a positive impact on the margin in these second six months of the year, with significant improvements in the Cortefiel chain.
At 28 February 2017 the Cortefiel Group had 1,982 sales outlets, a 3.7% increase compared with 2015/16. This figure includes own stores, corners, and franchise stores. In the year ended 28 February 2017, 67 Group-managed stores were opened, 26 of which are located outside Spain. As a result of the closure of certain stores, in 2016/17 the increase in owned retail space was not significant.
The financial management of the business continued to focus on improving management of working capital and on rigorous control of the allocation of investments for the opening and renovation of stores, which in turn enabled an increase in cash-flow generation.
In addition, as explained in the accompanying notes to the consolidated financial statements, in 2016/17 negotiations took place with the banks involved in the Group's syndicated financing with the aim of renegotiating certain terms and conditions thereof. Finally, in March 2016 an agreement was reached with the financing banks to modify the maturity date of the debt, which was set at March 2018.
EBITDA from continuing operations for the year ended 28 February 2017 amounted to EUR 75.7 million, compared with EUR 104 million in the preceding year.
As indicated in the consolidated financial statements, earnings were significantly affected by the cost of the measures put in place by the new management team:
- The strategic repositioning of the Cortefiel chain, which involved a renewal of product design and the implementation of a new price strategy in order to adapt the chain to the needs of its customers. This repositioning, the implementation of which has already resulted in a significant improvement in the sales figures for the first few months of 2017/18, made it necessary for the surplus merchandise from previous seasons that was not in line with the new commercial strategy to be placed in clearance sales at the outlets, at very reduced prices, or even to be destroyed. This had a negative effect on the Group's gross profit, and led to the need to recognise an additional write-down under "Inventories".
- The closure of unprofitable stores or those which did not fit in with the new commercial strategy, both in Spain and abroad. These store closures, which have been carried out gradually since their approval in January 2017 and will continue into the next few months, have at times led to the need to adjust the commercial staff of the stores concerned and, where appropriate, to the payment of certain compensation to the lessors of the store premises for the early termination of the leases.
- The establishment of new productivity criteria relating to the number of employees in each store. The rationale underlying these criteria will continue to be a basis for management approach in the future.
- Changes to core personnel: In order to adjust general costs and also to adapt them to the new commercial strategy, the Group decided to redefine certain head office positions and adjust the workforce to the Group's current and forecast level of business.
Recurring EBITDA for 2016/17 amounted to EUR 114.7 million, after deducting EUR 39 million of non-recurring expenses (employee termination benefits and lessor compensation, write-down of stock as a result of the renewal process and the Cortefiel chain's change in strategy, and other costs),compared with EUR 108.3 million in 2015/16. Therefore, recurring EBITDA/total income for the year ended 28 February 2017 was 10.17%, compared with 9.89% for the year ended 29 February 2016.
The Group's net bank borrowings increased by EUR 21 million.
The loss before tax from continuing operations in 2016/17 amounted to EUR 24.8 million and the attributable net loss was EUR 22.9 million.