AVI delivers despite constrained consumers

AVI's food and beverage businesses are still producing top results according to chief executive Simon Crutchley. Image: AVI

For the first time in a number of reporting periods‚ AVI's fashion businesses‚ which have been the group's major profit driver‚ contributed a slight decline in operating profit as margins fell.

Overall group revenue from continuing operations grew 10% to R5.4bn‚ with operating profit from continuing operations up 11% at R1bn. Headline earnings per share from continuing operations improved 10% to 231c.

Crutchley said there had not been a fundamental change in trading conditions during the period and that demand remained reasonable.

AVI's food and beverage brands‚ which include Entyce Beverages‚ Snackworks and I&J‚ contributed a 16.9% improvement in operating profit of R631m.

"I&J‚ which is AVI's biggest exporter‚ was given a leg up in the past six months by the weaker rand‚" said Crutchley. I&J's operating profit was up 59.8% at R74m.

Meanwhile AVI's fashion businesses saw revenue growing 7.6% to R1.54bn‚ while operating profits decreased slightly with a fall in operating profit margin from 27.5% to 25.5%. Crutchley said this was the result of input cost pressures.

He said the group still saw its footwear and apparel business as a great business which would continue to perform for AVI but probably not quite as well. This was in line with most fashion retailers given stagnant consumer demand.

Managing inflationary pressures

Crutchley said it was important for the group to focus on the basics at this time. "AVI would concentrate on managing some of the inflationary pressures that are coming through, so pricing and demand elasticity is something that matters enormously under the current set of circumstances," he said.

The group reported a 33% jump in its interim dividend to 120c per share‚ in line with AVI's reduced dividend cover introduced in September last year.

The group had historically used special dividends and share buy-backs to return surplus cash to shareholders. "We felt over time that we weren't getting the recognition on the dividend yield that we could‚ therefore we felt it was sensible for us to effectively increase the cover‚" Crutchley said.

Aslam Dalvi‚ an investment analyst at Kagiso Asset Management‚ said AVI had reported a good set of results despite a difficult trading environment in which consumer spending remained under pressure and the weaker rand raised input costs.

The food and beverage division performed well with solid volume growth across both its beverage and biscuits business. Management's focus on operating costs resulted in good operating leverage and saw the division achieving healthy profit growth.

However‚ as expected‚ the more discretionary fashion division disappointed with operating profit down marginally.

Dalvi said demand was expected to remain under pressure in a rising interest rate environment.

"Further cost pressure from the weaker currency will be difficult to fully pass on to already struggling consumers and this should lead to additional margin pressure for the food producers," he said.

However, Dalvi expected the group's focus on costs and manufacturing capabilities to offset some of these pressures.