Rate cuts could give Edcon R500m shot in the arm

The group, with about R10bn in interest-bearing loans linked to SA's prime rate and a euro note of R19,1bn, has benefited from SA's rates dropping 2.5% since December, said Absa Investments analyst Chris Gilmour.

Edcon paid R3,1bn in financing costs last year, taking it from a profit before tax of R1bn to a loss topping R2bn, he said. Financing costs included interest on its euro note, fixed at a low rate.

Bain Capital bought the group in 2007 for R25bn, then SA's largest private equity deal. Edcon owns Edgars, Jet and Discom, CNA, Boardmans, Prato, Red Square, Temptations, Jet, Jet Shoes, Legit and Blacksnow. Last June, the group was trading out of 1154 stores, up from 959 in 2007.

According to the group's June update, the latest providing loans details, it had about R10bn in interest-bearing debt. Of this, R5,7bn was a loan from Bain at SA's prime rate plus 2%. It also had a R4,3bn short-term loan at Jibar plus 2.1%, which comes off as prime decreases.

If analysts are correct, and rates keep falling, the group could benefit by more than the R250m it would have benefited from this year. Analysts said if rates came off again by a percentage point each this month, next month and in June, up to R500m could be saved on its debt bill. This would be a huge benefit. Edcon should also benefit as consumers resumed spending at its shops.

Edcon has more than 4-million customer accounts with credit sales comprising about half of all sales. It said its December quarter sales rose 9.7% despite poor trading conditions. It also reported higher gross profit margins on lower markdowns, but these were offset partly by higher store expenses and overheads. Despite this, the group expected growth in adjusted operating profit for the quarter to be in line with sales growth. December quarter like for-like sales rose 6.7%. Edcon said its debtors' book was in the same shape as it was last September in terms of net bad debts as a percentage of debtors' balances.

Source: Business Day

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