Personal care products carry AVI in storm
September 8, 2009
By Florence de Vries
Revenue increases 12%
Results show consumers drop pricey indulgences in tough times
Sales of personal care goods weathered a tough economic storm to boost profit at AVI, but sales of luxury brands fell as the group reported a 12 percent increase in revenue from continuing operations in the year to June.
AVI's revenue grew from R6.6 billion to R7.5bn in the period, while headline earnings a share were up 10 percent to R1.75. A final dividend of 52c and a total dividend up 10 percent to 88c was declared.
"It is a well-known fact that consumers don't opt for fancy items in tough times and AVI's results is a reflection of this," Mohamed Loonat, a portfolio manager at Element One, said yesterday.
Loonat referred to the "lipstick index", adding that AVI's personal care brands fell in the lower-price categories and that the group had benefited from the "buying down" trend.
Coined by Estee Lauder chairman Leonard Lauder in a previous recession, the "lipstick index" is based on the theory that consumers turn to inexpensive indulgences when faced with an uncertain financial future.
Operating profit rose 28.7 percent to R94.5 million in the personal care brands category.
Indigo Cosmetics' revenue increased 17 percent, with body spray volumes supported by good performances in the make-up and fragrance categories.
Chief executive Simon Crutchley said beauty sales had been boosted by strong growth in female deodorant spray brands AVI made, such as Yardley. The group had focused on innovation, which led to good growth.
But luxury brands Nina Roche, Gant and Spitz in AVI's apparel and footwear category faced difficulties as demand came under pressure.
Operating profit declined from R132.9m to R101.7m, with lower profit margins in Spitz and operating losses in Gant and Nina Roche.
According to John Thompson, an equity analyst from Investec Asset Management, the second-half sales growth slowed considerably at Spitz. "The fact that AVI had to write down its investment value in Nina Roche underscores the trading difficulties."
Loonat added that the footwear division had started taking a tumble in 2007, as margins steadily decreased by 30 percent in the past two years.
Over the past few years AVI had steadily expanded the Spitz footprint through new and refurbished stores, but the higher fixed cost base contributed to a decrease of between 23.1 percent and 18.1 percent in operating profit margin in the current year.
While AVI is not a staple food producer, it secured prices for a substantial quantity of raw materials before the spot prices when commodities dropped sharply, resulting in prolonged pressure on margins in a number of key categories.
But growth in the demand for AVI's beverage and snack brands slowed. "This slowdown can be attributed to high food inflation levels, which led consumers to trade down the value chain. In certain cases, food brands have been shunned for no-name brands or even commodity products," Thompson said.
According to Thompson, wage growth is above inflation levels, and the loss of employment in sectors such as financial services and the automotive industry has reduced consumer buying power.
Though top-line growth slowed in the category, profit had marginally increased from R5.3bn to R6bn in the review period.
Reduced access to funding has frustrated AVI's efforts to disinvest from its underperforming Argentinian hake and shrimp operation, Alpesca.
The group said it remained committed to achieving a disposal during the next year.
During the year Tiger Brands made an unsolicited approach to acquire the entire issued share capital of AVI but later withdrew the proposal.
AVI incurred costs of R6m related to defending the bid from Tiger Brands.
AVI shares fell 1.32 percent to R18.75 on the JSE yesterday.
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