Dfi Retail Intl Regulatory News (DFI)

Announcement

7th March 2024

The following announcement was issued today to a Regulatory Information Service approved by the Financial Conduct Authority in the United Kingdom.

DFI RETAIL GROUP HOLDINGS LIMITED

2023 PRELIMINARY ANNOUNCEMENT OF RESULTS

Highlights

· Substantial improvement in underlying profit

· Subsidiaries' performance driven by recovery in Health and Beauty and Convenience

· Associates' performance supported by Maxim's recovery

· Final dividend of US¢5.00 per share

"The Group has been encouraged by the significant improvement in performance in 2023. The recovery in economic activity following the pandemic has, however, brought about changes in customer behaviours to which the Group is still adapting. In addition, higher interest rates, inflationary pressures and a broader economic slowdown on the Chinese mainland are likely to lead to slower growth in 2024. Nonetheless, with the appointment of Scott Price as Group Chief Executive, we are confident in the Group's long-term strategy to deliver the medium- and long-term growth prospects of the Group."

Ben Keswick

Chairman

Results

The final dividend of US¢5.00 per share will be payable on 15th May 2024, subject to approval at the Annual General Meeting to be held on 8th May 2024, to shareholders on the register of members at the close of business on 22nd March 2024.

DFI RETAIL GROUP HOLDINGS LIMITED

PRELIMINARY ANNOUNCEMENT OF RESULTS

FOR THE YEAR ENDED 31ST DECEMBER 2023

OVERVIEW

Following a number of challenging years for the business in a disrupted environment, DFI Retail Group (the 'Group') reported substantially improved performance in 2023. The Group reported total underlying profit attributable to shareholders of US$155 million for the year, an increase of US$126 million compared to the prior year. This profit improvement was driven both by subsidiaries and associates.

OPERATING PERFORMANCE

Total 2023 revenue for the Group, including 100% of associates and joint ventures, was US$26.5 billion, slightly behind 2022 levels. Strong revenue growth in Health and Beauty and Convenience was offset by lower sales within Food and Home Furnishings. Total subsidiary revenue was US$9.2 billion, broadly in line with the prior year, or 5% higher for ongoing businesses (excluding the impact of the Malaysia Grocery Retail divestment).

The Group's underlying profit attributable to shareholders was US$155 million, a substantial improvement from the US$29 million reported in the prior year. Within subsidiaries, profitability was supported by strong recovery in the Health and Beauty and Convenience divisions. The increased contribution by associates was driven by improvement at Maxim's and reduced losses from Yonghui. There was a non-trading loss attributable to shareholders of US$123 million, predominantly due to a goodwill impairment in respect of the Macau business and Giant Singapore, and foreign exchange losses associated with the divestment of the Malaysia Grocery Retail business. These losses were partially offset by gains from property divestments, resulting in total reported profits attributable to shareholders of US$32 million.

Operating cash flow for the period, after lease payments, was a net inflow of US$419 million, compared with US$279 million in 2022. As at 31st December 2023, the Group's net debt was US$618 million, compared with US$866 million at 31st December 2022. 

The Board recommends a final dividend for 2023 of US¢5.00 per share (2022 final dividend: US¢2.00).

PEOPLE

Scott Price succeeded Ian McLeod as Group Chief Executive with effect from 1st August 2023. We wish to thank Ian for his contribution during his six years as Group Chief Executive, when he led a comprehensive business transformation of DFI Retail Group to strengthen its customer propositions. Anthony Nightingale retired from the Board and Audit Committee on 31st January 2024 and we would like to thank him for his contribution to the Company over many years. We are pleased to welcome Weiwei Chen, an Independent Non-Executive Director of the Company, as Chair of the Audit Committee in place of Anthony Nightingale with effect from 31st January 2024. As a result of this appointment, the Audit Committee now has a majority of independent Non-Executive Directors as members.

PROSPECTS

The Group has been encouraged by the significant improvement in performance in 2023. The recovery in economic activity following the pandemic has, however, brought about changes in customer behaviours to which the Group is still adapting. In addition, high interest rates, inflationary pressures and a broader economic slowdown on the Chinese mainland are likely to lead to the rate of growth in the Group's performance reducing substantially in 2024 compared to that of 2023. Nonetheless, we remain confident in the medium- and long-term growth prospects of the Group.

Ben Keswick

Chairman

GROUP CHIEF EXECUTIVE'S REVIEW

INTRODUCTION

It is both a pleasure and a privilege to join DFI Retail Group as Group Chief Executive. I am excited to be part of an organisation with such a long history and which plays such an important role in serving all of the communities where it operates. 

The past few years have been very challenging for the Group, our customers, team members and shareholders. Post the pandemic, there is a need to reset DFI and align the business to a strategic framework focussed on capital allocation priorities and growth plans that will improve performance over the coming years. I believe this realignment of the organisation will generate enhanced returns for shareholders.

Overall financial performance in 2023 has been encouraging. Total underlying profit attributable to shareholders was US$155 million for the year, an increase of US$126 million compared to the prior year. There remains a significant opportunity, however, to continue to build on this profit recovery. I am confident that, with the right focus on our customers, team members and shareholders, as well as the right balance of local autonomy and centralised scale, we will gain share from our competitors and sustainably grow returns for our shareholders.

STRATEGIC FRAMEWORK

Since joining the Group in August, I have visited all our markets and formats, meeting team members and learning about our business and customers. This has been a great opportunity to receive input and I have been impressed by the energy our team members bring to serving our customers. Over the course of this period, a new strategic framework has been introduced: Customer First, People Led, Shareholder Driven. An aligned strategic framework is crucial to supporting the Group's capital allocation priorities and growth plans over the coming three to five years.

Customer First

As a leading retailer across multiple formats in the markets where we operate, we must evolve at the same pace as our customers' changing shopping behaviours. While significant progress has been made over the past few years in enhancing retail fundamentals within the Group, there remain opportunities to improve local relevance across our assortment, Own Brand mix, store execution and design. Additionally, we are resetting our approach to creating a digital proposition across the businesses that is significantly less margin dilutive yet protects our future market share. 

People Led

As a People Led organisation, we are focussed on deeply embedding our values throughout the Group, speeding up decision making and improving Inclusion, Equity and Diversity to ensure local relevancy of decision-making to customers. Our team members are closest to the views of our customers and their voices must be heard.

Shareholder Driven

We have committed to driving improved shareholder returns. We must win with customers, but do this through a disciplined capital and resource allocation model that creates sustainable returns as well achievement of our Environmental, Social and Governance ('ESG') commitments.

ORGANISATION STRUCTURE

An important milestone achieved over the course of the second half of 2023 was the alignment of our organisation structure to the new strategic framework. Our customers, competitors and the markets in which we operate are changing. We must ensure our organisation is prepared to meet the challenge. Decisions that impact our customers must be made close to the customer. Centralised services must add value to the banners through scale and expertise, all delivered through a lean overheads model. We will invest only where our business leaders commit to delivering attractive returns. Based upon these principles, we have moved accountability to a format structure across Food, Health and Beauty, Convenience and Home Furnishings, removing the regional layer. By moving to a format structure, each of our formats will optimise the assortment, digital proposition and store design principles to deliver service, quality and value to our customers in a more consistent manner that can also be tailored to the format's individual strategies.

Aligned to the format structure is a new go-to-market digital strategy. Driving Digital has been a key strategic focus for DFI Retail Group during the past several planning periods and will continue and intensify. We need, however, to revise our strategy based on the post-COVID needs of our customers. The end goal is to provide them with great choice and service at an affordable price, capturing potential opportunities and creating greater synergies between our stores and online businesses. Consequently, accountability for the technology function, the yuu Rewards business and the Digital function has been split. This will enable us to create greater focus on these three important strategic areas and support the creation of a Customer First digital proposition.

2023 PERFORMANCE

The Group reported total revenue from subsidiaries in 2023 of US$9.2 billion, broadly in line with the prior year. Total revenue for the Group, including 100% of associates and joint ventures, was US$26.5 billion, slightly behind 2022 levels. 

The Group reported a subsidiaries underlying profit attributable to shareholders of US$112 million for the full year, over 70% higher than the prior year. Profit from associates was US$43 million, US$78 million higher than the prior year. Total underlying profit attributable to shareholders was US$155 million for the year, an increase of US$126 million compared to the prior year.

Our Health and Beauty business reported over 20% sales growth and nearly 130% profit growth for the full year, driven by traffic recovery from markets reopening and gross margin improvement. Recovery of customer foot traffic also supported strong profit growth for our Convenience division, which grew 74% compared to the prior year. 

Food profit reduced relative to the prior year. Within North Asia, first half performance was impacted by the absence of pantry-stocking seen during the fifth wave of COVID in Hong Kong in the equivalent period last year. However, North Asia Food performance improved in the second half and profit during that period also increased compared to the prior year. South East Asia Food financial performance was adversely affected by intense competition and weakening consumer sentiment caused by rising cost of living pressures.

IKEA saw like-for-like ('LFL') sales decline due to reduced home renovation and furniture demand, as a result of a softening in property market sentiment caused by higher interest rates. Profit also fell, primarily as a result of the revenue shortfall.

The Group's share of underlying profits from associates was US$43 million, representing a US$78 million increase from the prior year. Maxim's reported strong recovery with its share of underlying profit more than doubling relative to the prior year, as customers returned to dining out. The Group's share of Yonghui's underlying losses was US$36 million, an improvement relative to the prior year. Robinsons Retail reported good underlying business performance but its contribution to the Group's profits reduced due to foreign exchange losses and higher net financing charges.

The Group reported strong operating cash flow after lease payments of US$419 million, 50% higher than the US$279 million reported in the prior year. Operating cash flow after lease payments and normal capital expenditure was US$222 million, over six times higher than the US$35 million reported in 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE ('ESG')

The growing awareness of the impact from climate change has sparked a global movement towards sustainable practices and environmental responsibility. As a leading pan-Asian retailer, we have the unique opportunity to contribute to and be part of the solution. Indeed, being part of the solution is an important component of our Customer First, People Led and Shareholder Driven strategic framework.

The Group's strong commitment to ESG is reflected in our three strategic pillars: serving communities, sustaining the planet, and sourcing responsibly across the markets in which we operate. In November, the Group's greenhouse gas emissions targets were validated by the Science Based Targets initiative ('SBTi'). We became one of the first Asian retailers to receive validation from the SBTi for its near-term emissions reduction targets, aligned with its criteria and recommendations. The validated targets cover Scope 1, Scope 2, and Scope 3 greenhouse gas ('GHG') emissions. For Scope 1 and 2, the committed target is to reduce half emissions by 2030. DFI has also pledged separately to achieve net-zero emissions by 2050, with an annual investment plan to achieve this long-term goal. SBTi has also validated DFI's Scope 3 emissions reduction target, focussing on purchased goods and services (category 1) as well other significant categories. 

DFI has also achieved a significant improvement in its independent ESG Risk Rating from Morningstar Sustainalytics, a leading global ESG rating provider, with our score improving from 25.3 in 2022 to 22.9 in 2023. This represents a ranking improvement from top 50% to top 29% in the Global Food Retail sub-industry. DFI's overall management score from Sustainalytics, which assesses the robustness of a company's ESG programmes, practices, and policies, is also rated as 'Strong'. This improvement represents external validation of the strong ESG management efforts that have been made by the Group, despite above-average risk exposure for the sub-industry. These efforts have included proactive climate risk management in line with Task Force on Climate related Financial Disclosures ('TCFD') recommendations and auditing of supply chains against ethical standards.

I am personally passionate about this topic and the achievement of our ESG objectives, particularly our emissions reduction targets, is a core focus of the leadership team. Whilst the journey will not be easy, we believe it is necessary and we will continue to drive the organisation to be a change agent in the markets that we serve.

BUSINESS REVIEW

FOOD

Reported sales revenue for the Food division in 2023 was US$3.3 billion. Excluding the impact of the Malaysia Grocery Retail divestment, revenue for the division reduced by 5%. Underlying operating profit for the division was US$45 million for the year, compared to US$91 million in the prior year.

Wellcome's LFL sales growth in the first half of 2023 was adversely affected by the absence this year of the pantry stocking behaviour that occurred during the fifth wave of COVID in Hong Kong in the equivalent period last year. LFL sales momentum improved in the second half. Nevertheless, the rising frequency of travel from Hong Kong residents into the Chinese mainland is now impacting shopping behaviour, particularly during weekends. Despite the challenges, the Wellcome team continued to execute well in stores, which has supported continued market share gains. While Wellcome profitability reduced in the first half of the year, strong margin and cost control contributed to profit growth in the second half relative to the prior year. Digital growth remains a priority for the Wellcome team and the wellcome.com.hk website launched in October 2023, in addition to the existing app. The yuu Rewards programme in Hong Kong also continues to grow, and now has 4.9 million members.

South East Asia Food sales performance was adversely affected by intense competition and weakening consumer sentiment caused by cost-of-living pressures. Profitability was impacted by soft sales as well as rising cost pressures, particularly labour costs. Growing the contribution from digital sales has remained a key focus area for the management team. The yuu Rewards programme in Singapore, which was launched in October 2022, has now reached 1.5 million members, with the Food banners leading the programme in terms of transaction penetration. In September 2023, the Singapore Food business also launched one hour delivery in partnership with Foodpanda, with initial encouraging results. 

In March 2023, the Group completed the divestment of its Malaysia Grocery Retail business. The sale of all six associated properties in Malaysia completed in the second half of 2023.

CONVENIENCE

Total Convenience sales were US$2.4 billion, an increase of 8% compared to the prior year. LFL sales grew 5% compared to the prior year. Convenience underlying operating profit was US$88 million for the year, an increase of 74% compared to the prior year. 

Within Hong Kong, LFL sales were strong in the first half, as revenues were adversely impacted by the fifth COVID wave in the first half of 2022. LFL sales in the second half were broadly in line with the prior year, as sales were impacted by the rising frequency of outbound travel from Hong Kong residents, particularly during weekends. Operating profit improved strongly due to a favourable shift in mix away from cigarette sales, as well as ongoing strong cost control.

7-Eleven South China reported double-digit LFL sales growth, as the business benefitted from the economy reopening. Strong execution of promotional campaigns and ongoing strong digital sales also supported revenue growth. Profit increased significantly as a result of strong LFL sales growth, favourable margin impact from product mix shift and ongoing strong cost control.

7-Eleven Singapore also reported strong LFL sales growth, as the business continued to benefit from the economy reopening and strong in-store execution. Profit almost doubled, despite labour and utility cost pressures.

HEALTH AND BEAUTY

Health and Beauty division revenue increased by 21% to US$2.4 billion, with LFL sales growing by over 20%. Underlying operating profit increased by 127%, to US$213 million for the year.

In Hong Kong, the Mannings business benefitted from the recovery in the economy and increased tourism traffic. LFL sales were consistently strong over the course of the year and the team continues to execute well in stores, which supported positive market share momentum. Healthcare as a category performed strongly, representing over 50% of Mannings' revenue. Mannings' profit increased significantly due to strong sales growth, gross margin expansion, operating leverage and ongoing strong cost control. In Macau, Mannings also reported double-digit LFL growth, which supported strong profit growth.

Guardian's sales performance in South East Asia was driven by LFL sales growth in Indonesia and Malaysia, although growth did slow in the second half. Guardian's profit also increased significantly in the year. Strong profit growth was reported across all key markets, supported by gross margin expansion and operating leverage. Performance in Indonesia was driven by a recovery in mall traffic, increased demand for beauty products and strong execution of marketing and promotion campaigns in stores. Malaysia performance was supported by strong marketing campaign execution, competitive healthcare pricing and range innovation. Strong commercial execution and changes in product mix supported gross margin expansion in Singapore. During the year, Guardian continued to grow its store network and opened 138 stores. Driving digital growth was also a focus, with e-commerce orders growing over 70% compared to the prior year and fulfillment capability upgraded in both Singapore and Malaysia.

HOME FURNISHINGS

IKEA reported sales revenue of US$794 million, 5% behind the prior year. Overall, LFL sales reduced by 7% in 2023. Operating profit was US$19 million, US$27 million behind the prior year.

IKEA's business performance in its markets has been hampered by a combination of changing customer behaviours post COVID and weak property market activity across our markets. LFL sales performance has been driven by reduced customer traffic, which impacted the business more as the year progressed. Despite strong cost control measures in place, the challenging sales environment materially affected IKEA's level of profit.

Despite the challenging external environment in the short term, the IKEA team continues to invest judiciously for the long-term. In May 2023, the new IKEA Taiwan fulfillment centre became fully operational, providing a key foundation for future e-commerce growth in Taiwan. Supported by enhanced fulfillment capabilities, e-commerce penetration in Taiwan has now increased to over 9%. In 2023, three small store concepts were opened in Hong Kong, with encouraging initial performance to date. The formats will provide IKEA with an opportunity to test and experiment new growth drivers over the coming years.

RESTAURANTS

The Group's overall share of Maxim's underlying profits was US$79 million for the full year, more than double the US$38 million contribution in the prior year. The growth in profit reflects the substantial business recovery in Hong Kong and the Chinese Mainland following the full reopening of their economies, as well as a favourable performance in South East Asia. Maxim's reported strong restaurant growth, as well as solid mooncake sales in the year.

Maxim's continued to expand in the year and reached the milestone of its 2,000th store in December. In March 2023, Maxim's opened its first Shake Shack store in Thailand and has subsequently opened its first The Cheesecake Factory store in the country in early December.

OTHER ASSOCIATES

The Group's share of Yonghui's underlying losses was US$36 million for the year, compared to a US$80 million share of underlying losses in the prior year. The reduction in losses was underpinned by an improvement in gross margin as well as cost optimisation. Nevertheless, Yonghui's sales performance in the year has been impacted by a combination of challenging macroeconomic conditions and intense competition.

Robinsons Retail's underlying profit contribution reduced from US$24 million to US$15 million. Robinsons Retail continued to report strong sales and core net earnings growth. For reporting purposes, however, DFI's share of underlying profits was adversely impacted by foreign exchange losses and higher net financing charges reported by Robinsons Retail.

OUTLOOK

The reopening of economies following the pandemic has had a positive overall impact on the Group's financial performance in 2023. Customer behaviours are, however, rapidly evolving and the Group is dynamically adapting to changing market conditions. In our home market of Hong Kong, for example, we have seen increased levels of outbound travel, particularly into the Chinese Mainland over weekends and public holidays. There remain additional market challenges such as high interest rates, inflationary and wage pressures and uncertainty as to the impact these factors will have on consumer sentiment. Nevertheless, I am confident in the short-, medium- and longer-term prospects of the Group and believe we have put in place strong foundations to drive sustainable growth and shareholder returns over the coming years.

Scott Price

Group Chief Executive