Dairy Farm International (Dairy Farm) (SGX: D01) is a leading pan-Asian retailer. The Group operates supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishings stores under well-known brands. The group announced their full-year 2018 earnings yesterday. Here are 12 takeaways from the earnings report:-
1) Sales for the group rose 4% year on year from US$11.3 billion to US$11.7 billion. Revenue was weaker for its supermarkets/hypermarkets division but this was offset by better sales performance in Convenience Stores, Health and Beauty and Home Furnishings.
2) Gross profit rose 6.3% year on year from US$3.4 billion to US$3.6 billion. Gross profit margin improved from 30.4% to 31.1%.
3) Operating profit jumped by 16% year on year to US$426.2 million as total expenses increased by a lower percentage compared to the increase in gross profit. Operating profit margin improved marginally from 3.3% to 3.6%.
4) Dairy Farm recorded lower share of earnings from associates and joint ventures and slightly higher tax expenses, leading to net profit margin being flat for both years at 3.6%. In 2018, Dairy Farm booked an exceptional expense of US$453 million relating to restructuring charges for the Food business in South-East Asia. This charge was only partially offset by a net gain of US$121 million relating to business and property disposals. As a result of the above, adjusted net profit attributable to shareholders plunged 77% year on year to US$92 million.
5) The exceptional items were non-cash in nature and did not negatively impact the group’s cash flow, which remained very healthy. Dairy Farm generated operating cash flows of US$643 million compared to US$671.3 million a year ago. Total acquisitions and capital expenditure for 2018 amounted to US$533.8 million. Free cash flow generated for the year was US$109.2 million.
6) The main acquisitions for 2018 for Dairy Farm were for an additional 51% stake in Rose Pharmacy in the Philippines for US$54.6 million, as well as an additional 7.85% stake in Robinson Retail Holdings Inc and capital injection into Vietnam for a total of US$223.1 million.
7) A detailed strategic review conducted by the group concluded that Food division in Southeast Asia was not viable in its current form, thereby necessitating an impairment charge against the goodwill and assets of the Giant business. Net cash costs relating to the restructuring charge are expected to be less than US$50 million.
8) Though net debt had increased from US$599 million at end-2017 to US$744 million at end-2018 (reflecting additional investments made in the Philippines), the group recommended a similar level of final dividend at US$0.145 per share. Total dividend for the year was similar to 2017 at US$0.21 per share. At Dairy Farm’s last done share price of US$8.94 as at 28 February 2019, the trailing dividend yield stood at 2.3%.
9) The CEO’s review provides details for the immediate restructuring of the Food division, which saw weakness due to consumers’ changing preferences and tastes. The level of change required to deliver improvements, however, will take at least five years to show up. Using consumer insights and intelligence in order to analyze customer and product offerings, Dairy Farm has decided to stop building hypermarkets.
10) The three distinct phases of the group’s Transformation Plan are: Building a Solid Foundation, Delivering Consistently Well and Driving the Dairy Farm Difference. New leaders have been recruited to take a critical look at the business in order to drive positive and long-lasting change to improve the Food division.
11) Dairy Farm has announced five strategic imperatives to drive growth and to realign the business for better performance. These are: grow in China, maintain strength in Hong Kong, revitalise Southeast Asia, build capability and drive digital innovation.
12) The group has revamped their management team and announced over 30 new senior management positions across the group, including new positions such as Chief Digital Officer and Chief Technology Officer. These changes are necessary in order to initiate the changes which will take place across the group in order to re-position it for growth.
The Foolish Bottom Line
Dairy Farm has undergone a pivotal year as the group admits to being slow to respond to rapid changes in the consumer landscape, and has written off their investment in hypermarkets in order to re-position the group for better prospects. Profitability suffered due to the impairment but cash flow remains strong. The group has once again rewarded shareholders with a similar level of dividends to 2017.
It remains to be seen if the radical changes proposed would be able to turn the Food division around, as time is also required to implement the changes and monitor their progress. However, it is a positive sign when management is candid about the mistakes they made and take responsibility for delayed decisions in the past. Painful decisions in the short-term may lead to better outcomes over the long-term, therefore we feel this is a step in the right direction for Dairy Farm.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in the companies mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has a recommendation for Dairy Farm International. The Motley Fool Singapore writer Chin Hui Leong owns shares in Dairy Farm International.