Tougher operating conditions hurt Cargills March bottom line; full year profit up

Sri Lanka’s Cargills Ceylon PLC (Cargills) saw its group performance for the January-March (4Q17) quarter adversely impacted by the challenging operating conditions and one-off, non-recurring expenses, but the top-line remained intact.       
Cargills, which operates the country’s largest retail chain with over 300 outlets, saw its bottom line declining by a little over 50 percent to Rs.204.7 million or 91 cents a share during the quarter under review from Rs.412 million reported during the same period, last year, the interim financial showed. 
However, for the financial year ended March 31, 2017, the group, which also has interest in fast moving consumer goods (FMCG) and restaurants, reported earnings of Rs.9.55 a share or a net profit of Rs.2.1 billion, up 32 percent year-on-year (YoY). 
“The second half of the year under review proved challenging amidst a slowdown in economic activity that impacted the FMCG industry as a whole. The slowdown was exacerbated in the fourth quarter of 2016/17 as the full impact of fiscal changes and climatic challenges impacted consumer spending power”, Cargills said in a performance review, which accompanied the financial results. The group turnover for the quarter increased by nearly 10 percent YoY to Rs.20.6, but the cost of sales and administrative expenses rose by a faster 10.2 percent and 28.2 percent YoY to Rs.18.3 billion and Rs.1.1 billion, respectively.  
However, Cargills said, the operating costs includes a non-recurrent expenditure of Rs.132 million on account of restructuring the group’s property portfolio. The operating profit fell by 18 percent to Rs.822.2 million but when the profit is adjusted for the one-off expense, the contraction in operating profit is just 4.3 percent. 
For the full year (FY17), the group turnover rose by about 19 percent to Rs.84.2 billion. The company has 315 Cargills Food City outlets and boasts of being the only retail chain with presence in all 25 districts of country. Cargills has opened 18 new outlets during FY17. Retailers in developed markets are seeing tough competition from e-commerce outfits, such as amazon.com, due to a whopping increase in online shopping and thus have been forced to downsize their operations significantly. 
The 114-year old chain, J.C Penney Co., is among the growing list of American retailers who announced downscaling of operations, closing as many as 140 outlets of its 1000 odd stores, early this year.

Sector analysts opine that Lankan retailers may also have to re-assess their strategy of opening up brick-and-mortar stores given the rapid proliferation of internet and the emergence of e-commerce websites.
However, some argue e-commerce overtaking traditional retailing is still a long shot in Sri Lanka because there is still enough space for the traditional retailers to expand their footprint in relatively under-developed areas in the country. During FY17, the retail business, Cargills’ cash cow, earned a revenue of Rs.66.6 billion, up from Rs.55.7 billion YoY with an operating profit of Rs.2.7 billion. 
The net finance cost in 4Q17 rose by 103 percent YoY to Rs.323.5 million as the short-term borrowings rose by Rs.4.5 billion. Cargills said they are aware of the rising market interest rates amid substantial investments planned over the next three years.  
In March 2017, Cargills group invested close to Rs.3.5 billion in three fully owned subsidiaries. Meanwhile, the group FMCG business increased revenue from Rs.17.7 billion to Rs.20.3 billion during FY17 with an operating profit of Rs.2.1 billion. 
The group restaurant business, which owns the KFC, TGIF franchises, earned a revenue of Rs.3.3 billion, up from Rs.2.8 billion YoY and earned an operating profit of Rs.266.7 million, more than doubling the profit YoY. 
During the year, Cargills invested Rs.3.8 billion in Cargills Bank Limited, the group’s associated company to help the bank to meet its minimum regulatory capital requirements. 
As of March 31, 2017, C T Holdings PLC held 70.2 percent stake in Cargills Ceylon PLC, while the state-run pension fund, Employees’ Provident Fund, held 3.28 percent stake being the third largest shareholder.