CONSUMER bands conglomerate AVI is walking a few uncomfortable miles with recently acquired health shoe specialist Green Cross. It is clear that the Cape Town-based shoe manufacturer and retailer raised a few blisters on AVI’s income statement in the financial year to end June, and that there will still be some hard yards before Green Cross steps up profitability. AVI acquired Green Cross in July 2012 for around R400m, hoping to add more scale to its existing shoe businesses in Spitz and Kurt Geiger.
AVI’s financial results released last month showed that Green Cross had its retail sales disrupted by major mall renovations and store refurbishments, and that there was a lost sales opportunity from “sub optimal planning and buying activity.” Adding to Green Cross’ woes was additional cost pressure from a weaker Rand. AVI also admitted there was a decrease in Green Cross’ wholesale revenue and slow progress with (unspecified) initiatives.
AVI’s divisional breakdown showed Green Cross’ revenue growing 1,1% to R340m – which is not surprising since. Eight new stores were opened in financial 2016. But operating profit slumped almost 40% to R27,3, reflecting weak demand in a competitive environment. The operating margin was trampled down to just 8% - well off last year’s 13,4%.
The performance by Green Cross looked out of synch with AVI’s other footwear interests with Spitz increasing sales 4% to R1,47bn and posting a 10% drop in operating profit to R320. The margin was down 13,5% to 21,8%.
AVI said there had been a management change at Green Cross in the fourth quarter of financial 2016. The company still appears upbeat about Green Cross’ longer term prospects, and stressed it would continue to invest in retail stores.
The new financial year will see three new stores opened as well as the refurbishment of two existing stores. AVI also believes there will be benefits from improved product ranges, and that Green Cross will be able to leverage improved factory capability at the Epping manufacturing plant, but AVI concedes the Green Cross will be affected by the constrained consumer spending and continued cost pressure from weaker rand.
Perhaps what will be critical for Green Cross in the financial year ahead will be a more intense management focus on revitalising the wholesale function.
By Jenni McCann