Italtile, listed on the Johannesburg stock exchange (see the Biznews data bank for more details on JSE: ITE), may have taken a bruising in Australia but it is not giving up on its international aspirations. This time, though, it is focusing on terrain closer to home: Kenya is where it expects to build revenue streams beyond our borders.
Namibia, Tanzania and Botswana are all showing signs of promise for Italtile, chief financial officer Brandon Wood tells Alec Hogg and Gugulethu Mfuphi on the CNBC Power Lunch show. And, although two franchisees exited the business, there are exciting plans to build the South African operations – not least of all high-tech IT systems aimed at making it easier and more pleasurable to shop with the retailer.
The Italtile share price is up more than 27% since this time last year, which suggests that investors have generally liked the story they have been hearing from its management. Italtile today reported respectable results for its six months ended December,  with a 16% rise in headline earnings per share (HEPS) to 28c (2012:24c). The company declared a gross interim dividend of 9c per share (2012: 8c). – JC
To watch this CNBC Power Lunch video click here
GUGULETHU MFUPHI: Italtile, South Africa’s longest-standing franchisor and retailer of local and imported tiles as well as other related home-finishing products, has reported credible results despite their weakening trading conditions. Joining us now to unpack the numbers is Brandon Wood. He’s the CFO at Italtile. Brandon, maybe a good point to start on would be the weakening in the Rand, no doubt, impacting your imports as well as business operations in general. I take it…it’s been difficult to hedge against that.
BRANDON WOOD: Firstly, we don’t enter into any type of hedging activities. What we have been able to do – and we’ve seen many benefits at store level – is cap some of those cost pressures in the supply chain  – our Cedar Point business, ITT business, as well as the distribution centre. On the local product, there’s also been a bit of pressure. As you can imagine, the manufacturers with the imported raw materials etcetera, the distribution costs have also increased, but generally, it’s putting real pressure on our margins in the supply chain.
ALEC HOGG:  What about this big stock level build-up that you had…450 million for a business of your size – an R8 billion company – is a huge build-up of stock: wasn’t that a view on the Rand?
BRANDON WOOD: We’d like to say so, yes.
ALEC HOGG:Â Â Was it just lucky?
BRANDON WOOD: It’s more by accident than design, but it is a function of a couple of changes in the business. We’ve taken on nine CTMs. That obviously adds a bit on the inventory line. Our Cedar Point business, in particular, is also working on its range, adding new products while existing products are selling out, but we are at levels that we’re not comfortable with. It’s not that the stock is not saleable. We believe that everything can sell through and we’ll see much better numbers – more reasonable numbers – by year-end.
ALEC HOGG:  It’s so interesting. Leaving that aside, the point you made about conversion of franchise stores on the one hand, which is exactly what Woolies is doing as well: the sale of your Australian operations, which came through this reporting period, and which is exactly what Woolies is not doing. You’re therefore…on the one hand, you’re together, and on the other hand, you’re apart. What’s your strategy on both of those?
BRANDON WOOD: Firstly, on the franchise stores: it was a bit of a once off. We had two franchisees exit the business, and those two franchisees – themselves – had eight stores. Generally, the churn between company on stores and franchises stores in a financial year, is two to three stores, so that’s really once off. The franchise model in South Africa is still very important for us, given our flat management structure, given our values in partnership and entrepreneurial spirit we don’t see that changing in the short to medium term.
ALEC HOGG:  I’m sorry. Just slow down there…how many franchise stores do you have and how many company-owned stores?
BRANDON WOOD: In the CTM space, it’s about a 50/50 split. Top T is more lopsided on the franchise stores. We have 18 franchise stores and 6 company-owned stores. Italtile is purely company-owned.
ALEC HOGG:  So what you’re telling us is that you’re not going to wipe out all the franchise. You’ll buy them all back in.
BRANDON WOOD: Not at all, they’ve very important to our business.
ALEC HOGG:  Okay…Australia…
BRANDON WOOD: Australia: we slogged it out for over a decade there in Australia. The Australian consumer is very different to the South African consumer, so we massaged the business model a bit. Unfortunately, given the economic conditions there in Australia, we really made the call to exit. We didn’t see any long-term growth prospects. Australian business has always been a tiny element of our business, so in many senses, it almost was a standalone business that we’ve now disposed of, but we still have a sizeable property portfolio in Australia. We’ll hold onto that and we’ll gauge it as the property market improves there.
ALEC HOGG:  It’s an NBO and NBOs are not generally known for giving you top dollar, because there’s no one else to sell to except for the management. What was it about Italtile in particular that took you into Australia ten years ago? We’ve seen many companies go in there – Imperial, Pick & Pay, and yourselves – taken a bloody nose, and many other companies like Investec, have gone and done quite well.
BRANDON WOOD: Sure, I don’t know. At that stage, we thought it might be a plug and pay type of scenario, but as I mentioned, it took a lot of hard work. We had changed the offering quite extensively. There are many ‘mom and pop’ types of competitors in Australia that trade off margins we weren’t comfortable trading off of
GUGULETHU MFUPHI: What about your African businesses? You have 16 stores across the continent.
BRANDON WOOD: Yes, our immediate neighbours…we’ve done pretty well in Namibia and Botswana etcetera. On East Africa, we’ve also had a good set of results. We see a lot of opportunity in East Africa. Unfortunately, the infrastructure is a problem. The logistics of our big and bulky stock is always a challenge, but having said that, there are opportunities. Our franchisee in Tanzania opened an additional store and we’re looking for opportunities in Kenya. I guess, as infrastructure development improves in East Africa, there’s plenty of opportunity for us.
ALEC HOGG:  I guess you wish you’d taken all that money you pumped into Australia, into the continent, rather. Hindsight is an exact science. You have however, just appointed a new COO, and brought him over from Massmart – the highly rated Jan Potgieter. He ran Mass Discounters for six years as the CEO there. It’s quite a coup.
BRANDON WOOD: We’re very pleased to have Jan joining us. He came through channels via the non-executive board members. I think he was looking for a new challenge. He’s excited by the business and as I said, we’re very lucky to have someone of his calibre and experience joining us.
ALEC HOGG:  It’s a much bigger business that he was running in the past. Mass Discount is massive.
BRANDON WOOD:Â Absolutely, but like the rest of us he sees the opportunities.
ALEC HOGG:  Now, I have to ask you because when we had Grant Patterson here – Massmart’s Chief Executive, coming back from Walmart in America – he said he felt South African retailers were ten years, at least, behind the Walmart model. Has Jan come with new ideas yet, that he might have picked up from Walmart?
BRANDON WOOD: I don’t think it’s from Walmart, but perhaps his stay in Massmart. Our business has always been entrepreneurial, so we haven’t really embraced some of the more corporate types of stuff. He can bring those types of ideas – new thinking, so we’ll see how it goes. Jan as an individual, is also entrepreneurial himself, so it’s a very good fit for our business.
GUGULETHU MFUPHI: In your results, you also mentioned that you’re focusing on IT innovation in your stores.
BRANDON WOOD:Â Yes.
GUGULETHU MFUPHI:Â Explain that.
BRANDON WOOD: IT innovation in our business is across the spectrum, so from an administration perspective and in-store shopping experience we have a very powerful ERP system that we can continue to leverage off of. We’re look at the web store. Our CTM web store is starting to do quite well for us. We’re quite excited about that. It’s a non-stop thing. My IT spend is quite significant, and we see the benefits. I think we’re quite unique in terms of the handheld Point of Sale (POS) devices we have in our stores, which again speeds up the buying process as well as busts queues. It takes away a bit of the frustration from the shopping experience. In fact, it just enhances it. IT, for us, is a strong focus and I think we have a fantastic IT team that’s doing a great job for us.
ALEC HOGG:  Did somebody visit the Apple store and say ‘hey, we need that here’?
BRANDON WOOD: No, not at all. A lot of it is Greenfields thinking
ALEC HOGG:  What about your website? You did make mention of it and you just referred to it in a moment. Just elaborate…you call it a pre-purchase activity. What is that?
BRANDON WOOD: Consumers are doing a lot of research online and we’re almost trying to build our web store to be a better experience than what you would actually get in-store. The problem with our produce…we face two challenges, really. The consumer’s still a bit sceptical to completely online sales transactions – submitting credit card details etcetera – so there’s a bit of nervousness. From a support perspective in store, what we’re seeing is that consumers still want to touch and feel the product. It’s not as though we’re selling jackets and consumable goods etcetera. It’s a product that…customers just want to make sure around their buying decision – in-store.
ALEC HOGG:  It’s a bit like the motor sector. We hear about car manufacturers who’re getting a lot of pre-purchase activity. Is it similar in your case?
BRANDON WOOD: Yes, we’ve had, over six months, almost 800,000 visitors to our web store. Coming from a base of nearly nothing, that’s really good. We generated huge amounts of quotes – R150 million-odd in that eight-month period- which again, is being converted at a store level.
ALEC HOGG:  I’m sorry – R150 million worth of sales.
BRANDON WOOD: No, they were quotes generated on the web store, which, most of the time, have been converted in-store. There are four types of buying decisions. The consumer will research and buy in-store, research on the web and buy in-store, research and buy on the web, and research on the web. We almost cater for all four. I think it’s a very nice fit into the CTM business model in particular, because we have stores throughout the country and each – effectively – acts as a distribution centre. Our brick and mortar structure is very supportive of our web store, so as I say, we’re pretty excited about it.Â
