Retail is our business. annual report 2012

Transcription

1 Retail is our business annual report 2012

2 Macintosh Retail Group 2012 Van dit Jaarverslag is een Engelstalige versie beschikbaar. An English language version of this Annual Report is available. Should different interpretations arise between the Dutch and English version of this Annual Report, the Dutch version prevails. This annual report may include rounding differences with figures previously published, or between figures in the Report of the Managing Board and those in the financial statements.

3 Macintosh Retail Group 2012 Table of contents Highlights Key Figures 3 Report of the Managing Board 2012 To our shareholders 4 Retail environment 5 Cross-channel strategy and implementation in Other way of thinking and acting 9 Cross-channel is profitable 14 Accelerated transformation: MacFit 15 Living has perspective 17 Sustainability in 2012 as well Financials and dividend 19 Long-term outlook 20 Financial review of Fashion 32 Living 48 Services 52 Employees and organisation 54 Step-by-step: more transparent, more sustainable 56 Risks and risk management 77 Governance and responsibility statements 85 Report of the Supervisory Board Supervisory Board data 100 Financial Statements 101 Preliminary comment 101 Consolidated balance sheet at December Notes to the consolidated financial statements 110 Company financial statements 162 Notes to the company financial statements 163 Appropriation of results 174 Independent auditor s report 175 The company Shareholder information 176 Directors Data 182 Managing Board member data 183 Three-year summary of Macintosh Retail Group 184 List of addresses 185 1

4 Retail is our business Retail is our business Fashion Preferred retailer of every consumer wishing to purchase shoes or home decoration. Relevant at any moment of purchase and through all sales channels. Cross-channel approach to clients by combining offline and online retail concepts. Powerful retail and product brands. Nationwide store coverage in Benelux and United Kingdom. Supply chain management, resulting in economies-of-group and sustainable business operations being easier to realise. Excellent back-office facilities, systems and cost leadership. Highlights 2012 S t y l e & Q u a l i t y Macintosh Retail Group Turnover up 2.1% due to consolidation effect of Jones Bootmaker. Operating EBIT amounts to 18.1 million (2011: 31.9 million). Accelerated transformation to new retail reality: MacFit. Lower expected growth for the years ahead results in goodwill impairment. One-off gross non-cash effects (MacFit and goodwill impairment in particular) of million. Net operating profit: 10.0 million (2011: 22.0 million); total net result million. Dividend of 0.20 per share, or nearly 50% of net operating profit. Strong balance sheet position, with solvency landing at 43% and lower net debt of 32.3 million (2011: 32.7 million). Living Fashion Turnover up 5.1% to million due to consolidation effect of Jones Bootmaker. Higher gross margin as a percentage of turnover. Operating EBIT amounts to 18.8 million (2011: 29.3 million). Operating EBIT in second half higher than in the same period in All countries made markedly positive contributions to operating EBIT. Living Decline in turnover of 7.7% to million in, again, extremely poor home decoration market. Higher gross margin as a percentage of turnover. Operating EBIT amounts to 6.0 million (2011: 9.6 million). Sale of GP Décors (France). Online Substantial investments in cross-channel future. Online turnover up nearly 50% to 39.3 million, of which 36.1 million in Fashion. Online sales are profitable. Intreza transformed into Fashion NL conversion model (Intreza Shoe Points). 2

5 Retail is our business Key Figures Turnover ( million) 2012 % 2011 % Fashion % % Living % % Total % % Netherlands % % Belux % % UK % % Other 7.0 1% % Operating EBIT (in million) Full year First half Second half Fashion Living Other Operating EBIT Jones Bootmaker consolidated from April 17, Effect full consolidation 2012: million. 2 The item Other includes all group expenses that cannot be directly allocated to sectors. Total ( million) Per share ( ) Net operating result Total net result 1 T Dividend 4, Operating EBITDA Equity : including one-off net effects of million; 2011: including positive effect of 80.0 million, mainly because of sale of BelCompany : regular dividend of 0.16 and extra dividend of 0.04 (2011: 0.33 / 0,37). Turnover Omzet per by sector Turnover Omzet by per country land Operationele Operating EBIT In million 2012 % 2011 % Fashion % % Living % % Total % % In million 2012 % 2011 % NL % % BeLux % % UK % % In million Fashion Living Other Operating EBIT

6 Report of the Managing Board To our shareholders Transition programme MacFit started: Accelerated transformation from traditional retail business to cross-channel retailer We had our own hurricane in It stormed through the non-food markets, leaving in its wake a trail of poor market conditions, changed purchasing behaviour and retailers looking for ways to deal with the situation. But it was also a year in which we strengthened our position in business as well as organisational terms, emerging in good financial shape with a clearly positive operating EBIT. We greatly value this positive development, especially in view of the difficulties currently facing the retail sector. Since the beginning of 2011, Macintosh Retail Group has been engaged in the transformation of its organisation from a traditional retail business to a crosschannel retailer. This means we are seeking to offer our products to consumers via all available offline and online sales channels, at any time. The various sales channels should serve to strengthen one another. The cross-channel approach anticipates changes in the purchasing behaviour of consumers due to the growing role of online sales, which reduces the number of consumer visits to brick-andmortar stores. Initial results proved this approach to be profitable, prompting a decision to speed up the transformation of Macintosh Retail Group. To this end, we initiated the MacFit programme in late 2012, combining investment in crosschannel initiatives with a national and regional optimisation of the number of stores in order to reflect the new retail reality. Partly thanks to the strong balance sheet and sound financial position we have created in recent years, we are now able to move on several fronts simultaneously in the years ahead under the banner of taking a step backward to jump forward. At the same time and despite one-off effects on the result such as goowill impairment and MacFit, we have sufficient financial reserves to pay a dividend to our shareholders. With all these initiatives, both those already undertaken and those in the pipeline, Macintosh Retail Group is once again taking the lead in the non-food retail market. We therefore view the future of Macintosh Retail Group with confidence, even though this is not likely to be fully reflected in our figures for 2013 and 2014 due to external market conditions. Cross-channel 4

7 Report of the Managing Board Retail environment Retail landscape in 2012 We cannot of course deny that spending in non-food retail items has been decidedly flat lately in the countries where Macintosh Retail Group operates. The Fashion and Living markets, too - both quite relevant to Macintosh - had to contend with reluctance on the part of consumers to spend money. Moreover, turnover in non-food retail is not only stagnant, but divided over more and more players and sales channels. The cause is years of growth in the number of bricks-and-mortar stores, floor space and traders, combined with the rise of online retailers. Traffic in shopping streets is declining and the share of online related spending is growing At the same time, the way consumers make their purchases is changing. Stores now compete with laptops, smartphones and tablets as tools consumers use for comparing and buying. Consumers are much better informed and more focused in their shopping, so that shopping streets and shopping centers see fewer visitors while the online share of spending grows. Demographic factors such as an ageing population and declining numbers of young people, as well as the depopulation of certain areas are also major factors - especially locally - in the reduction of traffic to bricks-and-mortar stores. In addition, limited opening hours, vacant stores, measures to discourage traffic and high parking tariffs have dampened interest among consumers in going into town or to a shopping centre. Another typical phenomenon these days is aggressive competition in the form of low prices, high discounts and special offers. This is due both to consumers having become more price conscious because of the stagnant economy and to the price transparency provided by the Internet. Another major reason, however, is that the non-food retail sector remains very traditional. Product ranges are often procured a year in advance, and if sales are disappointing, dumping on the market is usually the only so-called creative solution. In many cases this is not because those ranges are obsolete or of less value, but rather because fellow retailers need to release funds to buy in new seasonal products. One retailer then copies another, because lagging behind with discounts means being passed over by consumers. The margins are under pressure as a result of this, but also because of high raw material prices, a cheap euro that makes it more costly to purchase outside the EU, and suppliers who are sparing with credit and price concessions. 5

8 Report of the Managing Board There is likewise little positive news to report as regards costs. Store owners continue to charge premium rents while store and transport expenses are rising. The Fashion and Living markets in 2012 were therefore facing pressure that was high all around. To make matters worse, the weather in both the spring and autumn was unfavourable. In addition, for the first time in ages, shrinking demand was accompanied by structural changes in purchasing processes and a shifting revenue model. Changes in retail are a constant factor, however, mostly leading to a new state of equilibrium in the longer term. They force retailers to make choices, however, and demand from them a willingness to change. Physical shops offer trust, additional service and security Choices are necessary Although customers have not changed in essence, their way of thinking and acting certainly has. In today s retail landscape, this means many retailers are facing tough choices. Retailers with bricks-and-mortar stores can continue with business as usual into a future that, apart from exceptional cases, will probably be difficult. This has led many retailers to expand their online activities. A point they have ignored, however, is that having a webshop alone is not enough. To operate in the jungle of the big and established online players, substantial efforts are necessary as regards organisation, systems and logistics, as well as marketing. This requires spending that does not immediately yield anything, added factors being that the number of online traders, and with it the competition, has grown, and that extra costs are incurred due to aspects such as online marketing and free shipping and returning of goods. For pure online retailers, too, it is not evident that their existing revenue model is the only correct one in view of the high marketing and logistical costs of their operations. Moreover, although online shopping is highly convenient and possible around the clock, physical outlets offer confidence, additional service and security, plus the opportunity to see, smell and feel products. Some online players have realised this and opened their first bricks-and-mortar stores. Studies indicate that the pure online market share of non-food retail will increase over the next few years, probably to around 15% to 25% in the sectors relevant to our business. Cross-players from the traditional retail sector are expected to account for about half of all online turnover in future. This means that the large majority of future sales will have a hybrid character, with both an online and an offline aspect. These conclusions have led many retailers to serve customers via multiple channels. The range varies from a multi-channel approach based on coexisting channels, each offering a different experience, often uncoordinated and without switching possibilities, to an omni-channel approach that provides customers with a seamless viewing, transaction and user experience of a retail format, regardless of the channel where contact is taking place. Macintosh Retail Group opts expressly for a cross-channel strategy, in which the different channels reinforce one another. 6

9 Report of the Managing Board Cross-channel strategy and implementation in 2012 We made our strategic choices Macintosh Retail Group made its choices early in 2011, thus already early anticipating on market conditions and changes in consumer behaviour. The following are the key principles: Relevancy to all consumers who want to buy our products at any time and via any sales channel, employing a cross-channel approach that extends beyond simply coordinating offline and online activities. Customer service and a personal approach need once again to be main features of a familiar and trustworthy (on and offline) shopping environment. Bricks-and-mortar stores with national coverage are essential for retail of the future, but the function of stores is changing and some stores will have to be closed. Perfect design of back-office processes for stores (web-based and others) to give customers optimum service, utilising systems developed generically by Macintosh Retail Group. A focus combined with some form of risk diversification is characteristic of Macintosh Retail Group. Our strategic choices based on these principles are broadly the following: The choice of Fashion and Living because these two sectors are viewed as having the best potential for influencing relatively fragmented markets and capturing leading positions. Concentration on countries where we either are or can become the leader: currently Benelux and the United Kingdom. Multiple retail brands in each country, each with clear positioning and a unique image for customers, the aim being to satisfy the largest possible share of consumer demand. Investment in cross-channel operations so that we are constantly visible to customers, by developing our online activities further and integrating them with our bricks-and-mortar stores, as well as by selling our products at as many locations as possible, without necessarily having to open our own stores. Amassing customer knowledge in a more structured way than before by investing in databases, systems and customer relationship management, combined with a realignment of marketing tools. Increasing the appeal of and visits to our bricks-and mortar stores, by means of supplementary product ranges, collaborative ventures and additional services, which will increase profitability per m 2 of floor space. Country organisations with, for each store format, considerable emphasis on ownership and responsibility for customer orientation, product range and sales, supported by strong national back offices. Coordination of cross-channel activities and innovations at group level, with local implementation by country and format. Sell our products in as many places as possible 7

10 Report of the Managing Board Pan-country responsibility at group level for product brands, supplier management and procurement, supported by brand managers for each product brand, who perform their work for all relevant formats. Strong emphasis on business intelligence in preparing decisions, so that matters are handled proactively, instead of an explanation being given after the event. Our strategy is unchanged The implementation of the focus strategy took the form of the sale of the BelCompany telecom stores in 2011 and the home decorating stores of GP Décors in France in July We still intend to sell the Halfords automotive chain. Once that transaction has been completed, we will have a consistent portfolio with a stable base and strong retail brands, which we would seek to further expand over the next few years in a profitable manner. In our Annual Report 2011 we described the strategy at length, including the adjustments we expect to have to make to our operations and philosophy in order for our cross-channel approach to be successful. We worked hard on this, in 2011 and even more so in The fact that a number of leading food retailers have also advocated this strategy strongly reinforces our opinion that we are on the right track. Our strategy has therefore not changed, and we have no need to reinvent the wheel. On the contrary, the main thrust in 2013 will be to implement our decision further, and to carry out a wide variety of operating activities faster and more effectively. This accelerated transformation is described in the MacFit programme. Keywords: customer orientation, ownership and group synergy 8

11 Report of the Managing Board Other way of thinking and acting Cross-channel is more than having multiple sales channels Macintosh Retail Group s decision to opt for a cross-channel approach anticipates changes in market conditions and consumer behaviour. Cross-channel is more, however, than the simultaneous operation of multiple sales channels. It requires a different mindset from everyone in the organisation, and an effort to ensure that systems are mutually compatible. This is essential if we are to create a process in which, for example, a shoe ordered online at Scapino is collected and paid for at a Dolcis store. The term cross-channel also implies that we aim to market our products via every existing sales channel. It does not matter whether we market those products through our own sales channels or indirectly through a third party or a wholesaler. In order to achieve this goal, various measures were taken over the course of 2012: Restructuring of Fashion into separate country organisations, in which everything revolves around the core concepts of customer orientation, ownership and group synergy. Integration of back-office activities in the Netherlands, Belgium and the UK. Focus on individual formats within countries, which jointly purchase both from external suppliers and from internationally organised internal product brands, enabling us to combine the benefits of a uniform purchasing policy with our strong retail brands. The function of Intreza within Macintosh Retail Group was converted from that of a purely online player pursuing only its own turnover to an additional crosschannel conversion model for all Fashion formats as well as a platform for external brands. Partnerships with other retailers, both online and in bricks-and-mortar stores, to further enhance the availability of our products. Stronger organisation Customers rightly expect to receive the best possible service from all our sales channels, which means that processes, systems and organisations, both at the front and at the back of web stores and traditional stores have to be perfect. At the same time, the earning capacity of the old-style stores has to be safeguarded as much as possible, while the new-style environment has to be developed further and integrated with the old-style one. This has consequences for all levels of the organisation and requires transformation of mindsets that have existed for years. If this does not happen, then an old-style organisation with new technology eventually becomes nothing more than a costly old-style organisation. Processes, systems and organisations have to be perfect follow us on: For the country organisation structure implemented in Fashion in 2012, everything revolves around the core concepts of customer orientation, ownership and group synergy. Each country has a Managing Director with final responsibility for the financial results of all the formats operating in the country concerned, who at the same time is the manager with responsibility for the sales and marketing relating to one of the formats. Each of these format managers has responsibility for results and is involved every day in all customer-related matters such as store image, product range, pricing, advertising, new social and other media and the relationship between these aspects that is relevant to customers. Alongside the 9

12 Report of the Managing Board Managing Director is the Management Services Director, who is responsible at country level for all financial and back-office activities in support of sales (a service centre unit). Both the Managing Director and the Management Services Director are accountable to the Managing Board for their country s entire operation, with the other format managers being accountable for their own specific formats. This ensures the optimum local market approach within a solid organisational framework. Group Supply Management provides uniform purchasing policy In order to ensure the best possible local customer approach while still securing maximum economies of scale in procurement, the efforts to build up a range and the actual procurement have been separated. Responsibility for procurement in Fashion was delegated to the central Macintosh Product House in Brand managers, each responsible for specific Macintosh product groups, product brands and licences, enter into centralised agreements with suppliers. While those responsible for individual formats will continue to make their own individual decisions on products and product ranges, the aspect of procurement will be facilitated for the Macintosh product brands and licences by the brand managers and the external A brands. This will allow for the maximum leverage of economies of scale across the Group, while maintaining the format DNA. Brand managers only procure products (footwear, clothing, bags, accessories etc.) from suppliers selected in terms of their contribution to the margin, reliability and compliance with the Macintosh Code of Conduct and subject to permanent scrutiny by the central Product House. This helps ensure a standardised and transparent procurement policy, and allows for suppliers to be compared and assessed on the basis of their performance. At Group level, four operating areas which are deemed essential to the future of Macintosh Retail Group and embrace all formats as well as countries have been defined and created. Each of these operating areas is under the control of a Group Director. Product House: supply chain management, supplier management, brands and trends, social responsibility and procurement. Cross-channel: innovations in online and offline retail, customer relation management (CRM) systems and their impact on consumers, together with the corresponding strategies, and activities relating to the cross-channel approach and support by local teams. ICT: technology supporting supply chain, cross-channel, customer relationship and back-office systems. Finance: planning & control cycle, group accounting principles, investment reviews, data analyses, benchmarking and scorecards, together with consolidation. Sales channels and brands of all countries are supported centrally and consistently by the Group management teams and monitored by the Managing Board. We intend to stay in the vanguard of the cross-channel retail business and demonstrated this in 2012 by the launch of operational cross-channel country teams and Group cross-channel management charged with developing aspects such as mobile commerce, location-based marketing, e-fulfilment, web design, social media, apps and search engines and with the development of an E-approach for bricksand-mortar stores. 10

13 Report of the Managing Board Structuring our organisation along these lines and setting specific targets for each operating area allows the Managing Board to determine the contribution to results made by an area or service and assess the responsible parties. This ensures that we can focus entirely on customers and sales, by taking advantage of the latest trends, while keeping innovation and group synergy in mind. Integration of back-office activities The implementation of the country structure in Fashion has led to integration of the Dutch Fashion activities of Hoogenbosch and Scapino into Macintosh Fashion NL. The business activities of all retail formats were transferred to Den Bosch and the back-office activities to Assen. From the time of its acquisition early in 2011, the emphasis at Jones Bootmaker was seen to be on buying and selling, with financial processes and risk management taking second place. The logistics of Jones Bootmaker were organised along traditional lines and not suitable for facilitating the envisaged growth in the number of bricks-and-mortar stores and online activities. The decision was therefore made at the beginning of 2012 to combine all logistic activities, ICT systems and financial processes of Jones Bootmaker and Brantano UK to form Macintosh Fashion UK, in line with Macintosh Fashion NL. The head office and distribution centre of Brantano UK were expanded and their systems and processes adapted to the new situation. The new centre became operational according to plan at the beginning of January 2013, with the commercial activities of Jones Bootmaker transferred from Eastbourne to London s fashion heart early in the year. Scapino s activities in Belgium are to be fully integrated into the Belgian organisation of Brantano BeLux around mid-2013, so that a single shoe platform will be created in that country as well under the banner of Macintosh Fashion BeLux. F ashion BeLux Fashion U K Brantano Jones Bootmaker As a result of these integrations, an amount of 2.8 million was charged against the EBIT for In 2012, the integration effort led to the relocation of activities and people - along with the associated costs and investments - as well as a temporary reduction in management focus on the stores. As a result, however, the back-office aspects of Macintosh Fashion operations in all active countries are now future-proof as well. Brands provide confidence We are expressly opting for multiple retail formats per country, in order to reach the largest possible consumer group at a variety of browsing and buying times. Thanks to clear positioning, a customer, at times belonging to one group of consumers and at other times to another, knows which retail format is appropriate for which buying time. A consumer who buys himself/herself a pair of fashionable shoes online from Manfield s walks just as easily into a Scapino or Dolcis store to get some inexpensive children s footwear. The right balance between own and third-party brands In addition to retail formats, the product brands at the forefront of these formats also instil confidence. Reputable third-party brands are crucial, since these are the brands that attract a significant percentage of the shopping public to (online) stores. Our own product brands are important, too, because they impart an image to a retail format and because they make it easier to differentiate by price and 11

14 Report of the Managing Board margin. Striking the right balance between, and carefully pre-selecting, our own brands and third-party brands, combined with the right price and quality levels, makes a store recognisable for consumers. Find an Intreza Shoepoint in your neighbourhood We therefore put considerable effort during 2012 into evaluating the brands and licences that we carry under the Fashion banner. This led to the selection of a limited number of internal product brands that we include in all relevant Fashion formats in all countries. Central to each brand is that it is linked to a predefined consumer need, positioning, style and product group, and that the brand can be sold in any retail format and by any third party that matches the definition. In this arrangement, each retail formula will select its own products from the product brand range to match its specific format features. One example of such an approach is the successful sale of the Jones Bootmaker product brand not only at Jones Bootmaker but also at the Gordon Scott and Manfield stores, as well as at external retailers such as House of Fraser and Wehkamp. Other successful examples include the sales of Steve Madden/Madden Girl products at Brantano, Invito, Dolcis and Intreza stores, and the No Stress comfort brand at Brantano, Dolcis, Jones Bootmaker, Gordon Scott and Manfield stores. This reinforces the brand experience of consumers and the recognition of our own Macintosh product brands, thus building permanent distinctive power in an environment that presents a huge range of choices from comparable product offerings. By expanding the awareness of our brands, moreover, they become so strong that more and more third parties, both physical and online retailers, are interested in including them in their product ranges. Intreza as an online conversion model In early 2011, we launched a new generation of webshops and with Intreza we introduced the umbrella online shoe platform of Macintosh Retail Group. We expanded this in 2012, realising at the same time that this involves a continuous learning process. For example, although Intreza was successful in the Netherlands as a pure online footwear player for sales to consumers and attracted a decent flow of visitors, at the same time losses were mounting. If turnover maximisation had been pursued, the aggregate loss would have been even greater. In August 2012, Intreza thus abandoned the online-only approach and launched Intreza Shoepoints in all of our Netherlands nearly 500 shoe stores. Shoes ordered online from Intreza can be collected and tried on at Dolcis, Manfield, Scapino, Invito, PRO 0031 and Steve Madden stores. If necessary, it is also possible for shoes delivered to customers homes to be returned to these locations. Customers of the webshops of Macintosh Retail Group s other shoe formats can opt for delivery to any Intreza Shoepoint. In this way, the function of Intreza within Macintosh Retail Group was converted from that of an online player pursuing only its own turnover, to an additional conversion model for all Fashion formats. This supports the following goals: Intreza utilises existing facilities and infra structures, and delivers from the inventories of the store formats and third parties (mostly A brands), which saves costs and reduces the demand for working capital. 12

15 Report of the Managing Board Intreza s online platform is available to the stores, so that customers have access to a much wider range than can be on display there. Moreover, a customer can call on the store personnel for advice, so that sales are made that might otherwise have been lost. As the Shoepoints bring more visitors to the stores and create more opportunities for contact with customers, the stores can increase their own turnover. Customer information from Intreza can be used to the advantage of all store formats. The functionality offered by Intreza is set to be introduced in Belgium over the course of 2013 and subsequently in the UK. Cooperation with third parties From our experience of cross-channel selling, it is more than just collaboration between our offline and online stores. We now also sell shoes through third-party web stores, concessions and wholesalers. Some examples are sales of shoes by Scapino, Dolcis and Manfield via Wehkamp s website, and by Brantano UK on Amazon. Sales of shoes from the Jones Bootmaker collection in the Manfield stores and the collaboration between Jones Bootmaker and the UK s up-market department store House of Fraser also fall under the heading of cross-channel, as do the indirect sales to consumers via the wholesaling activities of Steve Madden. Third parties appear interested in collaboration because of our well-known and broad product range and the solid reputation of our brands. This enables us to generate turnover without opening our own stores. In the end, it makes no difference how our products are sold, as long as they are sold via all the sales channels where consumers look for items. This is the philosophy underlying our cross-channel concept. We also choose the approach of increasing the appeal of stores and thus the number of visitors they attract. The launching of the Intreza Shoepoints is a case in point. Other examples include the collaboration between Scapino and Aktiesport, that between Brantano UK and Greggs, Lotus and Clarks, and the launching of Kiala collection points in the Brantano BeLux stores. Different forms of cooperation, such as Scapino and Aktiesport Use all sales channels in which people search for products 13

16 Report of the Managing Board Cross-channel is profitable 50% increase in online turnover ( million) An increase in turnover with nearly 50% Macintosh Retail Group offers its customers a wide range of options in terms of browsing, purchasing, delivery and return of products. As a result, turnover can be allocated to a sales channel in various ways. It should be pointed out that this is not very relevant to the cross-channel approach, as it does not matter where the consumer buys from - the only important thing is that products are purchased from one of our retail formats rather than from a competitor. In 2012, online turnover rose by nearly 50% to a total of 39.3 million, (2011: 26.2 million) or 4.4% of the Macintosh Retail Group s overall turnover. Turnover from shoe sales represented a share of 5.2%, with Fashion NL achieving an aboveaverage share of 8%. This figure could have been far higher. However, we made a conscious decision to opt for profitable turnover rather than turnover maximisation. After all, there is little point in giving away products at a low price and incurring costs in order to do so. Cross-channel approach has positive impact on EBIT Our cross-channel strategy has proved to be profitable. This is due to the fact that we are in a position to serve each individual consumer in the manner he or she prefers when purchasing products. We are available both online and offline, no matter when the consumer feels the desire to make a purchase. Consumers will be familiar with our retail formats from previous visits to shopping streets and shopping centres. As a result, we can be certain at a relatively low marketing cost that our (online) stores will be first on their minds when they wish to purchase a product. Our infrastructure also plays an important role in this regard. By offering consumers the option of collecting or returning their online purchases via our stores, we can supply these products through our existing distribution system without incurring high additional costs. Depending on the product category, online turnover is expected to grow to approximately 15% to 25% of total non-food turnover. Cross-players from the traditional retail sector such as Macintosh Retail Group are expected to account for about half of all online turnover in future. We believe we will be able to achieve this additional turnover at current or lower cost levels, thus creating financial leverage. This is precisely what we are aiming for. 14

17 Report of the Managing Board Accelerated tranformation: MacFit Acceleration of the cross-channel agenda In order to fast-track the adaptation of Macintosh Retail Group to the new retail reality, the Macintosh Managing Board adopted the MacFit programme at the end of While enabling us to restructure our retail network, the programme also provided for investment in future growth in order to further consolidate the market position of our formats. Thanks to our resolve to launch the cross-channel approach back in 2011, the time has now come for us to reap the benefits. Over the next few years, MacFit will be implemented as a supplement to our existing cross-channel agenda and will focus on the following: Restructuring and downsizing the store network by closing stores that are not expected to have sufficient resilience in the new retail reality; Opening new stores, particularly in the UK); Updating store formulas and sales outlets; and Investing in cross-channel, Customer Relationship Management, ICT and organisation. It is our belief that implementation of the cross-channel approach and the MacFit programme will, in 2013, result in investments equalling the levels of recent years ( million). It is our belief that the loss of approximately 65 million in turnover in the years ahead due to reorganisation of our store network should be largely absorbed by increasing turnover from cross-channel sales and through other initiatives from the MacFit programme. A network of physical shops that covers the country is an absolute necessity Stores remain key A network of bricks-and-mortar stores with nationwide coverage will be crucial in ensuring the lasting success of our cross-channel approach. In addition to the sense of confidence offered by a bricks-and-mortar store and the existing cost structures, customers can choose from a preselected range of products personalised to their preferences by our retail formats. This is an important advantage in view of the current overabundance of products in bricks-and-mortar outlets. Turnover from the traditional bricks-and-mortar stores has been under pressure in recent years, whereas the supply of retail floor space is growing and rental prices for premium locations are going up rather than down. This leads to falling profitability per m 2 and raises the question of whether particular stores have reached the point where it no longer makes sense to keep them open. Although we have never ceased to ask ourselves this, more factors play a role today than just a store s contribution to profit. 15

18 Report of the Managing Board In 2012, we assessed the future potential of each of our stores within a changing retail environment, with a focus on profitability and the long-term contribution of each store to our strategy. Based on these assessments, we have decided to close over 110 stores especially in the Netherlands reducing our overall portfolio of 1,002 stores by approximately 10%. Mainly Fashion stores are affected (around 100), but Living stores will also be closed (around 10). This realignment will have the following effects: A one-off effect on the 2012 EBIT: million. This comprises an asset write-down ( 9.8 million) and a provision for future commitments ( 29.2 million). No cash effect in Recurring annual positive effect on EBIT of approximately 5 million as of Future cash out: limited due to intelligent timing of closures and working capital effect. According to current expectations, consequences for staff members will be minimal. Lower purchasing volumes will not affect purchasing conditions. Successful transformation of PRO 0031 Stores that received a positive assessment will not be exempted from the responsibility of taking action. On the contrary, these stores, too, need to increase their buffer capital in various ways. Macintosh Retail Group is in the fortunate position of renting its stores, with 20% of the leases on average coming up for renewal each year. Although lease renegotiations tend to be difficult in practice, we have given clear instructions to our managers to drive a hard bargain, even if in the end this means leaving a location where we would rather stay as a retailer. Store openings and other MacFit initiatives In addition to closing stores, Macintosh Retail Group will also be opening stores in the next few years. Especially in the UK, we will need a larger number of stores to ensure sufficient coverage to achieve the necessary synergy between online orders and traditional stores. At the same time, we will continue to invest in the updating of existing stores and formulas. Examples include the successful transformation of PRO 0031 with unique local street-style stores, the introduction of the smallerscale Brantano UK formula and the roll-out of the new-style Dolcis stores positioned as the leading family store with renowned brands at premium locations. We will also continue to invest in our retail organisation, in order to ensure that cross-channel is experienced in the location our customers visit most frequently: the store. This means we will also continue to invest in systems and databases that help us support cross-channel more effectively, also via Customer Relationship Management. After all, customers increasingly value a personal approach by staff members or systems familiar with their particulars. 16

19 Report of the Managing Board Living has perspective We cannot ignore the fact that Fashion currently accounts for over 75% of our turnover, Living having become less visible as a result. Despite this, Kwantum performed well in 2012 in a market that was once again very difficult, and we continue to see a healthy future for Living as part of our enterprise. In common with footwear, home decoration products are not primary necessities of life, but consumers will continue to buy them. This is because, on the one hand, shoes and furniture are essential parts of people s lives, and on the other, both have a fashionable side to them, allowing people to express their individual tastes. Kwantum has performed well in difficult times Unlike in the Fashion sector, it is a lot more difficult to establish a market position in the Living sector. This is related to the low purchasing frequency for Living products, with the result that a specific home decoration store is not very often at the forefront of a consumer s mind. In addition, a substantial size is necessary for a strong negotiating position, in view of the limited number of large suppliers of products such as curtains, wallpaper and floor coverings, lighting and paint, and the necessary investments in the complicated supply chains. For these two reasons, new entrants find it difficult to establish a position in the Netherlands like Kwantum s. This insight was also one of the motivations for disposing of GP Décors France in A multi-channel approach is still the norm in the Living sector, with offline and online sales channels operating in parallel, instead of the integrated approach favoured by more and more Fashion retailers. The lessons learned from Fashion will be applied to Living. 17

20 Report of the Managing Board Sustainability in 2012 as well Although price (and value for money) is the main purchasing criterion for consumers in difficult economic times, responsibly manufactured products, transparency, and a sustainable supply chain continue to play a role in buying decisions. The sustainability of our business and its products is a factor of growing importance not only for consumers but also for our other stakeholders, such as shareholders, potential investors, central and local governments, suppliers, lessors and third parties selling our products. We are convinced that the success of Macintosh Retail Group in the future depends on the trust that consumers and other stakeholders place in us. Trust is gained not only through strong retail formats and product brands, but also through consistent corporate responsibility, and professional Balance in responsibility and ethical business practices. We therefore structure our activities in a way that strikes a profitable balance between our responsibility to society, and the individual interests of our shareholders, employees, customers and business partners. This has been the case for years, and 2012 was no exception, despite being a difficult year. We describe our sustainability strategy and related achievements in 2012 in a separate section of this annual report. We set out our supply chain from A to Z, and identify the impact of our activities on the environment as well as on the people who work in the chain. We conduct feasibility studies and perform risk analyses with the assistance of external organisations. In a study carried out by HIVOS (a Dutch development organisation guided by humanist values) as part of the campaign to stop child labour, as well as in research by Rank a Brand into the sustainability of footwear brands, Macintosh Retail Group was hailed as a leader for supply chain transparency. One of the most tangible initiatives for many of our customers was the affordable and comfortable shoe developed jointly with Diabetes Fund Netherlands for diabetic patients. This clearly shows that sustainability can be combined with efforts to penetrate a new market with great potential. Apart from the work at the corporate Macintosh level, there are also many local initiatives as described in the chapter on sustainability. 18

21 Report of the Managing Board 2012 Financials and dividend Markedly positive operating EBIT for 2012 Despite being lower in comparison with 2011, the operating EBIT of 18.1 million was markedly positive. This achievement should not be taken for granted given the current market conditions. Most of the 13.8 million reduction is attributable to the lower turnover of Fashion NL and Living. The negative effect of the Jones Bootmaker consolidation over 2012 as a whole was also considerable, at million. On the upside, the operating EBIT for Fashion in the second half of the year was higher than in the same period in A markedly positive operating result was achieved in all countries where Macintosh Retail Group is active in the Fashion segment. Kwantum achieved an EBIT of 6.0 million despite extremely difficult market conditions. The total EBIT for 2012 was greatly influenced by various one-off effects: Write-down/provision in connection with restructuring our retail network: million. Impairment of Scapino and Brantano goodwill in connection with the sharp downgrading of growth projections for the coming years in 2012: million. Fashion integration costs: million. As a result, total EBIT was firmly in the red, at million. However, it is important to point out that the 39.0 million and 96.3 million write-downs were one-offs and did not have a cash effect in We should also emphasise that the impairment of the Scapino and Brantano goodwill does not mean any loss of confidence in either company. On the contrary, we expect that in future both will continue to make substantial contributions to our EBIT, as they did in the past. Net operating profit and dividend Net operating profit on continuing operations was 10.0 million compared with 22.0 million for The total net result was negative due to one-off effects, and amounted to million (2011: net profit of 99.1 million, including a net profit of 80.0 million from discontinued operations, mainly in connection with the sale of BelCompany). Even after the write-down of the one-off effects, Macintosh Retail Group will retain a strong balance sheet with solvency remaining well above 43%. Furthermore, our relatively low debt of 32.3 million in combination with our earning capacity and projected positive cash flow will allow us to continue investing in Macintosh Retail Group s cross-channel future. We believe in this future and feel our shareholders should be rewarded for their investment in our company over In our view, it is thus justified to make a distribution to shareholders out of our reserves. A dividend will be paid to shareholders of 0.20 per share, representing nearly 50% of net profit on continuing operations of 10.0 million. 19

22 Report of the Managing Board Long-term outlook Fashion Market conditions are unlikely to recover in In 2013 we will especially concentrate on implementing our choices further. To that end, we will set our direction even more according to short-term developments than before, without losing sight of the long term. Following the closure of stores under the MacFit programme, in 2013 Fashion formats will mainly focus on: Making cross-channel activities more tangible for consumers. Customer Relationship Management. Managing/improving gross margin through more intensive use of powerful own brands, better procurement conditions and a smart pricing policy. Cost savings through rental price negotiations, managing head-office expenses, and economies in the area of marketing. Creating awareness among store personnel for the cross-channel approach and providing related training courses, in combination with a modification of the compensation and benefit system. Encouraging local initiatives and entrepreneurship. We do not expect to see a slow transition to a new balance in the Fashion sector until Although most of the growth in Fashion will have to come from crosschannel activities, the opening of new stores will also be necessary, especially in the UK. Apart from organic growth, we also want to play a leading role in the round of consolidation currently underway in the Fashion market. As it first has to be clear what direction the market is taking, as well as which players are thriving and which fall by the wayside, we are exercising the greatest possible caution in this regard. Living For Living in 2013, the top priority will be to improve profitability by increasing the number of visitors to stores, and to improve product ranges and reduce costs, together with profitable cross-channel growth and utilisation of the experience gained in Fashion. Some Living stores will be closed in Kwantum s strong market position and the possibility of becoming a pioneer for cross-channel operations in the Living sector offer plenty of prospects, especially once the home relocation market has picked up and the number of traders in home decoration has declined. However, for Living, as for Fashion, we do not expect to see this happening any time soon. We will conduct an assessment in 2015 to determine whether further investment in Living is justifiable or whether a shift towards Fashion would be more profitable for shareholders We have determined our strategy and made clear choices, and are accelerating our cross-channel future through the MacFit transformation programme. Our gross margin is healthy and we have strengthened our hold on operating processes. Our primary objective remains, however, to generate profitable turnover, and we cannot achieve that without the assistance of consumers. 20