By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
AML Foods yesterday unveiled a 61.8 per cent profit decline for its second quarter, blaming a combination of internal issues and a 5-6 per cent decline in per head consumer spending from mid-year 2013.
Admitting that the BISX-listed food retail and franchise group was “disappointed” with its performance for the three months to end-July 2013, Gavin Watchorn, its chief executive, said Bahamian consumers appeared to have “paused” due to uncertainty over the proposed Value-Added Tax (VAT) and Budget tax increases.
And, warning AML Foods shareholders that its third quarter results were also likely to be “weak”, Mr Watchorn said the company’s financial performance would not be back on track until the fourth quarter of its 2014 financial year.
He also revealed that while the group’s Back-to-School sales were up 3 per cent year-over-year, the increase came from increased customer footfall - not growth in average transaction spend.
However, on a brighter note, Mr Watchorn said AML Foods’ $1 million investments in energy savings initiatives this financial year were already paying dividends, with one Domino’s Pizza outlet having reduced its electricity consumption by 20 per cent.
“The issue for us is not people; it’s spending,” Mr Watchorn told Tribune Business of a second quarter, where net income slumped to $171,000 compared to $448,000 for the same period in 2012.
“We have seen a very definite shift in average transaction. Up to mid-summer we were reasonably optimistic about the way things were looking, and mid-summer we’ve just seen a drop,” he added.
While not impacting AML Foods’ various retail formats “across the board”, Mr Watchorn reiterated: “People are spending less money. It’s [average consumer transaction spend] dropped by about 5-6 per cent.
“We saw it in Back-to-School. Our Back-to-School sales were generally up just a little bit, but we worked very hard for it. We got the increase in sales from an increase in traffics, not an increase in spend. They were up 3 per cent.”
Describing the slowdown in per capita consumer spending as “a little concerning for us”, Mr Watchorn said of the possible causes: “I think people have just paused for a moment to see how things settle down.
“They need to see the impact of what’s happening. Through VAT, there’s a lot of increased talk of change.”
With consumer spending estimated to account for two-thirds of Bahamian economic activity, the AML Foods chief executive pointed to the wider effects of a consumer spending slowdown and said: “It’s not good for anybody.”
Given that the Bahamian economy was “relatively close knit”, he explained that the same dollar circulated numerous times via the multiplier effect.
If consumers were not spending, retail employees were among the first to feel it. And, in turn, this resulted in a slowdown in their own spending on items such as car washes and beauty salon visits.
“It runs through the economy very quickly,” Mr Watchorn added.
A further impact from the Budget’s tax and fee increases had been a rise in wholesale prices charged to AML Foods of between 2 per cent to 5-6 per cent, Mr Watchorn told Tribune Business.
And the slowdown in consumer spending meant AML Foods could not immediately respond by raising its own prices, he explained.
“We are still adapting to that,” Mr Watchorn said. “We cannot go out and increase our prices to combat that, as we’ve already seen customer spending is under pressure. Quite honestly, we’re probably looking at a weak third quarter until we get these adjustments made.
“By the fourth quarter we should be OK, but VAT is around the corner, and there will be another impact from that, which is uncertain.”
On a positive note, Mr Watchorn said AML Foods should have implemented all its energy efficiency initiatives by October, and was “very confident we are going to see some good savings”.
To-date, energy savings had ranged across the group from 2-3 per cent to 20 per cent at one Domino’s Pizza store.
“We don’t have a lot of fat, have always been very lean on cost structure, and are always looking at ways to reduce costs and manage margins without having a significant impact on the customer’s ability to spend,” Mr Watchorn said.
AML Foods’ sales were up 18 per cent or $5.513 million for the second quarter, boosted by the impact from its Solomon’s Fresh Market at Harbour Bay. However, that store only opened in late 2012, so like-for-like comparisons are currently misleading.
But, while AML Foods saw net margin dollars generated increase by 16 per cent or $1.443 million, its net margin percentage decreased from 29.5 per cent to 29 per cent.
Mr Watchorn said “a couple of internal factors”, as well as the overall economy, had impacted AML Foods’ performance, although he declined to specify these.
“We’ve got one or two challenges we’re working on ourselves that we will deal with in short order, and we’re not overly concerned about it,” he said.
“It just happened at a bad time with the increase in government taxation, but it’s something we will have back in line in short order.”
Mr Watchorn said the results did not reflect AML Foods’ work on reducing inventory expenses and shrink, or its “healthy” cash flow and operational cash balances.
“We have lots of positives happening, and our results do not truly do justice to the work the management team is doing in many areas,” Mr Watchorn told Tribune Business.
“We just have to focus on our challenges and work our way through them. It may take us a quarter to work through them, but we feel confident we will get back to where we need to be.”
Dionisio D’Aguilar, AML Foods’ chairman, said in a statement: “We are disappointed in our results for this quarter as we have set much higher expectations for our performance.
“Our results are reflective of both internal and external factors, which combined to produce the sub-par results of this quarter.
“We were generally optimistic regarding our performance until mid-summer. However, since then we have seen a definite decline in consumer confidence, which we believe is impacting average spend.”
Despite the reduced profits, AML Foods has continued its programme of profit distribution to its shareholders, paying a final 2012 dividend of $0.04 per share on May 3, 2013, and a dividend of $0.02 per share on July 8, 2013.
A dividend of $0.02 per share will be paid on October 8, 2013, to shareholders on record at October 1, 2013.
Mr D’Aguilar added that the company would not be making any immediate changes to its current dividend policy.
Comments
John 11 years, 1 month ago
The beginning of the year saw excitement for many businesses because the referandum was about to happen and web shops were painting the town blue with marlins. Then the "NO" supporters came across big money and so as much or more was spent in New Providence than during a general election. Then shortly after the csmpaign, many of the persons working on the road works were terminated as the works neared completion. The same is happening as the airport nears completion and the hospital extension. Also many persons who have secure employment, like government workers, still do their shopping abroad, and many have explored online shopping. No jobs were created to fill the ones lost as the work they were doing was completed and so many businesses saw aa drop in sales. Since there are no major works in the pipeline until Bah Mar opens in December, the first 6 months of 2014 will be a serious challenge for many businesses. So much so that a number of them will close doors for good.
Chucky 9 years, 1 month ago
It's ridiculous to think that VAT can be absorbed by customers. The pie is only so big and government just took 7.5% off the top- that money has to come from somewhere, and there is only one pie.
For GDP growth to offset the VAT, the GDP growth must first surpass the rate of inflation. We all know that inflation on most consumer goods is in the 7%-10% range these last few years. GDP growth is somewhere in the 1-2% range at best, and therefore the economy is actually shrinking.
As an example of this effect: 2014 AML Foods sells 100,000 loaves of bread at $3.00 each, total sales of bread = $300,000.00
2015 AML sells $306,000.00 worth of bread, 2% increase of gross bread sales (similar to GDP growth rate). But the inflation (using 7%) has the bread price at $3.21 per loaf. So reality is that the $306,000.00 in sales in this example, divided by the price of new price of bread due to inflation, $3.21 per loaf, = 95,327 loaves of bread. Thus we have a reduction in units sold (year over year ) and a shrinking economy, as less loaves of bread are bought. When the growth of the pie (i.e. GDP) is less than the inflation rate, you have no control over the shrinking sales volume in all industry. While fuel and other commodities are fluctuating, most consumer goods are going up in price at an alarming rate.
Inflation is really currency devaluation, mainly due to the "printing of money" by governments. Obviously market sentiment has an effect on currency values, as investors flock to the USD it tends to shore up its value to some degree, despite all their money printing stimulus packages.
But no thinking individual can deny the real inflation rates far exceed what government propaganda suggests. All governments are in a race to the bottom with their insatiable appetites for debt and resulting increased need of taxes to fund the debt.
One can clearly see that we need to work on real GDP growth, to the point it exceeds actual inflation rates before we can begin to absorb the effects of VAT. Short of this, anyone who thinks VATs appearance in our economy will be absorbed is a wishful thinker.
Our economic pie is only so big, and there is only one, enjoy the view as business and government jockey and fight for their pieces of the pie..........
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