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Commentary

The Body Shop


Positioning

The Body Shop is a high-profile global brand which markets naturally-inspired beauty products, focusing primarily on the middle to upper income groups. New Clicks manages The Body Shop under a franchise arrangement in South Africa.

Over the past two years the brand has been repositioned internationally to the "masstige" sector of the consumer market. This positioning differentiates The Body Shop by combining a comprehensive range of personal care products that offer performance and indulgence as well as value.

The naturally-inspired product positioning remains core to the brand with extensive use of community-traded ingredients sourced from local communities around the world.

Review of the year

Sales for the year increased 14% to R58.4 million, although existing stores continued to show negative sales growth for the period. New product launches, particularly in the body care category, contributed to sales growth while gifting ranges doubled in sales volumes. Skin care and make-up sales were muted.

The brand experienced a stronger second half but this was not sufficient to overcome the disappointing first six months and profit declined 5.2% to R9.5 million for the year.

Expense management showed an improvement over the previous year, with the 12% increase in expenses driven mainly by higher occupancy costs and depreciation. Advertising costs were curtailed in the second half of the year and staff expenses well contained.

The margin remained steady over 2004, assisted by a retail price increase in May 2005 and lower inventory markdowns. The margin came under pressure with the introduction of the Clicks ClubCard which enabled customers to earn points on purchases in The Body Shop. The arrangement with ClubCard was discontinued late in the financial year.

Two new stores were opened in Gauteng, namely Woodlands Mall in Pretoria and Clearwater Mall on the West Rand, bringing the total number of stand-alone stores to 25 and an additional two capsule stores within Clicks.

The Body Shop has a strong commitment to the well-being of fellow humans and continues to support The Big Issue project in the Western Cape (refer to the Corporate Citizenship Report). Stores also support local communities through voluntary assistance programmes and the inland region received an award from The Body Shop International for their role in raising funds for the St Vincent's Home for deaf children.

Financial highlights and statistics

 20052004
SalesR'm58.451.3
Sales growth%14.012.0
Comparable stores sales growth%(1.5)8.0
Operating profit before interest and after allocation of net costs of support structuresR'm9.510.0
InventoryR'm2.72.2
Property, plant and equipmentR'm11.48.9
Number of stores  2724
Full-time permanent employees  7676
Weighted trading aream21 5131 214
Net increase in weighted trading area for the year%24.628.9
Weighted annual sales per m2R38 62742 237

Strategy

The key objectives for the year ahead are to grow sales from existing stores, rigorous expense management, implement global marketing strategies of The Body Shop International and relaunch the make-up category early in 2006.

The global strategies will include the introduction of the "Love Your Body" loyalty programme, the launch of a new brand identity under the umbrella of "Made with Passion", increased in-store activity, more intensive staff training and continuous product launches across all merchandise categories.

Store growth will be consolidated as the brand approaches its market saturation level of around 30 stores nationally. New stores opened over the past few years have negatively affected turnover of stores in nearby locations and the brand has been impacted by a lack of awareness in outlying areas. The Body Shop will only pursue more strategic sites in the future.

The expansion plans for the capsule stores within Clicks have been halted owing to space constraints following the introduction of pharmacy dispensaries into Clicks.

Prospects

Sales growth is expected to be enhanced by the adoption of the global marketing strategies, while expense growth is anticipated to level off as fewer new stores are opened. These factors, together with an enhanced margin, should assist profit growth in the year ahead.