Blue Square-Israel Ltd. announced results for the fourth quarter and full year, which ended December 31, 2002. The Company's revenues for the fourth quarter of 2002 were 1.326 billion new Israeli shekels ($280 million), a decrease of eight percent compared to NIS1.441 million in the fourth quarter of 2001.
Revenues for the quarter reflect the recession in Israel, the accompanying high unemployment, and increasing competition. In addition, when comparing the Company's 2002 revenues with previous results, it is important to note that Israeli GAAP mandates inflationary adjustments of previous period results to reflect changes in Israel's Consumer Price Index, a broad-based index of prices in all sectors of the economy.
During the period from December 2001 to December 2002, the CPI rose by 6.5 percent, while the Food Index (not including fruit and vegetables), which is more applicable to the supermarket industry, rose by only 4.9 percent, indicating a real decline in food prices. Further, the Company's average price changes were below those of both indexes, reflecting a marked shift toward hard discount sales.
Under these circumstances, assuming that there had been no decline in sales volume, the Company's financial statement would still have reflected a decline in revenues. The Company's gross profit for the fourth quarter was NIS361.6 million ($76.3 million) compared with NIS405.5 million in the fourth quarter of 2001.
Gross margins for the quarter declined slightly to 27.3 percent from 28.1 percent in the fourth quarter of 2001, reflecting competition and an increased emphasis on hard discount sales. The Company's operating income for the fourth quarter was NIS46.1 million ($9.7 million) compared to NIS75.3 million in the fourth quarter of 2001.
The operating margin of 3.5 percent in the fourth quarter of 2002 was affected by the decrease in sales and the resulting reduction in gross profit, together with a sharp increase in expenses for security, electricity, and credit card charges. The impact of these items was moderated by successful ongoing efficiency efforts, including a reduction in employee compensation.
The Company recorded financing expenses of NIS12.8 million ($2.7 million) in the fourth quarter of 2002, compared to NIS8.1 million for the comparable period of 2001. The large financing expenses in both of these periods are attributable mostly to the negative CPI recorded in the fourth quarter of 2002 and the fourth quarter of 2001.
The Company's revenues for 2002 were NIS5.548 billion ($1.171.3 billion), a decrease of 6.6 percent compared to NIS5.939 billion for 2001. The decrease reflects Israel's ongoing recession and associated rise in unemployment and increasing competition. In addition, as described above, the results reflect the decrease in real terms of average food prices.
The Company's gross profit for 2002 was NIS1.497 billion ($316.2 million) compared to NIS1.643 billion for 2001. Gross margin for the year was 27 percent compared to 27.7 percent for 2001, reflecting competition, an increased emphasis on hard discount sales, and adjustments made to account for the effect of inflation on the opening balance of inventory.
The Company's operating income for 2002 was NIS223.2 million ($47.1 million) compared to NIS322.8 million in 2001. Operating margin for the year was four percent, compared to 5.4 percent in 2001. As explained above, the operating margin was affected by the decrease in sales and the resulting reduction in gross profit, together with a sharp increase in expenses for security, electricity, and credit card charges. The impact was moderated by successful ongoing efficiency efforts.
The Company recorded financing income of NIS16.2 million ($3.4 million) during 2002, compared to financing expenses of NIS13.4 million in 2001. This reflects the fact that the CPI rose by 6.5 percent during 2002, as compared to 2001, when the CPI rose by only 1.4 percent. The increase in the CPI eroded the excess purchasing power of the unlinked monetary liabilities over unlinked monetary assets, with the resulting gain on net monetary position offsetting interest expense on unlinked bank loans.
In addition, the reduction of financing expenses reflects the fact that the Company has taken advantage of lower interest rates to renew outstanding loans under more favorable terms. The Company recorded Other Expenses, Net of NIS177.3 million ($37.4 million) during 2002. The majority of these expenses were recorded during the fourth quarter of 2002, as explained above.
Commenting on the results, Yoram Dar, Blue Square's President and Chief Executive Officer, said, "The substantial write-downs taken during the fourth quarter reflect the economic consequences of a market plagued by ongoing recession and two years of the difficult security situation.”
“This has reduced prevailing real-estate prices and brought about a market-wide consumer shift towards hard discount formats, impairing the value of some of our assets. The write-downs brought the balance-sheet carrying value of these assets in line with their market value, but forced us to report our first quarterly loss in many years. However, given our profits from the first three quarters, we were able to absorb the charge and to post a small profit for the year,” he added.
"This achievement reflects the success of our conservative operating strategies. Since the beginning of the recession, we have restrained our expansion rate -- a strategy that slowed our revenue growth, but moderated the reduction in sales per square meter. Now, it has paid off by moderating the extent of asset impairment."
Dar continued, "As we move into 2003, our markets remain challenging, with continued low demand, intensifying competition, and high expenses. In light of this reality, we are intensifying our strategies to increase revenues, streamline operations, and minimize expenses.”
He concluded, "Even in today's challenging environment, we are confident that we can continue building market share, improving our revenues, and further reducing our expenses. As we enter 2003, we are working diligently to achieve progress on all these fronts."
The Company's largest shareholder, the Co-Op Blue Square Services Society Ltd. initiated a process under which it plans to sell all of its holdings (78.1 percent) in the Company's Ordinary Shares. The process is progressing and is expected to be completed during the next few months.
Blue Square is a leading Israeli food retailer. Blue Square currently operates 173 supermarkets under different formats, each offering varying levels of service and pricing. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
