DISTRIBUTION & SERVICE D&S SA - 20-F - 20040630 - RESULTS_OF_OPERATIONS
future transactions, the adoption of Technical Bulletin No. 72 is not
expected to have a significant effect on our results of operations, financial
position or cash flows of the company.
Results of Operations
The following table sets forth, for the periods indicated, certain items
in our income statement and their respective percentages of net revenues:
Year ended December 31,
2001
2002
2003
Net revenues
100.0
%
100.0
%
100.0
%
Cost of sales
(77.5
)
(77.2
)
(77.5
)
Gross income
22.5
22.8
22.5
Selling and administrative expenses
(16.6
)
(18.8
)
(18.6
)
Operating income
6.0
4.0
3.9
Non-operating income
0.2
0.1
—
Non-operating expenses
(1.6
)
(2.0
)
(1.6
)
Price-level restatement and foreign exchange gain (loss)
0.6
0.5
(0.1
)
Taxes
(0.8
)
(0.4
)
(0.6
)
Net income
4.3
%
2.3
%
1.8
%
2003 Compared to 2002
For 2003, our net revenues increased 9.9% compared to 2002 to Ch$1,163,000
million (US$1,958.6 million). Our operating income rose to Ch$45,242 million
(US$76.2 million) for 2003, an increase of 6.0% compared to Ch$42,665 million
for 2002. These improvements in our net revenues and operating income resulted
primarily from the opening of new stores, the improved performance of the
Chilean economy and the implementation of our EDLP strategy. Despite the
increases in our net revenues and operating income, our net income for 2003
decreased by 13.3% to Ch$20,819 million (US$35.1 million) as compared with
2002. This decline in our net income resulted primarily from net price level
restatement, an increase in our income taxes and other financial expenses that
more than offset the decline in non-operating expenses incurred in connection
with restructuring charges in 2002 associated with severance payments to former
management and employees. In December 2002, we announced significant changes
to our senior management team, including the appointment of a new chief
executive officer, as well as the departure of four senior executives and
another 70 employees in the corporate offices.
Net Revenues.
Our net revenues for 2003 were Ch$1,163,000 million
(US$1,958.6 million), which represented an increase of 9.9% compared to
Ch$1,058,719 million for 2002. The following table sets forth the composition
of our net revenues for the periods indicated and the percentage change between
periods.
Year ended December 31,
2002
2003
% change
(in millions of constant Ch$)
Hypermarket and Supermarket
Ch$
1,022,833
Ch$
1,112,258
8.7
%
Credit cards
11,257
19,086
69.6
Other
24,629
31,656
28.5
Total
Ch$
1,058,719
Ch$
1,163,000
9.9
The 9.9% increase in our net revenues for 2003 resulted primarily from:
Hypermarkets and Supermarkets
. A 8.7% increase in net
revenues derived from our hypermarket and supermarket business,
to Ch$1,112,258 million (US$1,873 million) for 2003 from
Ch$1,022,833 million for 2002. This increase resulted from an
addition of 23,983 square meters of sales area (one new
Lider
hypermarket, three new
Lider Vecino
compact hypermarkets and two
new
Lider Express
supermarkets), an increase of approximately 8%
over the total sales area at December 31, 2002. These new stores
accounted for 9.3% of our hypermarket and supermarket sales for
2003. Another factor which contributed to the increase in
hypermarket and supermarket business was a 0.3% increase in
same-store sales compared to 2002, compared to a decline of 1.4%
in same-store sales in 2002, which we believe resulted from the
implementation of our EDLP strategy, which helped to increase our
customer traffic levels and, consequently, our net revenues, as
well as the improved performance of the Chilean economy.
•
Credit Card
. An 69.6% increase in net revenues derived
from our credit card operations compared to 2002 reflecting an
increase in our net financial revenues, including primarily
interest and commissions, to Ch$19,086 million (US$32.14 million)
for 2003 from Ch$11,257 million for 2002, which increase was
attributable to a 43% increase in the number of active accounts,
an increase in average monthly account balances per individual
account to Ch$128 million for 2003 from Ch$92 million for 2002,
and our promotion of sales of non-food products through our
Presto
card, leading to increased use of our
Presto
credit card
to purchase higher priced non-food products.
•
Other Revenues
. A 28.5% increase in net revenues
derived from other revenues to Ch$31,656 million (US$53.3
million) for 2003 from Ch$24,629 for 2002. This increase
resulted primarily from increased lease payments received from
merchants leasing space in our stores and in our shopping
centers.
Cost of Sales and Gross Profit
. Our gross profit for 2003 was Ch$261,885
million (US$441.0 million), representing an increase of 8.4%, compared to
Ch$241,642 million for 2002.
As a percentage of net revenues, our cost of sales for 2003 was 77.5%
compared to 77.2% for 2002. Shrinkage for 2003 remained constant at 2.0% of
total sales, as compared to 2.0% of total sales for 2002. The increase in cost
of sales as a percentage of net revenues was principally attributable to the
implementation of our EDLP strategy in the second half of 2003 by which we
reduced our prices by a greater amount than we were able to reduce our costs of
sales.
As a result of our increase in cost of sales as a percentage of net
revenues, our gross margin in 2003 declined to 22.5% from 22.8% for 2002. We
expect to experience continued pressure on our gross margin in connection with
our EDLP strategy.
Selling and Administrative Expenses
.
Selling and administrative expenses
for 2003 were Ch$216,643 million (US$364.8 million), representing a 8.9%
increase as compared to Ch$198,977 million for 2002. As a percentage of net
revenues, selling and administrative expenses fell to 18.6% for 2003 from 18.8%
for 2002 principally due to decreased advertising expenses and labor costs,
which were partially offset by increased utilities costs in each case as a
percentage of net revenues.
Our selling and administrative expenses related to our credit card
operations increased 81.5% to Ch$14,346 million for 2003 (US$24.2 million) from
Ch$7,904 million (US$13.3 million) for 2002. This increase was principally
attributable to our allowance for doubtful accounts which increased 139.5% for
2003 compared to 2002 and other expenses which increased 24.4% for 2003
compared to 2002.
Operating Income
.
Our operating income for 2003 was Ch$45,242 million
(US$76.2 million), representing an increase of 6.0% as compared to Ch$42,665
million for 2002 reflecting the revenue and cost trends described above. As a
percentage of net revenues, operating income for 2003 was 3.9%, representing a
decrease of 0.1% as compared to operating income of 4.0% of net revenues for
2002.
Non-operating Income
.
The following table sets forth, for the periods
indicated, information concerning our non-operating income on a consolidated
basis:
Year ended December 31,
2002
2003
(in millions of constant Ch$)
Interest income
Ch$
459
Ch$
539
Other non-operating income(1)
515
592
Amortization of negative goodwill
346
353
Total non-operating income
Ch$
1,320
Ch$
1,484
(1)
“Other” includes principally equity in earnings of related companies.
Non-operating Expense
.
The following table sets forth, for the periods
indicated, the components of our non-operating expenses on a consolidated
basis:
Year ended December 31,
2002
2003
(in millions of constant Ch$)
Financial expense
Ch$
13,522
Ch$
16,408
Minority interest
63
43
Other non-operating expense(1)
6,372
1,286
Amortization of goodwill
795
795
Total non-operating expense
Ch$
20,752
Ch$
18,532
(1)
“Other” includes equity in losses of related companies, charitable
contributions and, in 2002, severance payments to former management and
employees including our former Chief Executive Officer, current director
and controlling shareholder, Mr. Nicolás Ibáñez Scott.
Non-operating expense for 2003 was Ch$18,532 million (US$31.2 million),
representing a decrease of 10.7% compared to non-operating expense of Ch$20,752
million for 2002. This decrease for 2003 resulted primarily from lower other
non-operating expenses for 2003 of Ch$1,286 million (US$2.2 million), as
compared to Ch$6,372 million for 2002. Other non-operating expense was higher
for 2002 because of restructuring expenses incurred in connection with
severance payments made to former management and employees totaling Ch$4,997
million. See Item 7—“Major Shareholders and Related Party Transactions”.
Price-level Restatement and Foreign Exchange Gain (Loss).
Our net
price-level restatement and foreign exchange gain (loss) amounted to a net loss
of Ch$872 million (US$1.5 million) for 2003, as compared to a net gain of
Ch$5,485 million for 2002. The net loss for 2003 is primarily attributable to
a Ch$2,997 million foreign exchange loss for 2003, compared to a Ch$5,004
million foreign exchange gain for 2002, reflecting the impact of exchange rate
variations on our foreign currency denominated assets.
Income Taxes.
Income taxes for 2003, including current and deferred
taxes, amounted to Ch$6,503 million (US$11.0 million), representing an increase
of 38.3% as compared to Ch$4,703 million (US$7.9 million) for 2002. This
increase occurred primarily because of a larger amount of fixed asset
acquisitions for 2003 resulting in an increase in deferred tax expense relating
to the book versus tax depreciation of such fixed assets. The statutory income
tax rate applicable to Chilean companies for 2003 was 16.5% of income before
income taxes, as compared to 16.0% for 2002. In accordance with Chilean law,
we and each of our subsidiaries compute and pay taxes on a separate,
unconsolidated basis.
Net Income.
Net income in 2003 was Ch$20,819 million (US$35.1 million),
representing a decrease of 13.3% as compared to net income of Ch$24,015 million
in 2002. As a percentage of net revenues, net income was 1.8% in 2003, as
compared to 2.3% in 2002.
2002 Compared to 2001
Net income for 2002 was Ch$24,015 million, representing a decrease of
41.4% as compared to net income of Ch$40,952 million for 2001. As a percentage
of net revenues, net income was 2.3% for 2002, as compared to 4.3% for 2001.
The decline in our net income for 2002 was attributable primarily to a
reduction in our operating income resulting from increases in our operating
expenses such as our selling and administrative expenses and our cost of sales,
as well as from increased non-operating expenses, which together outweighed the
impact of increased net revenues and gross profit.
Net Revenues.
Our net revenues for 2002 were Ch$1,058,719 million, which
represented an increase of 11.5% as compared to Ch$949,713 million for 2001.
The following table sets forth the composition of our net revenues for the
periods indicated.
Year ended December 31,
2001
2002
% change
(in millions of constant Ch$)
Hypermarket and Supermarket
Ch$
920,136
Ch$
1,022,833
11.1
%
Credit cards
7,606
11,257
48.0
Other
21,970
24,629
12.1
Total
Ch$
949,713
Ch$
1,058,719
11.5
%
The 11.5% increase in our net revenues in 2002 resulted primarily from:
•
Hypermarkets and Supermarkets
. A 11.1% increase in net
revenues derived from our hypermarket and supermarket business,
to Ch$1,022,833 million for 2002 from Ch$920,136 million for
2001. This increase resulted from the addition of 45,726 square
meters of sales area (the transformation of six
Ekono
supermarkets into
Lider Vecino
hypermarkets, the opening of five
Lider
hypermarkets, two
Lider Vecino
hypermarkets, and one
Ekono
supermarket), an increase of approximately 17.3% over the total
sales area at December 31, 2001. Same-store sales decreased by
1.4% for 2002 compared to 2001, which reflected a lack of growth
in domestic consumption and additional competition that resulted
as we and our competitors continued to open new stores during
2002. The increase in our selling space more than offset the
costs we incurred in connection with rebranding our former
Ekono
stores and opening our new locations for 2002.
•
Credit Cards
. A 48.0% increase in net revenues derived
from our credit card operations, resulting from an increase in
our net financial revenues, including primarily interest and
commissions to Ch$11,257 million for 2002 from Ch$7,606 million
for 2001, reflecting the increasing sale of our higher-priced
non-food products which our customers increasingly financed with
our
Presto
credit card.
•
Other Revenues
. A 12.1% increase in net revenues
derived from other revenues to Ch$24,629 million for 2002 from
Ch$21,970 in 2001. Our net revenues from other sources remained
relatively constant in 2002 owing to the fact that we did not
open any new shopping centers in 2002 and that we do not own the
property on which many of our newer stores operate.
Cost of Sales and Gross Profit
. Gross profit for 2002 was Ch$241,641
million, representing an increase of 13.0%, as compared to Ch$213,794 million
for 2001.
As a percentage of net revenues, our cost of sales for 2002 was 77.2%, as
compared to 77.5% for 2001. Shrinkage for 2002 represented 2.0% of total
sales, as compared to 1.7% of total sales for 2001. The increase in cost of
sales as a percentage of net revenues was principally attributable to the
increase in shrinkage as compared to 2001. Shrinkage increased for 2002
primarily because of changes to the product mix offered in our stores, notably
the increase in higher-priced non-food products such as home appliances and
electronics.
As a result of the increase in cost of sales as a percentage of net
revenues, our gross margin for 2002 increased to 22.8% from 22.5% for 2001.
The costs associated with our credit card business are included in our
selling and administrative expenses.
Selling and Administrative Expenses.
Selling and administrative expenses
for 2002 were Ch$198,977 million, representing a 26.6% increase as compared to
Ch$157,179 million for 2001. Additionally, selling and administrative
expenses, as a percentage of net revenues, were 18.8% for 2002, representing an
increase of 13.2% as compared to 16.6% for 2001. The increase in our selling
and administrative expenses in 2002 was largely the result of the opening of
new stores and the development of recently opened stores, as well as increased
losses as we expanded our credit card operations. As a percentage of net
revenues, selling and administrative expenses increased in 2002 because we were
unable to offset these increased expenses with corresponding growth of our net
revenues.
Our selling and administrative expenses related to our credit card
operations increased 48.0% to Ch$7,904 million for 2002 from Ch$5,341 million
for 2001. This increase was principally attributable to our provisions for
doubtful accounts which increased 57.3% for 2002 compared to 2001 and other
expenses which increased 55.0% for 2002 compared to 2001.
Operating Income.
Our operating income for 2002 was Ch$42,665 million,
representing a decrease of 24.6% as compared to Ch$56,615 million for 2001
reflecting the variations described above. As a percentage of net revenues,
operating income for 2002 was 4.0%, representing a decrease of 33.3% as
compared to operating income of 6.0% of net revenues for 2001.
Non-operating Income
.
The following table sets forth, for the periods
indicated, information concerning our non-operating income on a consolidated
basis:
Year ended December 31,
2001
2002
(in millions of constant Ch$)
Interest income
Ch$
1,011
Ch$
459
Other non-operating income(1)
256
515
Amortization of negative goodwill
346
346
Total non-operating income
Ch$
1,613
Ch$
1,320
(1)
“Other” includes principally gains on sales of fixed assets and tax
refunds.
Non-operating income in 2002 was Ch$1,320 million, representing a decrease
of 18.1% compared to non-operating income of Ch$1,613 million in 2001. This
decrease was principally a result of a decrease in interest income.
Non-operating Expense.
The following table sets forth, for the periods
indicated, the components of our non-operating expenses on a consolidated
basis:
“Other” includes equity in losses of related companies, charitable
contributions and, in 2002, severance payments to former management and
employees including our former chief executive officer, current director
and controlling shareholder, Mr. Nicolás Ibáñez Scott.
Non-operating expense for 2002 was Ch$20,752 million, representing an
increase of 34.5% compared to non-operating expense of Ch$15,424 million for
2001. This increase resulted primarily from higher financial expenses and an
increase in other non-operating expenses for 2002 of Ch$6,372 million, as
compared to Ch$1,689 million for 2001. Other non-operating expense was higher
in 2002 because of charges recorded in connection with severance payments made
to former management and employees totaling Ch$4,997 million. See Item
7—“Major Shareholders and Related Party Transactions”.
Price-level Restatement and Foreign Exchange Gain (Loss).
Our net
price-level restatement and foreign exchange gain (loss) amounted to a net gain
of Ch$5,485 million for 2002, as compared to a net gain of Ch$5,760 million for
2001. This net gain for 2002 was primarily attributable to a Ch$5,004 million
foreign exchange gain in 2002, compared to a Ch$6,234 million foreign exchange
gain in 2001, reflecting the impact of exchange rate variations on our foreign
currency denominated assets.
Income Taxes.
Income taxes for 2002, including current and deferred
taxes, amounted to Ch$4,703 million, representing a decrease of 38.2% as
compared to Ch$7,612 million for 2001. This decrease was attributable
primarily to changes in our deferred taxes and higher non-operating expenses,
resulting in part from severance payments in 2002 to former management and
employees. The statutory income tax rate applicable to Chilean companies for
2002 was 16.0% of income before income taxes, as compared to 15.0% for 2001.
Starting on January 1, 2001, we began to record all deferred taxes arising
from temporary differences, tax losses and other events that create differences
between the book value and tax basis of our assets and liabilities. Pursuant
to Technical Bulletin No. 71 of the Chilean Institute of Accounts, deferred
taxes are accounted for by reference to the income tax rate effective during
the year in which such deferred taxes are recognized. In 2002, the income tax
rate began to increase progressively and is scheduled to reach a maximum of 17%
in 2004. In accordance with Chilean law, we and each of our subsidiaries
compute and pay taxes on a separate, unconsolidated basis.
Net Income.
Net income in 2002 was Ch$24,015 million, representing a
decrease of 41.4% as compared to net income of Ch$40,952 million in 2001. As a
percentage of net revenues, net income was 2.3% in 2002, as compared to 4.3% in
2001.
Impact of Inflation, Price-level Restatement and Foreign Exchange
Chilean GAAP requires that financial statements recognize the effects of
inflation. We are therefore required to adjust our financial statements to
reflect the effect of variations in the purchasing power of the Chilean peso
during each year. These adjustments are based on the variation of the official
Chilean CPI from December 1 to November 30 of each year, with the exception of
assets and liabilities denominated in foreign currency which are adjusted to
closing exchange rates at period-end. For practical reasons, the CPI
adjustment used to compute the price-level restatement is delayed one month.
See Note 2 to our consolidated financial statements for a description of these
price-level adjustments.
Because of Chile’s past history of relatively high inflation, the
financial markets have developed a system of borrowing or lending in UFs. The
debt associated with our long-term assets, including our property, plant and
equipment and the bulk of our other current assets and liabilities is
denominated in pesos and any adjustment necessary for price-level restatement
is reflected in the price-level adjustment account. The use of UF-denominated
transactions offsets the effect of inflation in the preparation of price-level
adjusted financial statements. For example, a company with UF-denominated
obligations will record both a financing cost (from the adjustment to the value
of the UF due to the effects of inflation) and a price-level gain (from holding
a liability during a period of inflation) of comparable amounts, excluding the
difference between actual inflation and the inflation rate used for purposes of
the UF index. In the case of UF-denominated assets, the price-level adjustment
(a loss) and the UF valuation (a gain) also offset each other, with the
exception of the difference in the UF index referred to above.
The required price-level restatement of our non-monetary assets and
liabilities, equity and income-expense accounts in 2003, together with foreign
exchange gains (losses), resulted in a net loss of Ch$872 million (US$1.5
million), compared to a net gain of Ch$5,485 million in 2002. This was
principally due to lower rates of inflation applicable to our non-monetary
assets, the appreciation of the Chilean peso (affecting our dollar-denominated
assets) and the fact that a greater proportion of our liabilities are
denominated in Chilean pesos and not in UFs.
We finance a portion of our current and fixed assets with short-term and
long-term liabilities denominated in foreign currency. Because assets are
generally restated using the Chilean CPI and liabilities in foreign currency
are restated to closing exchange rates, the price-level restatement line in our
consolidated statements of cash flows is affected by the relationship between
local inflation and the exchange rate of the Chilean peso against the
applicable foreign currency. Lower rates of Chilean inflation have increased
the relative importance of the foreign currency exchange rate conversion as a
component of the price-level restatement credit or charge in our consolidated
statements of income.
Liquidity and Capital Resources
Overview
Our principal uses of funds are for capital expenditures, dividend
payments and the repayment of short-term and long-term liabilities. We have
historically met these requirements by using cash generated from our
operations, as well as through short-term and long-term debt. We believe that
these sources of funds, together with our cash and cash equivalents on hand,
will be sufficient to enable us to meet our currently contemplated capital and
debt service requirements.
In 2004, we expect our major cash needs to include:
•
repayment or refinancing of short-term contractual
obligations in the amount of Ch$75,280 million (US$126.8 million);
•
repayment or refinancing of outstanding debt incurred in
connection with our acquisition of Carrefour Chile S.A. in the
amount of Ch$53,000 million (US$90 million);
•
budgeted capital expenditures of Ch$59,380 million (US$100 million);
•
budgeted cash dividends of approximately Ch$17,250 million (US$29.1 million); and
•
increased working capital needs, primarily in connection with
our planned expansion of our credit card operations in the amount of
Ch$41,500 million (US$70 million).
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