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Profit growth had slowed due to increasing competition in the tile and bathware retail sector, Italtile said yesterday, but it would respond by increasing the fashionability of products.

August 16, 2007

By Tom Robbins

Cape Town – Profit growth had slowed due to increasing competition in the tile and bathware retail sector, Italtile said yesterday, but it would respond by increasing the fashionability of products.

Chief executive Gianpaulo Ravazzotti said that not only top-end customers at its Italtile chain had become more discerning, but also entry-level customers who shopped at its CTM stores.

Nevertheless, profit growth at the retailer outpaced sales growth in the year to June. Net profit increased 15.9 percent to R270 million, while revenue grew 14.7 percent to R2.58 billion.

This was, however, a slowdown in growth; last year profit grew 22 percent to R2.25 billion.

Shares in the company gained R11, or 4 percent, to R286 in thin trade yesterday, with only 6 719 shares changing hands. Italtile outperformed the general retailers sector, which fell 1.9 percent.

Ravazzotti said the lack of liquidity in shares had been a long-standing criticism voiced by the investment community. The Ravazzotti family are majority owners of Italtile.

Last month the company’s shareholders approved an aggressive share split to improve the tradeability of shares.

Italtile has proposed that investors will get up to 44 shares for every existing share. The move is yet to be approved by regulators.

Referring to what the company described as suboptimal revenue and profit growth, given the prevailing construction boom, Ravazzotti said it planned to inject a more entrepreneurial culture in store management.
“We need to remove the complacency,” he said.

“It is a combination of the continuing pressure of new entrants coming into the market and an overreliance on our brands as opposed to improving service and store offerings.”

Ravazzotti said the residential market for tiles and bathware continued to grow unabated, although this had led to greater market fragmentation with a rise in demand for niche products.

This, he said, was despite frequent reports that new home building had slowed over the last year, with the construction boom having shifted to government infrastructure projects and commercial property developments.

Italtile has no exposure to the infrastructure and commercial property markets.

But Ravazzotti said the residential sector was less cyclical than others. When interest rates climbed, customers shifted to renovating homes as opposed to building new ones.

Despite its disappointment at profit growth, operating margins at the retailer improved from 15 percent to 15.2 percent.

Italtile will pay out a total dividend of R5 for the year, up from R4.30 the year before.