Zara franchisee Fawaz AlHokair's Q1 profit slips on additional costs

Company says implementation of new accounting procedures resulted in expenses related to additional lease liabilities

Makkah Mall operated by Arabian Centres.Owner Fawaz Alhokair reported a 10 per cent drop in its second quarter net income. Reuters

Fawaz Abdulaziz AlHokair, a Saudi Arabian retailer, reported a 10 per cent decline in first-quarter net income as the company booked additional costs under new accounting requirements.

Net profit for the three months to June 30, dropped to 224 million Saudi riyals (Dh219.4m) the company said in a statement to the Tadawul bourse, where its shares trade.

AlHokair, which owns the franchise rights for brands such as Zara and Banana Republic in Saudi Arabia, attributed the fall in quarterly profit to additional costs of 26m riyals under accounting procedures implemented in April. These costs, the company said, were associated with the recognition of additional 4.65 billion riyals of right-of-use assets, as well 4.53bn riyals in lease liabilities.

Before the implementation of IFRS 16 accounting procedures, AlHokair booked a record net profit, the company said.

“The application of IFRS 16 had a significant impact,” it said in the bourse filing. “[AlHokair] produced a significant increase in both depreciation expense and finance costs, and a significant decrease in rent expense as compared to prior periods.”

The company said its revenues for the three months to June-end slipped by 6 per cent year-on-year to 113.3m riyals as it optimised its portfolio through closure of non-performing stores and disposal of weaker brands. It disposed of the Marks & Spencer brand and terminated its franchise agreements with a number of other non-performing brands, which in the first quarter of this year collectively contributed 160m to company’s revenues, it said.

Earlier this month, AlHokair signed an agreement to purchase 100 per cent of Innovative Union Company from Food and Entertainment Company, adding to its portfolio of cafes and restaurants. The deal is expected to contribute to the company's earnings per share from the first year of acquisition.

"This exciting transaction marks our company's successful expansion into the food and beverage sector," said Marwan Moukarzel, chief executive of AlHokair. "The acquisition gives us a kingdom-wide portfolio of strong brands that cover a wide range of tastes and products and fast-growing challenger brands with significant growth potential."

The proposed acquisition will contribute to "a better financial position" for the company as Innovative Union will also help to improve sales volume, increase profitability and product diversification, in line with the company's future strategy, he said at the time.

The deal adds 10 international brands and more than 200 branches around the kingdom to AlHokair's portfolio, with plans to open 80 new branches during the next five years, it said.

AlHokair Group in May raised 2.47bn riyals when it sold shares in its malls unit, Arabian Centres Company, the biggest Saudi initial public offering since lender National Commercial Bank raised $6bn (Dh22.03bn) in 2014.