QUESTION 1 [100 MARKS] KAN Stores (Pty) Ltd ("KAN") operates a chain of retail department stores. It retails cosmetics, ladies' and men's fashion apparel, housewares and small appliances, and ladies' accessories. KAN is a high-end retailer which offers in-house developed brands as well as external brands through large-format department stores, within premium shopping malls in Zimbabwe and Botswana. The company was founded in 1968 and currently occupies over 40 000m of retail space spread over 12 department stores. KAN features a carefully selected range of local and international brands (sourced mainly from the United States and Europe markets) catering to the middle- and upper-class consumer market. In recent years, nearly all retailers in Zimbabwe have struggled as consumer demand has hit multi-year lows as a result of high unemployment and inflation lowering disposable income. The main profit squeeze to high-end stores such as KAN came from less expensive retailers such as Zimbabwe's Woolworths, Sweden's H&M and Spain's Zara, which cut into KAN' customer base, and which frequently also managed to offer more fashionable apparel choices. The consumer slowdown has also been exacerbated by the weakening of the Zim dollar currency, which means higher prices for consumers, especially in imported branded goods. As a result, consumers buy less products, less often. According to the Chief Executive Officer (CEO) of KAN, consumers who used to buy three or four units a month and who regularly spent $5 000 to $10 000 per month, started spending between a quarter and half of those amounts. She also said that in fashion it is key to have a flexible supply chain to react to changes in the market demand. Business model The business model of KAN has always been to stock well-known luxury brands in elegant stores which occupy the most prestigious retail space in Zimbabwe and its neighbouring countries. Over decades and through many peaks and troughs of the retail cycle, KAN continued to grow, largely due to the accumulated experience of an excellent well rounded management team who had an ethos of "over-deliver always". That same ethos still exists in the business today. KAN believes in enriching the retail experience for its customers and prides itself on maintaining meticulous stores, appealing merchandise and employing well-trained staff. KAN is supported by its professional financial Page 2 of 11 managers and its equally experienced pool of shareholders representing private equity houses and pension funds focused on retail investments. KAN competes with clothing retailers, homeware stores and multi-product groups for its share of the broader retail sector and therefore the company's strategic approach has evolved to concentrate on the upper end of the market. Equally strategic, KAN has deliberately shifted their mix of turnover from credit to cash (at present this ratio is now credit: cash = 30:70) over the past three years, building in a measure of protection from interest rate increases and changes in consumer demands. Financial reports Extracts from the most recent annual reports of KAN are presented below KAN Stores (Pty) Ltd Statement of financial position as at 31 May 2022 Notes 2022 $000 2021 $000 ASSETS Non-current assets Property, plant and equipment Goodwill 1 403 056 453 300 2 54 286 81 206 Investment 3 45 714 45 714 503 056 580 220 Current assets Inventories 4 646 321 445 238 5 118 432 121 098 1 267 809 1 146 556 Trade Receivables Total assets EQUITY AND LIABILITIES Equity Share Capital Retained income/(loss) Total equity Page 3 of 11 100 000 100 000 (13 586,00) 42 310 86 414 142 310