A former darling of the JSE’s clothing retail sector, Mr Price, released its interim results last week. And while turnover rose sharply, even before the impact of acquisitions, bottom-line earnings slumped.
Mr Price is not unique in this regard; arch-rival TFG exhibited a similar situation recently, albeit for somewhat different reasons. The depressing aspect of Mr Price’s poor results is that they show just how cash-strapped SA consumers have become.
Back in the day, value players such as Mr Price would have experienced a reduction in earnings but nothing on this scale. And, of course, the situation is compounded by the recent emergence of extremely cheap Asian retailers such as Shein, which are undoubtedly eating Mr Price’s lunch.
Having said that, Mr Price CEO Mark Blair remains remarkably upbeat about the group’s prospects. Not only has Mr Price insulated itself from the worst aspects of load-shedding via 100% battery backup, but the rotational power cuts should decrease in frequency and intensity from 2024.
For the first nine months of 2023, the amount of load-shedding exceeded for all of 2022 — and by a considerable margin. Interest rates are at an historical high but should start to ease next year, offering some relief to hard-pressed consumers. And for Mr Price the disruption caused by the implementation of new enterprise resource planning software is now in the base and won’t be repeated.
For the six months to end-September 2023, group revenue rose 26.4% to R16.8bn. Operating profit fell 0.4% to R1.9bn, with the operating margin declining by 320 basis points to 11.5%.
Diluted headline earnings per share (HEPS) dropped 9.6% to 439.5c and a dividend of 283.5c a share was declared. The balance sheet is still very strong, with zero interest-bearing debt.
In a more “normal” operating environment, Mr Price would have demonstrated a much more robust, sustained set of financials. And therein lies the dilemma for potential investors, not just in the clothing retail sector generally though specifically in Mr Price.
Unless the government takes action to curb the importation of cheap online fashion retailers from the Far East such as Shein, Mr Price, TFG and others will continue to endure unfair competition. And besides, there are precious few signs that the SA economy is likely to break free of its low growth trap any time soon.
Like TFG, Mr Price has invested through the economic cycle, buying up retail assets at good prices. But unlike TFG, it has achieved this without resorting to increasing debt on the balance sheet.
Theoretically at least, it is well poised to benefit from an upturn in the economy and this probably goes a long way to explaining Mark Blair’s optimism.
Some years ago Blair also spoke of the ambition for Mr Price to become the most valuable retailer in Africa, at a time when it was the JSE’s biggest retailer by market capitalisation.
That ambition seems little more than a pipe dream now. With a market capitalisation of about R41bn, Mr Price is now marginally bigger than TFG (R38bn), though some way ahead of Truworths on R34bn.
However, it is markedly smaller than either Clicks or Woolworths, which are valued at about R70bn, and Shoprite is in different leagues at R152bn. It would Mr Price many years, if not decades, of spectacular earnings and dividend growth to get anywhere near that sort of market capitalisation.
At the current share price of R158.90, Mr Price is trading on a price:earnings ratio of 13.2. That compares with 12.6 for TFG and 9.5 for Truworths, indicating the market is still prepared to confer a slight premium on Mr Price, presumably because of its better long-term earnings track record.
Still, such a premium may prove temporary unless Mr Price gets back on the road to sustainable growth.
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