When times are tough, cash is king
Mr Price’s value-for-fashion retail slot draws the customers
CASH-based retailers are in the pound seats because consumers are hard up, and nowhere is this more evident than with Mr Price Group, which this week beat the performances of many of its peers.
As consumers battle with rising costs and high unemployment, the outlook for retail companies is subdued. Lowerto middle-income groups are under pressure, unable to shoulder the rising cost of living.
Mr Price Group said this week that consumers were struggling in a consumptionled economy, but that its fashion-value position gave it a strong competitive advantage. The high-fashion, low-cost retailer’s share price rose more than 2% on Wednesday, when it released strong results for the year to March, in contrast to credit-based retailers that have released less impressive results.
Wayne McCurrie, a portfolio manager at Momentum Wealth, said Mr Price was one of the most successful retailers in South Africa.
“They have consistently got their product offering correct and continue to gain market share.” Earnings had always met or exceeded market expectations, he said.
But Mr Price’s share price is down 17% from recent highs because, McCurrie said, it had been trading at exceptionally high valuations.
At its most expensive, the group was at a 36 times priceearnings ratio, roughly twice that of the market average.
“Foreigners were very heavy investors in our retail shares earlier in the year. Given improving global prospects, specifically in Europe, coupled with deteriorating domestic and rest-of-Africa fundamentals, foreigners are now selling heavily,” said McCurrie.
Reuben Beelders, portfolio manager at Gryphon Asset Management, said foreign activity in retail stocks had moved from being a tailwind to a headwind.
Credit-based retailers have been particularly hard hit. In the past month, Truworths’ shares lost 12.3% and TFG lost nearly 17%.
Beelders said Mr Price had held on to the clients it attracted during the financial crisis and benefited from the challenges faced by Edcon’s Jet brand.
He said 15 years ago, Jet appealed to lower-income customers, but had failed to enhance its profile and product offering as these consumers moved up the living standards measure curve. “Mr Price grabbed these customers, offering value merchandise but with hip appeal.”
Beelders said the “easy” money had been made in the local retail market. Now, with ‘HIP APPEAL’: Mr Price Group boasts good results for the year to March, sending its share price up 2%, as its focus on low-price cash sales pays off foreign retailers opening shop in South Africa, the “increased competition is not going to make life easier for the locals”.
Mr Price Group’s cash sales rose 14.9% for the year ended March, ahead of credit sales growth of 7.5%, and comprised 81.9% of total sales. The proportion of credit sales is expected to decrease further as sales in new territories are all cash. During the period, Mr Price’s total revenue grew 13.9% to R18.1-billion.
The group’s headline earnings per share rose 21% and dividends per share jumped 20.3% to R5.80. The market liked what it saw, especially in the midst of dire retail figures, and the share price rose 2.39% on Tuesday to close at R235.49.
To maintain long-term growth, an increased focus is on growing offshore earnings.
Mr Price will open its first test store in Australia this year, in time for the festive season. Whereas some South African retailers have exited Australia after making big losses (such as Pick n Pay), Woolworths bought Australian retailer David Jones for R23.3-billion last year, and appears to be integrating the business successfully.
Mr Price CEO Stuart Bird said: “Based on detailed desktop and on-the-ground research, we believe there is an opportunity for a fashion value retailer in Australia.”
Shane Watkins, a director of fund management company All Weather Capital, said: “My concern is that Mr Price is moving from a very high-return environment in South Africa, where return on equity has been 50%plus, to Australia, which is a substantially lower-return environment.
“In South Africa, a new store has roughly a two-year payback whereas in Australia, this could be as much as five years.”
Cotton On, an Australian retailer, came to South Africa precisely to access these higher returns. “Mr Price are doing the opposite.”
For investors considering retail stocks, Watkins said there had been a significant change in the risk profile of local retailers. Those that have expanded offshore include TFG and Brait to the UK, and Spar to Ireland. “This expansion means we do not really know what the businesses will look like in five years.”