Cautious cheer for OK

OK released an improved set of results for the financial year ended March 2017.

REVENUE went up by 8 percent while gross margins improved to 16,5 percent from 16,1 percent the previous year, management attributed the increase in gross margins to an improvement in sales mix towards high margin products.

Operating margins also had a positive outturn as a result, while profit after tax jumped 801 percent to $6,1 million following the revenue growth and margin improvements.

As an icing on the cake, shareholders were awarded a 0,26 cents per share in dividend, giving them a yield of around 4 percent.

On overall, OK presented a pleasing picture turning around the sombre mood of the previous year.

Without argument, OK is one of the largest retail stores in Zimbabwe boasting of 63 branches on aggregate.

Their wide distribution network has enabled them to capture markets across all demographic divides.

It has also strengthened their brand over the years and consumers can associate with OK.

In a performing economy, management can be able to push sales riding merely on brand equity.

Weak financial results reported over the previous years has however been a rude awakening that in an environment like the current, giants can also plummet due to market challenges.

Consumers are still struggling due to low disposable income and volumes can go down even for goods previously deemed as basic.

Low margin products, mark downs and promotions will take centre stage as businesses strategise to avert an otherwise disastrous fall in sales.

Margins simultaneously take a knock in the process.

Noting such market difficulties, one would then prompt to ask what may have moved OK’s performance in financial year 2017.

Is it a sustainable performance that calls for a toast, or would that be a premature celebration? Performance can be dissected in parts, starting with revenue.

During financial year 2017, the group closed two shops and added three.

On a net basis, the group had an additional store to contribute to revenue and thereby making up part of turnover growth over the year (ignoring square metre movements).

A standardised measure could be the asset turnover which indicates that there was a marginal fall from 3,5 to 3,4 times in 2017.

This means that the efficient utilisation of assets slightly dropped.

Essentially, although the difference is immaterial, the company was able to generate more out of its assets in 2016 than it was able to in 2017.

Next, finx analyses the growth in margins. OK attributed its margin growth partly to a good sales mix.

It has become rare to hear a testimony of an improved sales mix. Most consumers are substituting for cheap, thereby resulting in underperforming companies.

The ability to sustain a favourable sales mix in the current economic situation is low.

On the other hand, a fall in general prices, however, seems to have ceased. Inflation breached into positive territory in February 2017.

Cost of doing business has been increased and this could be the attribute to the emerging inflation, which seems to be cost push inflation.

Food retailers can price in the inflation in their merchandise, resulting in an increase rather than a decline in prices.

Whether margins will grow, maintain or fall depends on how much of the inflation the retailer can pass on to the consumer.

Considerations will be made that demand is still weak, and consumers will not be able to absorb steep price increases.

Either, prices will not reflect the full changes in inflation or volumes will come down should prices edge too high.

Whatever the scenario, margins are likely to fall.

Further headwinds await the business in the near future.

The drop in foreign currency reserves pose a threat to the smooth stocking of the stores as most of their merchandise is imported.

So far they have managed the situation well supported by their relationship with Kawena.

This is of course a business relationship, and should OK fail to pay out their dues, this arrangement may fall away.

Of course the risk of running out of stock lies with every importer.

While the results from OK were improved, the ability to sustain the performance remains doubtful.

The major pull factor is the operating environment where various challenges are at the fore - weak demand, foreign currency shortages, rising inflation in an overall inelastic market - and OK, like most companies, are at the mercy of the economy.

If OK can deliver a similar set of results come next year, then it is thumbs up to the management team.

The anticipation unfortunately is that the deteriorating economy will persist and OK will be negatively affected. - Wires.