Strong balance sheet a plus in times of crisis

The SA economy has suffered a number of body blows over recent years, which has meant managers have had to spend time on crisis management rather than business growth.

These experiences may well prove to have served as training wheels for business leaders as they navigate the impact that Covid-19 and the downgrade will have on the economy. Very few consumer-facing businesses will come out of this unscathed, with clothing retailers being particularly hard hit as disposable income dwindles.

Share prices of clothing retailers have started to discount the anticipated bad news. But have they fallen enough to pique the interest of long-term investors?

The key to navigating this crisis will be a strong balance sheet and an even stronger customer pull.

Not being classified as an essential service, clothing retailers have had to shut their doors during the lockdown. The questions to ask before investing in a clothing retailer is how the company will cope with a complete loss of rev

enue for a few weeks and how long it will take before it is business as usual again.

Mr Price, which has a strong balance sheet, warrants a look.

Its recent Covid-19 update gives us some indication of what has spooked the market. The share price is down some 35% year to date.

The initial risk to Mr Price early in the outbreak was the impact of China factory closures on its supply chain. Management moved swiftly to replace its sources of most atrisk merchandise. But then demand stopped as SA shut down.

The company’s update provides an indication of how rapidly the demand for nonessential items has fallen since March 15. Mr Price said that in the first two weeks of March, sales grew 8.6%. But between March 16 and 24, sales fell some 22%. If you consider that there would have been no sales in its SA business (which accounts for 92% of group sales) between at least March 27 and this week, you get a picture of the impact of this crisis.

As a result of this slowdown in demand, the measures taken to mitigate supply pressure earlier on in the crisis may have caused stock build-up. This will now likely affect cash generation. Management is negotiating with suppliers to try to change delivery dates.

But the business impact won’t stop there as consumers will become more stretched. In addition to expected pressure on sales, this will also result in debtors book pressure for those retailers that extend credit to their customers.

Mr Price has a business model which is cash rather than credit focused. This should enable the company to emerge from this crisis stronger than some of its peers.

As the JSE goes on sale due to sharp falls in share prices, there’s a lot of value to be found. For the long-term, patient investor, now may be the time to pick up a business like Mr Price, which has an experienced, entrepreneurial and proactive management team, at a discounted price.