Mr Price sees its fortunes turning next year

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Mr Price sees its fortunes turning next year

3:37 CAT | 15 Nov 2016

Money Web (File photo)

After blaming an unseasonably warm winter and aggressive discounting by competitors for its humdrum sales growth – apparel and household goods retailer Mr Price is betting on its discount and value offering as what it takes to ride out SA’s retail malaise.

Mr Price – a no-frills discount retailer – expects an improvement in its sales from summer well into winter next year as it plans to improve its fashion assortment and reinforce its value perception to cash-strapped consumers.

In the 26 weeks to October 1, Mr Price grew its revenue by 1.5% to R9.2 billion on the back of retail sales which have marginally increased by 0.4% to R8.6 billion.

The laggards within the retailer were the Mr Price clothing division and ladies fashion wear brand Miladys – with retail sales declining by 0.5% and 11% respectively.

Mr Price clothing accounts for 59.3% of sales.

Other divisions are faring better: homeware (Mr Price Home and Sheet Street) grew sales by 2.3%, financial services and the cellular division grew sales by 27.2%.

To curtail further declines in sales, Mr Price will invest in “timeless merchandise”, which is more durable than its current high-fashion offering; the competitive pricing of its merchandise and improving the customer shopping experience, said CEO Stuart Bird.

“We didn’t execute our strategy well. Our men’s apparel business performed well and the ladies sector has been the toughest. We had problems on product execution during winter,” said Bird.

But market watchers have been less convinced by Mr Price’s recovery plan with jittery investors sending the stock down by 32% so far this year, wiping R18 billion off its market capitalisation (R34 billion at the time of writing).

Chris Gilmour, an investment analyst with Absa Wealth & Investment Management said Mr Price’s results are poor and “far worse than we thought.”

“They [the results] illustrate the intense pressure consumers are facing. Consumer spending is under pressure, probably more than ever. But Mr Price simply got its merchandise wrong,” Gilmour tells Moneyweb.

Since April, its competitors have been discounting merchandise aggressively, sometimes by as much as 70% off the full price. Mr Price was slow on marking down its goods, resulting in competitors profiting at its expense.

Mr Price’s resilience has been tested, as the ongoing arrival of international fashion retailers such as Cotton On and more recently H&M have impacted the competitive retail environment.

Higher markdowns impacted the Durban-based retailer’s merchandise gross margin which decreased to 39.8% from 40% and the normalised operating profit was down 4.2% at R1.3 billion.

Mr Price’s selling price inflation – a key metric used by retailers to measure movement on merchandise – was 11.4%. “Our pricing is where we want it to be. And our pricing and quality are appropriately pitched,” said Bird.

A warm winter resulted in Mr Price getting its merchandise wrong – it also didn’t have enough knitwear and jackets for the colder days of the season.

Cash sales, which account for 82.6% of Mr Price’s sale, grew by 1.9% while credit sales declined by 6.2% due to the National Credit Regulator’s new credit regulations which seek to rein in reckless lending.

Under the regulations – introduced in March 2015 – additional steps are required for retailers offering store accounts (credit) which include applicants presenting three months’ bank statements and payslips in stores; additional checks with credit bureaus and assessing consumers’ existing financial means to prove if they are worthy of larger amounts of credit.

Mr Price, The Foschini Group and Truworths International call the regulations cumbersome in the process of issuing credit to consumers.

Mr Price was often described as defensive by market watchers because of its cash-based value model. The theory was that during tough economic times, consumers would trade down to Mr Price, putting the retailer in good stead compared to its competitors.

Said Anthony Rocchi, portfolio manager at Rexsolom Invest: “competitor discount activity has diluted Mr Price’s value message to consumers which has called future growth into question and the de-rating in earnings we are witnessing.”

The interim dividend was cut by 8% to 228.2 cents per share.

By: Ray Mahlaka

Source: Money Web