Thursday, May 27, 2010

Value & fashion appeal are key parts of formula, Mr Price CEO

Mr Price Group delivers strong results in tough conditions. South Africa experienced negative GDP growth from the fourth quarter of 2008 and tentatively emerged from the recession in the third quarter of 2009. Despite the difficult trading environment, the group has continued to capture market share as measured by the Retailers’ Liaison Committee (RLC) and achieved sales growth of 10.0% to R9.5 billion. Comparable sales, which include sales of expanded and relocated stores in like-for-like locations, increased by 8.2%.

CEO and Deputy Chairman Alastair McArthur said “Our business model is not built simply on low prices. Value and fashion appeal are key parts of the formula and we strive to delight our customers with our fashionable products at everyday low prices. Past performance has shown that as long as we execute well, the strategy is sound, both in good and poor trading conditions.”

Good fashion interpretations and merchandise calls resulted in lower markdowns with the gross profit percentage increasing from 39.0% to 39.9%. Expenses were well controlled and weighted average space growth was 4.5%. Operating profit increased by 19.9% to R991.5 million and the operating margin increased from 9.6% to 10.5% of retail sales. Net finance income was positively affected by increased cash balances, despite the repo rate decreasing and contributed to profit after net finance income increasing by 20.6%.

Core headline earnings per share, which is a reflection of true trading performance, grew by 21.0%, while, after accounting for the once-off effect of the unbundling of the export partnerships, headline earnings per share were up 9.9%.

The Apparel chains increased sales and other income by 13.1% to R6.9 billion and operating profit by 18.3% to R980.3 million. The operating margin increased from 14.0% to 14.6%. Mr Price once again delivered an excellent trading result, having now gained market share for 48 consecutive months and grew sales by 15.9% with profits well ahead of the previous year. Miladys’ annual sales were down 1.3%, with profits lower than the previous year but the chain showed an improved performance in the second half. Mr Price Sport increased sales by 19.1% to R437.0 million and exceeded internal profitability targets.

The Home chains’ performance continued to be hampered by consumers’ lower expenditure on discretionary home purchases. Sales and other income increased by 3.3% to R2.8 billion and operating profit by 21.5%. The operating margin increased from 3.1% to 3.7%. Mr Price Home recorded sales of R1.9 billion, an increase of 2.6% and gained considerable market share in the second half of the year. Operating profit improved due to an increased gross profit percentage and tight expense control. Sales in Sheet Street increased by 4.9% to R846.4 million with profits in line with the previous year.

The cash flows associated with 83.9% of sales being for cash has resulted in the financial position strengthening, and the group ended the year with cash resources of R1.2 billion. ”Remaining a predominantly cash retailer has also been a fundamental part of the model,” explained McArthur.

Sound inventory management and lower capital expenditure contributed to cash flows from operating activities improving by 30% and exceeding R1 billion for the year. Aided by Project Redgold, stock turn improved from 5.5 to 5.9 times and gross inventories were R71.8 million lower than last year.

There was a continued aggressive focus on credit management and risk processes in response to tougher economic conditions. An improved collections strategy, coupled with a conservative credit granting philosophy resulted in the company maintaining its leading position with regard to the state of its credit portfolio, as highlighted by benchmarking services to which it subscribes. Net bad debt amounted to 3.7% of credit sales or 7.0% of the debtors’ book and the provision for impairment is 9.1%.

As a consequence of the group’s current cash balances, its cash-generative business model and the board’s confidence regarding future performance, the dividend cover has been reduced from 1.9 to 1.6 times. Accordingly, the final dividend has increased by 36.6% to 126.8 cents per share, with the annual dividend being 173.0 cents per share, an increase of 30.1%.

Both the economy and consumers’ disposable income remain under pressure. Although interest rates are at a 30-year low and inflation has decreased to within target range, cost pressures exist in relation to electricity, rates and fuel. “Consumer confidence is increasing, but this is not yet reflected in South African retail sales data and the expected slow pace of the recovery will mean another tough trading year lies ahead,” said McArthur.

The group is cautiously optimistic given the success achieved in the second half of the year by initiatives undertaken to improve performance as well as the recovery prospects of the divisions hardest hit by the recession. The group will continue to look for trading space opportunities and in order to maintain its historical track record of sales growth, will give consideration to new business concepts and opportunities, including acquisitions should the business fit be right.

Said McArthur: “Trading beyond South Africa’s borders represents an exciting growth opportunity for the group. We have had great success with a franchising strategy in Africa and are now considering different models in countries with large potential, including joint ventures and corporate stores which will allow more rapid expansion, better control and improved profitability. We are also dealing with multiple logistics challenges in the various regions. We are proceeding with confidence but are taking care to minimise the risk that comes with international operations.”


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