At the time of writing, load-shedding had just reared its ugly head once more. Seemingly overnight we escalated from a mildly irritating couple of hours a day through to the full-fat, 7½-hours-a-day version.
By the time you read this, retail sector share prices could have been significantly affected by how much load-shedding there is in July.
At more than R144 a share, Mr Price had already bounced back quite strongly from the 52-week low of R123 a share that we saw at the end of May. This makes it vulnerable to another negative shift in sentiment. It can easily go back there (or worse).
The year ended March 2023 wasn’t a happy time for this retailer. Headline earnings per share was down 6% despite revenue increasing 17%, which tells you something about margins and the Studio 88 acquisition’s contribution to revenue in this period, as that certainly isn’t same-store growth.
The group made a poor comment in the earnings release about how being a value retailer means it is conservative in backup power investment. This is nonsense, as you can’t sell cheaper items in the dark. It also doesn’t make sense in the context of the numerous acquisitions undertaken by the group, none of which can really be described as conservative. What’s more, IM does not think that anyone can accuse Yuppiechef of being a value retailer, so Mr Price has ambitions beyond basic apparel.
In reality, the group was caught off-guard by the extent of load-shedding. To be fair, the level of load-shedding in the second half of the financial year was extraordinary. It affected everything from customer affordability through to practical issues such as the logistics of getting to the local shopping centre.
And, of course, this was over the all-important festive season, dealing a further blow to a retail industry that has been reeling from years of practically nonexistent economic growth. At the time results were released, Mr Price claimed that power solutions would cover the entire store network by the end of June 2023. That deadline has come and gone, so hopefully the group is ready for Eskom’s finest joys.
Eskom is only one of the challenges. Mr Price can’t do anything about the unemployment figures, the food inflation blowing a hole in almost every household budget and the interest rate hikes by the Reserve Bank. With more hikes likely to come from the US Federal Reserve, South Africans probably haven’t seen the top of the rate cycle yet.
The net impact is a severe knock to customer affordability. If you exclude Studio 88 from the numbers, sales were up 2.1% for the year. The second half of the year really spoilt the result, with sales down 0.9%. Inflation, excluding Studio 88, was up 4.1%, so there was a decrease in volumes sold.
Another excellent way to gauge consumer pressure is by comparing growth in cash sales with credit sales. About 87.3% of Mr Price’s sales are cash based, with these sales only increasing by 1.2%, excluding Studio 88. Credit sales grew faster, at 8.3%, in line with a trend observed across several retailers. Bluntly put, consumers are struggling and are trying to buy on credit to make up for it. Credit applications increased by 30.9% as shoppers desperately tried to kick the can down the road. Approval rates fell from 33.1% to 23%.
An environment of sales pressure isn’t good for margins, as inventory needs to be marked down and cleared. Gross profit margin fell by 150 basis points to 39.5%. By the time you get to operating margin, it was a drop of 260bp to 15.1%.
With R5.5bn in acquisitions in the past two financial years vs R4bn in dividends, Mr Price has effectively told the market that it can generate lucrative returns on behalf of shareholders. It takes time to bed these things down effectively and this hasn’t been the easiest environment in which to integrate businesses. An acquisition such as Yuppiechef was expensive but brings genuine diversification into the Mr Price model and gives the group access to customers of a much higher LSM level.
Studio 88 plays in the apparel space, but its customers are more aspirational than the core Mr Price customer. That’s a fancy retail way of saying that the products are more expensive, which means a higher LSM customer is being targeted. Based on anecdotal information, IM suspects Yuppiechef is more resilient in times of economic difficulties than Studio 88. That may prove to be a critical point.
A return to the 52-week low is plausible.
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