Fashion retailing conglomerate Pepkor released its results for the six months ended March 2024 in May.
Highlights included gross margins improving by 2% to a healthy 38.1%, revenue increasing by 9.5% to R43.3bn and operating profit (on a normalised basis) growing 13% to about R5.1bn.
These metrics reflect a decent set of results, especially considering the challenging retail environment, with consumers unable to reach deep into their pockets due to high living costs and unemployment.
On top of this, retail companies that import goods have had to deal with supply chain disruptions resulting from delays caused by inefficiencies at local port terminals.
In the past, Pepkor has focused mainly on cash sales. This has traditionally reduced the group’s risk profile relative to its peers, with a heavier credit sales focus during periods of increasing interest rates. These results were no different, with cash sales making up 87% of income generated.
But what is highlighted is that the group grew credit sales by 34%, compared with cash sales growth of a meagre 3.8%. This growth seems to have resulted from a well-targeted strategy and strong investment in its retail credit book.
Increasing credit sales is not necessarily bad, but it does add an extra layer of risk which investors will need to keep a beady eye on in future.
For now, the group is managing credit sales quite well, considering that nonperforming loans have not spiralled despite the challenging economic environment and the growth in the retail credit book.
Despite group debt being well under control and remaining flat compared with last year, a potential negative from the results is the slight increase in finance costs. This is predominantly due to higher interest rates and should ease on the back of a potential lowering of net debt, as well as the possibility that the interest cycle has peaked and interest rates could come down in the near future.
In February, the group announced the sale of The Building Co. This will strengthen the balance sheet, as the expected proceeds of R1.2bn will reduce debt and fund growth opportunities. The sale is still subject to approval by the Competition Commission.
With the exit of the building materials segment, the group now operates under two broad segments: traditional retail and fintech. The business has a broad footprint through its various brands, with about 5,900 stores across nine African countries and in Brazil.
Traditional retail is the group’s biggest segment (87% of group revenue and 90% of operating profit) and it trades across the clothing, general merchandise, furniture, appliances and electronics sectors through strong household brands such as Pep, Ackermans, JD Group, Russells, HiFi Corp, Incredible Connection and Avenida (its Brazil business).
Pepkor’s fintech division continues to perform well, achieving 24.5% in revenue growth over the past six months
Pepkor’s fintech division continues to perform well, achieving 24.5% in revenue growth over the past six months. Though still relatively small in the bigger group (13% of revenue and 10% of operating profits), this business segment is considered a high-growth area.
Its FoneYam business continues to see strong demand and has about 200,000 active cellular handset rentals. The group’s insurance business, Abacus — which used to be housed in the JD Group — now operates across Pepkor brands and has underwritten about 650,000 insurance policies. These two businesses, together with the other fintech businesses, generate good annuity income for the group long after customers leave the store.
It’s no surprise then that looking ahead, growth for the group can be expected to come from its fintech businesses and possibly Avenida in Brazil. Thanks to the success of its operations in Brazil and considering the group’s strength in emerging markets, it could expand into other South American markets.
Investing in retail stocks over the past five years has been very stock specific, with companies such as Shoprite and Clicks performing well, while Pepkor and Mr Price, for example, may have disappointed investors.
On most valuations Pepkor does not appear overly expensive, but it may need local economic variables to pick up before any major rerating.
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