At Mr Price’s capital markets day in September 2024, the investment case section described its value-focused proposition (affordable clothing, for the most part at least) and how this was positioned to outperform the sector. With the benefit of festive season trading updates behind us, it’s clear Mr Price wasn’t wrong.
The pandemic and its aftermath has been a time Mr Price really got the hammer down on acquisitions. Before that the company was focused mainly on organic launches of brands, with only a few acquisitions spanning a couple of decades. Just in the past few years, it has pulled the trigger on Yuppiechef, Power Fashion and Studio 88.
Now, acquisitions in the clothing sector have been a source of much heartache for South African investors, so a culture of dealmaking is by no means a guarantee of success for shareholders. It’s very easy to overpay for acquisitions, with the punishment being dispensed for years thereafter.
At Mr Price, perhaps the nuance is that the acquisition strategy has been focused on South Africa rather than abroad. This creates a more coherent group, albeit one that is less diversified and therefore more vulnerable to any wobbles in South Africa’s recovery story. In 2024 at least, waving the South African flag was the right strategy. If things change and the local market deteriorates relative to, say, the UK clothing market, Mr Price could end up on the wrong side of that compared to its peers.
Another element of the acquisition strategy that seems to be working is the relatively light-touch approach the company takes to businesses it has acquired. Aside from critical areas of integration and efforts to find synergies in logical places (like real estate or supply chain), it allows the acquired business to just get on with it. This is why Yuppiechef can coexist in the group alongside Mr Price’s core clothing offering.
The recent update for the 13 weeks ended December 28 shows the power of focus. Mr Price had a spectacular end to the year, with sales growth of 10.6% and a two-year compound annual growth rate of 10.3%. It gained market share for six consecutive quarters. Notably, there was an even split of in-store and online sales growth, up 10.6% and 10.5% respectively. This supports a strategy of growth in trading space, which was 4.9% higher on a weighted average basis.
In 2024 at least, waving the South African flag was the right strategy
As primarily a cash-based retailer (90.9% of sales), Mr Price saw the benefit of a South African consumer who was feeling far more confident about the world at the end of 2024. Cash sales were up 11.1% and credit sales increased only 5.7% as the company took a cautious approach.
Yuppiechef deserves an honourable mention, with double-digit sales growth and an increase in gross margin. This is evidence of Mr Price’s approach to acquisitions, in which businesses with little or no overlap with other parts of the group are allowed to focus on what they are good at.
January got off to a strong start for Mr Price, with double-digit sales growth and gross profit margin moving higher as well. Against this backdrop, you would fully expect the share price to be heading to the moon. Instead, it’s down 13.5% in the year to date.
The problem is that the valuation got too hot. It happened a lot later than most expected, which was a useful lesson in market momentum, especially in South Africa, where we have a relative shortage of high-quality assets on our market.
When IM last covered Mr Price, in August 2024, the share price was at R218 and one of the co-founders had been selling shares. The combination of a spicy valuation and insider selling led to a sell recommendation, which turned out to be wrong. Market momentum took the price over the R300 mark before a sharp fall to the current levels of R255. It seems to have found some support at about R245.
In the fourth quarter of the financial year ending in March, it’s going to be a few months until we see just how well Mr Price is doing at headline earnings level.
Based on recent results, it could deliver double-digit earnings growth in the second half to add to the 7.1% growth in the first. The second half is a far greater contributor to net earnings, so we could see 10% growth (or more) in full-year earnings. Even then, it would put the current price on a forward multiple of 18.
That’s a fully baked valuation, implying a hold from here only if Mr Price can keep achieving strong growth.
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