Mr Price’s year-to-date share price performance is a spectacular 89%, putting it well ahead of TFG at 58%, Truworths at 45% and Pepkor at 24%.
The government of national unity, the disappearance of load-shedding and a decreasing interest rate cycle have combined to be the rising tide for all boats in this sector.
The market believes that the improvement in consumer sentiment will be felt in clothing and homeware retail before anywhere else. It’s a logical assumption, as these types of categories are where consumers are likely to spend those extra few rands each month.
Speaking of retail categories, I’m still waiting patiently for my ship to come in for Cashbuild, up 15% this year and over 30% since I bought the strange and very helpful dip in August.
Things are taking longer to improve at Cashbuild than in some other discretionary categories, as we need more meaningful interest rate decreases to drive growth in home improvement.
If the performance in clothing retail is anything to go by, there’s a decent chance of the DIY dogs having their day at some point.
Those who backed Mr Price this year have taken the share price to what looks like a demanding valuation to me.
Shoprite is probably fairly valued, which suggests that Mr Price is expensive
Investors just can’t get enough of this story, with the share price now on an earnings multiple of 22, only slightly below retail sector darling Shoprite at 24. Can this be justified, or is this a classic example of a market overshooting the fair value with exuberance, creating danger at this entry point?
Mr Price and Shoprite aren’t direct competitors on the ground (at least not for the most part), but they are both competing for the space in your portfolio that you’re willing to allocate to South African retailers. So it’s worth considering these traded multiples and what they tell us about sentiment.
If you compare the multiples, it looks at first blush as though the market believes that Mr Price’s business is almost as strong as Shoprite’s. It’s not quite as simple as that. A valuation is a function of growth and certainty of earnings.
I don’t think you’ll find a single investor who believes that Shoprite is riskier than Mr Price, so from a certainty of earnings perspective, Shoprite should indeed be at a higher multiple than Mr Price. But is the two-times gap between the multiples large enough for this difference in risk?
Before considering a growth differential, then the answer is probably no, the gap isn’t big enough. This small gap is either because Mr Price has become expensive or Shoprite has become cheap. Before diving into the growth, let’s examine whether Shoprite is at reasonable levels as our anchor.
When you consider the numerous ways in which Shoprite can keep growing, from picking at the carcass of Pick n Pay to enjoying the benefit of consumers moving through LSM bands, it doesn’t feel as if Shoprite’s multiple is crazy.
A quick look at historical p:e ratios suggests that the current multiple is well in line with recent averages. Shoprite is probably fairly valued, which suggests that Mr Price is expensive unless it can meet what are clearly demanding growth expectations in the market.
Based on the 26 weeks to September 28, you might be wondering where the growth is. Total revenue was up 5.2% and comparable store sales increased just 0.4%. This isn’t exciting, yet the share price rallied 13.5% in the past week. Why?
Part of the answer lies in the uptick in gross margin. Most of it lies in Mr Price noting that sales growth is much better in recent weeks, up 11.5% in October and 14.7% in the first two weeks of November.
Though the store rollout strategy drove most of the growth over 26 weeks, the recent performance would require decent comparable store sales growth to be achievable. This is encouraging for Mr Price shareholders.
The last time Mr Price traded at this earnings multiple was in mid-2021. The share price then washed away from over R225 to just above R130.
So, investors would do well to remember how cyclical this sector is. Paying 22 times for Mr Price against, say, 24 times for Shoprite feels like an extremely brave punt, regardless of where we are in the consumer cycle.
Still, momentum is a powerful force and there’s no shortage of it in the Mr Price share price chart. Just be very cautious of chasing winners, no matter how frustrating it can be to have missed out.
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