mr price group performs well in softer trading climate

Focus remains on long-term growth strategy

[Johannesburg, Wednesday 14 November 2007] Value retailer Mr Price Group announced its trading results for the first half of its financial year with operating profits up 25% and earnings per share up 20% in what the retailer has termed ‘a softer’ trading environment.

Retail sales grew by 22% to R3.3 billion, with comparable sales growing by 11.3%. The cumulative effect of seven interest rate increases, the introduction of the National Credit Act and material price increases in food and fuel all had an impact on consumer confidence and spending. This resulted in a slowing in retail sales growths from June onwards.

Operating profit increased by 25.2% to R261.3 million, with the group operating margin up from 7.8% to 8.0% of sales. Headline earnings per share grew by 20% to 81.6 cents per share. An interim dividend of 36.5 cents per share was declared, reflecting an increase of 20% over the comparable period.

Mr Price Group CEO, Alastair McArthur said that he was satisfied with these results in a softer trading climate. “Our Apparel chains (Mr Price, Miladys and Mr Price Sport), which constitute the lion’s share of our business, performed really well and ahead of expectation, with sales up by 24% and profits up by 47%.”

The Home chains, comprising Mr Price Home and Sheet Street, experienced slower sales growth as consumers of home goods - many of them with higher interest payments on home loans - began to cut back on spending. Sales in this division were up by 17% but profits down 42%. Margin and profits in the Home chains would have been more in line with the previous year but for abnormal charges, which impacted profitability. These charges, which totalled R27.4 million, largely related to start-up losses in the furniture operation, establishment costs of a new Mr Price Kids concept, as well as changes in the allocation of transport costs between divisions.

The growth in credit accounts has slowed, particularly after the introduction of the National Credit Act in June 2007, while the contribution of cash sales remained steady at 86%. “Our bad debts have increased as anticipated following the introduction of new accounts into the former cash chains and given the current economic climate. Net bad debt, which includes the costs of recovery, increased to 5.1% of credit sales, with the debtors book remaining adequately provided for. While the group will remain predominantly a cash retailer, there are opportunities to further grow market share and profits through private label credit cards and related financial services”, said McArthur.

Mr Price Sport continued to roll out stores to achieve critical mass. “Mr Price Sport is only a year old and achieved sales of R82 million in the half year,” said McArthur. “We expect it to achieve sales of approximately R300 million for the year and we will be opening a further 11 Mr Price Sport stores before Christmas, bringing the total to 23.”

McArthur said that there were three exciting new growth opportunities which were currently being pursued.


The Mr Price chain recently opened four ‘Express’ concept stores which would ensure further market penetration by trading in locations where the group did not currently have stores. “We have identified 70 new locations and also plan to convert 60 existing Mr Price Stores in similar small town locations to this new format. These stores would typically be less than 500 square metres and fixturing, would cost up to 40% less. Rentals in these locations were also significantly lower, often running at four times less than major shopping centres”.

Miladys tested a stand-alone René Taylor store concept which caters for the fuller-figured woman. The first store was successfully launched in Pretoria in August and a second store was opened in October in Somerset Mall in the Cape. It is anticipated that further stores will follow across the country.

McArthur added that the group would also be opening four Mr Price Kids stand-alone stores before Christmas. The concept has been tested in the 6 000 square metre superstores. The merchandise offer is a unique combination of bed linen and soft furnishings, home decor, furniture, early learning and educational toys, apparel and accessories, all at low prices and targeted at the kids and baby market.

“Our newer businesses are investments for tomorrow. While initially they do not contribute to profits and have start-up losses, they will help us in future years to maintain our 21 year annual compound growth in headline earnings per share of 23%.”

The group also opened the first Mr Price Home franchise store in Nairobi, Kenya, at the end of October which is trading well ahead of expectations. The two Mr Price franchise clothing stores in Zambia and Mozambique continued to perform well, confirming the group’s view of the profit potential of franchising its brands in Africa and elsewhere.

The Mr Price balance sheet remained sound with cash of over R500 million. This would allow the group to maintain its expansion strategy, which would not be slowed despite the tougher trading climate.

“We remain committed to our space expansion strategy”, said McArthur. “We commenced our expansion strategy in the midst of the downturn five years ago and we benefited from the extra space over the last three years of good trading. We are again planning for strong long-term growth in the South African economy.”

“We plan to invest more than R1.5 billion in the growth of our business over the next five years. While this means a lot of new stores, it also means a lot of new jobs.” He added that the group had created approximately 5 000 new jobs over the last five years and would create a further 8 000 new positions over the next five years over and above those created at local manufacturers and suppliers.

McArthur said the cumulative effect of interest rates increasing by a third had still to be fully felt.

“The evidence from current retail sales, including car sales, clearly shows that the consumer is hurting. Customer confidence is somewhat fragile after the spate of interest rate changes and it is going to make this Christmas a particularly challenging trading period especially given the high trading base that has built up over the last few years. Fortunately, our business has historically been less affected than the credit retailers in downturns. In fact, we often experience a positive movement of customers to our stores when their credit is curtailed by other retailers.”

Looking to the year end, he said the group was again expecting real growth in earnings for the year. “Our predominantly cash value retailing model and limited exposure to retail credit should result in Mr Price being able to weather the slower growth in consumer spending better than most,” McArthur concluded.