mr price grows market share and capitalises on its value retailing formula

[Durban, 12 November 2008] Value retailer Mr Price Group Ltd announced its results for the half year ended September 2008, reporting retail sales growing 18.6% to R3.9 billion for the period. Comparable sales growth was 8.9%. Profit from operating activities increased by 14.9% to R300.4 million and the operating margin was 7.7% of retail sales against last year’s 8.0%.

CEO Alastair McArthur said that headline earnings per share of 88.2 cents (up 8.1%) and fully diluted headline earnings per share of 86.0 cents (up 11.0%) were negatively affected by a Secondary Tax on Companies (STC) charge which arose from the final dividend for the 2008 financial year being declared and paid in the current period. In the comparative period the distribution from share premium did not attract STC. This resulted in a 32.2% increase in taxation to R113.8 million and an effective tax rate of 34.5%. Reported earnings were also impacted by certain share trusts utilising company grants of R150.5 million to acquire shares in the second half of the prior financial year to partially cover options awarded. This resulted in a reduction in net finance income but also a lower weighted average number of shares in issue.

The interim dividend has been set at 40.2 cents per share which reflects an increase of 10.1% over the comparable period and is based on a maintained interim cover of 2.2 times. The group aims to maintain its cover of 1.9 times at year end.

“In view of the serious economic downturn, we are particularly pleased with this performance,” said McArthur. “There is little question that South African consumers are cash-strapped as a consequence of food price increases, rising fuel and debt servicing costs, healthcare and municipal rates. Consumer confidence is now well below the 25 year average.”

This has dramatically affected sales in the retail sector, which have been in a downward trend since late 2006 and have reflected a decrease in real terms since the beginning of the calendar year. “The past six months have been some of the most challenging we have experienced,” McArthur said.

“We believe that positioning ourselves as a value retailer has been strategically sound and this, taken together with the fact that we are still a predominantly cash business, has enabled us to withstand the effects of these economic headwinds better than most,” McArthur said. “We have also tightly managed our costs and debtors collections. As a consequence, the group has performed well in this difficult climate.”

“Our confidence is evidenced by the fact that the group has opened 66 new stores and has created in excess of 750 new jobs in the last 12 months,” said McArthur. At the end of September the group had 925 stores and employed almost 10 000 full-time associates.

The Apparel chains (Mr Price, Miladys and Mr Price Sport), which constitute 68.4% of group sales, grew sales by 21,0% to R2.7 billion - with retail selling price inflation of 4.1% - and increased operating profits by 20.1% to R323.4 million. The operating margin of 12.2% was in line with the 12.3% reported in the comparable period.

Mr Price grew sales by 19.3% to R2,0 billion on an increase in weighted average trading space of 5.8% and comparable sales were 15.3% higher. The increase in operating profits was positively affected by Project Redgold, an initiative aimed at enhancing supply chain and merchandise processes. Excellent fashion interpretations and the fashion-value appeal resulted in the division achieving growth in market share as measured by the Retailers Liaison Committee (RLC). The number of units sold exceeded 40 million, representing an increase of 12.4%. Independent market research conducted by Bateleur Khanya in July 2008 confirmed that Mr Price continues to be the most loved apparel retailer and most frequented clothing chain.

Miladys increased sales by 12.4% to R0.5 billion, with comparable sales growing by 7.0%. The number of units sold increased by 10.7%. As a result of the success of the three stand–alone René Taylor stores, the division plans to open a further six such stores by year end. Miladys recently won the ‘Orange Index - Top Clothing Retailer 2008’ award, which is an independent benchmark of service levels and best-in-class companies.

Mr Price Sport opened six stores, bringing the total stores operated by the division to 29. Sales of R165.3 million support the findings of independent market research which reflect an exceptionally high brand affinity score for such a young business and that shoppers are very staunch advocates of the brand.

Sales in the Home chains (Mr Price Home and Sheet Street), which constitute 31.6% of group sales, were up 14.2% to R1.2 billion. This segment has been the most affected by the reduction in consumer spend on semi-durable products. Higher markdowns and carriage costs, coupled with slower trading in homewares, resulted in operating profits being 35.3% lower at R22.9 million. Despite these challenges, both chains continued to gain market share and there is room for significant profit growth off a relatively low base.

Mr Price Home grew sales by 14.6% to R0.9 billion and comparable sales were 1.6% lower. Unit sales were 4.4% higher. Initiatives are in place to improve profitability. Mr Price Home won the ‘Retail Awards 2008 – Home and Lifestyle Stores’ category, which, inter alia, measures the range of products sold as well as value for money.

Sheet Street increased sales by 13.4% to R0.4 billion and comparable sales were 3.4% higher. The number of units sold increased by 6.0%. The new store layout and wrap is working well and is generating sales growth higher than planned. A phased rollout is underway.

Mr Price Franchising opened an additional seven stores in the Mr Price and Mr Price Home formats, bringing the total of franchise outlets in operation to 14. “Extensive market research for future territories is currently underway,” said McArthur. “Focus is being given to supply chain and logistics processes to support a rollout of this business concept.”

McArthur said, “Our balance sheet remains strong with cash resources of R365.5 million. Our business model, which generates strong cash flows, with 84.1% of sales in the current period being for cash, will finance our future growth.”

The debtors book has grown from R542.3 million at the previous year end to R609.6 million, an increase of 12.4%. The group is reaping the rewards of the focus placed on collections and the strategic decision taken to grant credit cautiously. Market information shows that the balances of accounts that are up to date in terms of repayments are higher than the industry average, with a corresponding lower value in the arrear categories. Despite the economic hardships being experienced by consumers and the relative immaturity of the debtors book, bad debts net of recoveries (excluding collection costs) decreased from 8.6% of debtors balances at year end to 7.1%. The book remains adequately provided for at the end of the reporting period.

Inventories have also been well managed, increasing by 12.0% over the comparable period relative to an increase in retail sales of 18.6%. Project Redgold contributed to the group improving its stock turn from 5.2 times to 5.4 times during the difficult trading conditions.

Looking ahead, McArthur said that while it was uncertain when the economic crisis would start to show signs of abating and consumer confidence would be restored, the group would continue to enhance its value proposition to customers.

“We expect the second half to be much like the first in terms of difficult trading conditions. However, we are well placed to gain further market share with our fashionable products at everyday low prices. Growth in earnings for the year should be achieved, provided there is no further marked deterioration in spending patterns,” said McArthur.
ENDS

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