Mr Price confounds bleak expectations in grand style

Business

Mr Price confounds bleak expectations in grand style

Analysts impressed by clothing retailer’s results, despite the ominous outlook for consumer spending

Larry Claasen


Clothing retailer Mr Price warns that GDP growth is likely to remain “muted” and that any structural reform aimed at energising the economy is likely to happen only after the national election, which is expected in May 2019.
Speaking at the interim results presentation for SA’s third-largest retailer by market capitalisation, incoming CEO and current CFO Mark Blair said the drop-off in household expenditure and disposable income shows that over the short term, consumers are experiencing “constrained spending power”.
This echoes what TFG said earlier in November when it flagged that it expects consumers to come under more pressure in the next few months. At the time TFG CEO Anthony Thunström said he “expected trading conditions to remain challenging ... as consumer spending and business confidence remain under pressure”.
The difficulty in the clothing retail sector can also be seen at Woolworths, which said in a recent trading update that its SA clothing operation had an effective 8% drop in sales for the 20 weeks to end-November.
Rising consumer inflation — driven by higher fuel prices and a rise in the VAT rate — as well as persistently high unemployment are putting customers under increasing pressure. pressure on consumer’s pocketbooks.
Blair said the rise in the level of indebtedness is concerning. The Transunion SA consumer credit index shows a deterioration in credit health and a rise in defaults in the second quarter of the year.
The index underlines the findings of Statistics SA, which reported flat retail year-on-year sales for September, and the Reserve Bank finding that disposable income has declined.
Argon Asset Management equity analyst Bjorn Samuels said Blair is right to be circumspect about the economy. “The new CEO has a cautious outlook on the economy and one can understand why: we face anaemic economic growth, highly volatile currency fluctuations and a potential rate hiking cycle which will put further strain on an already struggling consumer.”
Blair said even though South Africans are struggling, they are still relatively optimistic. He said a good indication of how the group will perform for the Christmas period is how consumers respond to Black Friday promotions.
Samuels pointed out that the weak economy could actually work to the group’s favour. “Mr Price is one of very few retailers that offer good value for money and are able to benefit from a downtrading consumer.”
Despite the difficulties consumers are going through, Mr Price’s revenue and earnings rose in its results for the half year. Revenue was up 7.8% to R10.53bn and profit before tax was up 12.6% to R1.79bn for the period.
Gryphon research analyst and portfolio manager Casparus Treurnicht said other retailers could learn from Mr Price.
“Brilliant set of results. If you look at the presentation you can see that they know their offering and customer extremely well. I think this is where Woolies is getting it wrong. It is offering clothing of a quality and style, but priced incorrectly for its target market.”
Blair takes over on January 1 and is seen as a safe pair of hands when it comes to running the company. “Mark has a good understanding of the business – he has been CFO for over a decade – and will likely ensure continuity and execution of existing business strategies,” Samuels said.

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