Mr Price: red cap, green earnings

Mr Price has released its results for the 52 weeks ended 2 April 2022. I know that this is an odd-sounding reporting period, but with retailers you need to remember that most of them report based on trading weeks rather than calendar years.

There’s another important nuance that you need to be aware of: because of the reporting calendar being based on weeks rather than calendar years, those retailers need to report a 53-week period every few years. Mr Price did this in FY21, which means you need to be careful when comparing FY22 to FY21 because the prior period has an extra week of trading.

To make it possible to do meaningful year-on-year comparison, retailers typically give commentary on a “comparable basis” where they only focus on the first 52 weeks of the comparable year.

I appreciate that these aren’t the most exciting concepts in the world, but you can’t properly understand retail results without knowing about this. Onward to the numbers!

Mr Price is a proper business

On a comparable basis (and now you know what that means), headline earnings per share (HEPS) grew by 25.9%. If you don’t adjust for the extra trading week, the growth rate is 20.1%. This is why it is so important to understand these periods.

One of the things you want to see in a retailer is growing market share, which Mr Price achieved with 140 basis points growth. Another important metric to look out for is operating margin, which has increased to 17.7%.

It’s worth highlighting that online sales grew by 48.2% and contributed 2.9% of total sales. This is much lower than we see in markets like the UK, which creates a strong argument that South Africa’s online shopping channel still has plenty of runway.

Mr Price has been on the acquisition trail, with Power Fashion (1 April 2021) and Yuppiechef (1 August 2021) both included in this result and described as being “earnings accretive” – there’s a difference between being earnings accretive and offering attractive returns on capital though. Investors will be keeping an eye on these acquisitions, as Mr Price did pay top dollar for them. Or top rand, even.

Mr Price is retaining a portion of earnings for future growth, as is common in listed companies. The final dividend is up 25.9% and the pay-out ratio of 63% has been maintained.

A closer look at the numbers

Revenue increased by 25.9% on a comparable basis and 14.1% using comparable stores, which is strong like-for-like growth. Other income grew by 37.5% but this included a once-off SASRIA claim of R296.1 million related to the civil unrest. A business interruption claim is still under assessment and should be finalised in the new financial year.

Here’s the most important metric for me: on a two-year basis and excluding acquisitions, sales grew by 12.5%. Consumers have shifted to value clothing in a time of economic pressure and Mr Price has been waiting with open arms.

Cash sales are 86.1% of the group total but it should be noted that Power Fashion and Yuppiechef are entirely cash based. If you exclude them, cash sales grew 14.3% and credit sales grew 23.6%, with account applications up by 54%. Mr Price notes that the account approval rate of 33.1% remains well within risk tolerance.

Selling price inflation was 5.5% excluding Power Fashion. Including that acquisition totally breaks the internal inflation number as the items are at a much lower average price point. Volumes were up 10% excluding acquisitions.

Moving on to margins, gross profit margin decreased by 150bps to 41%. There were some once-offs in the numbers, with Mr Price noting that on a comparable basis gross margin was in line with the previous period at 42.4%.

Total expenses grew 16.4%, a number well in excess of inflation. That is to be expected when a footprint is growing, as it includes new stores and inflationary costs on the old cost base. The important point is that sales growth is higher than expenses growth, so operating margins have expanded.

This is called “operating leverage” – the joy of revenues growing faster than inflation on fixed store costs.

When it comes to working capital, inventory increased by 6.1% excluding acquisitions and higher goods in transit. This is reasonable in the context of group growth and global pressures.

Capital expenditure was R734 million this year and is expected to be R900 million next year, including 180 – 200 new stores. With return on equity of 28.9% and return on assets of 23.2%, shareholders won’t complain about the group investing capital in growth.

Segments

The Apparel segment achieved record market share and saw operating profit increase by 33.7%, with operating margin up 40bps to 18.9%.

The Homeware segment achieved sales growth of 15.6% which is really impressive vs. a strong base. Operating margin did come under some pressure, down from a record 21.3% to 20.6%, a decrease of 70bps.

The Telecoms segment grew revenue by 34.4% to R1.2 billion. This is still a small contributor (Apparel is R19.5 billion for example) but growth prospects are exciting.

The Financial Services segment grew revenue by 6.2%, including insurance premium income up by 6.4%. The impairment provision adequately covers net bad debts.

Growth prospects

Mr Price is on a rampage. It opened 130 new stores this year, a much higher rate of growth than the 5-year average of 80 new stores a year. Power Fashion has increased its footprint by 20.6% since being acquired, which is quite something considering most people had never even heard of the group before Mr Price bought it.

Surprisingly, openings were lower than Mr Price had hoped, as the group had to direct a lot of its energy towards reopening looted stores.

Beyond bricks and mortar, Mr Price is doing very well in the online space. Online traffic market share is second only to Takealot among pure-play retailers and social media followers grew by double digits. The Mr Price mobile app is the highest ranked South African fashion app on Google Play, with usage up 27.3%.

Of the R4.6 billion available in cash, R3.3 billion is needed for the Studio 88 acquisition once regulatory approvals have been achieved. This will cap off a strong period of acquisitive growth for Mr Price, so the management team will need to focus on integrating the businesses and delivering the strategies.

The important thing is that there isn’t any debt on the balance sheet, so Mr Price isn’t under pressure to service payments to banks.

Am I trading it?

The share price is down around 2.5% this year and is trading at similar levels to May 2021. As great at these numbers look, it all comes down to what was priced into the stock. I must say, I’m tempted to punt at a move from R200 to R220.

There is an important point in the results presentation that gives some balance to all the good news: “May 2022 sales growth below expectations – details to follow at next trading update” – this means that inflation is starting to bite.

Decisions, decisions.

As always, you need to do your own research and arrive at your own conclusion!

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