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Is Mr Price getting its mojo back?

The retailer’s recovery over its fashion faux pas moments appears to be gaining momentum.
Following two-years of a concerted effort by management in ramping up a turnaround strategy that was vague at first but involved sourcing better merchandise to appeal to shoppers, it appears that Mr Price is starting to get its sparkle back. Picture: Supplied

It has been two years of hard slog for Stuart Bird, the CEO of Mr Price, in returning the retailer to its glory days.

The latest leg of its turnaround strategy – which focused on getting the merchandise mix right – seems to have put some sparkle back into its step. 

Judging from the nearly 4% jump in Mr Price’s share price on Monday after the release of its interims, the market appears to hold a similar view.

Mr Price share graph

Mr Price’s results for the six months to end September showed its headline earnings per share had soared by 22.2% to R4.43 and profit after tax grew by 23.7% to R1.1 billion. This is a vast improvement for Mr Price, whose profits (on an interim basis) fell by a whopping 14% in 2016.

Gross profit margins – a key measure of profitability in the retail industry – improved by 2.8% to 42%, compared with a decline of 0.9% and 1.1% in 2016 and 2015 respectively. Mr Price’s margins are lower than the usual 49% to 55% posted by its high-flying competitors The Foschini Group (TFG) and Truworths – but, it’s still progress.

“It’s quite clear that Mr Price’s turnaround is coming along quite nicely,” said Wayne McCurrie, a senior fund manager at Ashburton Investments.

Mr Price’s woes

Since 1985, Mr Price’s hallmark has been fashionable and on-trend clothes at highly competitive prices. Its wholesale focus on cheaper prices tended to alienate higher-income shoppers, exposing it to customers that are vulnerable to economic shocks.

The true problem was that Mr Price got its fashion offering wrong as its merchandise became more mainstream, resulting in shoppers preferring foreign competitors, among them Sweden’s H&M, Australia’s Cotton On and Spain’s Zara that offer fast fashion at similar price points. Mr Price was also caught sleeping on the wave of discounts, with retailers intensifying their promotional activity more than ever in an increasingly tough retail market.

Big changes have since followed to get customers back.

The Durban-based retailer has differentiated itself, as it now offers a wider range and lower prices, compared with its competitors that typically offer a small range or a wide range at higher prices. “When you look at Mr Price, they are not the cheapest around. But they are the cheapest by far when you take into account the number of their product range. They have [carved] a nice little niche for themselves and they seem to be back on track,” said McCurrie.

This has certainly paid off as group interim sales grew by 6.4% and comparable sales by 4.5%. Excluding internal inflation of 2.6%, group sale volumes are still positive. Mr Price’s apparel operations (Mr Price, Mr Price Sport and Miladys) grew comparable sales by 7.8% while sales in home operations (Mr Price Home and Sheet Street) fell by 3.4%.

Its 1 240 store network was upgraded to incorporate technology and faster pay points to improve the customer experience. Online shopping investments were boosted, which now makes up 46% and 50% of total sales at apparel and home operations respectively, despite no online offering at both divisions four years ago.

Jean Pierre Verster, the portfolio manager at Fairtree Capital, said two exogenous factors may have helped Mr Price’s recovery: the strength of the rand that made it easy to source merchandise at foreign exchange rates and slow consumer price inflation. “With a strong rand year-on-year, it means less inflation, therefore, it relieves the pressure on consumer’s personal finances, allowing them to shop more,” said Verster.

Expensive stock

Mr Price’s stock trades at a rather expensive and eye-watering price:earnings ratio of around 21 times compared with 13 for TFG and Woolworths, and Truworths’ 11. Verster said Mr Price’s revenue has to grow – even to double-digit growth – to justify its present rating. Ashburton’s McCurrie said: “Mr Price’s recovery still has to go on and its earnings should go up with a fairly good percentage over the next six months, which should probably bring the price:earnings down to 16 or 17 times.”

Anthony Rocchi, the portfolio manager at Rexsolom Invest, said Mr Price is the best run clothing retailer in SA. This based on its trading density (sales per store square metre) of R37 336 m2, which is in line with that of Truworths’ R37 350 m2, and its return on capital employed of 49.3% compared with Truworths’ 22% (five-year average) and Woolworths’ 15.1% (full year 2017).

“Retail is in a tough place, and growth will come from winning market share. So betting on the strongest competitor in this industry when the market turns overly bearish on the sector has proven to be a winning strategy,” he said.

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I calculated the intrinsic value of MR Price Group te be around R180 per share. Still too expensive at current levels for me.

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