Given the state of the economy and consumer spending, and selling price inflation of 2.5% in the Pepkor group’s clothing, footwear and home operations, it did well to grow volumes in these categories by 3.5% and to grow revenue overall by 7% to R35.3 billion in the six months to the end of March.
This was however lower than anticipated, with the group – which owns Pep, Ackermans and numerous furniture and building brands – citing poor consumer spending, pre-election uncertainty, power cuts and the shift of Easter to April as contributors to lower than expected sales growth, offset somewhat by the group’s defensive market positioning.
Pepkor grew market share and opened 164 stores to bring its total to 5 332 stores.
Operating profit increased by 25.2% to R3.4 billion, or by 6.9% on a comparable basis excluding one-off items, and headline earnings grew by 3.4% to 52.4 cents a share.
Net finance costs increased by 33.5% to R738 million due to the group funding two new credit books and lower cash generation. The new JD Group credit book, Connect Financial Solutions, amounted to R1 billion and the new Capfin credit book R300 million, funded by R2.5 billion bridging finance.
Net debt grew to R15.7 billion (R12.6 billion at September 30, 2018), with gearing at 2.04 times.
Chairman Jayendra Naidoo said that in the past year Pepkor had refinanced its debt to minimise its financial exposure to Steinhoff. The group continues to try to distance itself from the Steinhoff debacle and this week announced, without giving reasons, that Steinhoff’s former acting CEO Danie van der Merwe had resigned from its board, although he will be replaced with another Steinhoff director.
These were “not bad results in the context of a poor South Africa”, says 36One Asset Management portfolio manager Evan Walker. However, he remains concerned about the ability of consumers to spend, especially low-income consumers given the level of retrenchments and joblessness, and the effect of higher fuel and other prices.
Walker also believes that Pick n Pay Clothing is becoming a major threat to Pepkor’s growth in South Africa over the next few years, particularly to Ackermans. He is also concerned that Pepkor’s South African balance sheet is stretched, given that no cash is coming out of many Africa operations and that it is constantly funding the stock into Africa. This has been happening to companies like Shoprite, Nampak and Massmart too, he says, “where the SA balance sheet funds Africa, with no cash coming back”.
Pepkor CEO Leon Lourens said the results “might not be what we expected, as we have got high standards for ourselves” but that the group’s businesses were “still doing the right things”.
Pepkor said its clothing and general merchandise sales grew by 5.2% to R23.1 billion, while operating profit increased by 6.6% to R3.1 billion.
Innovation and growth
It also continues to innovate and grow new business. Its Paxi parcel delivery service is processing 45 000 parcels a month, while its new Dealz discount store rolled out four new stores, with six more planned this financial year.
Pep Africa contributed just 3.4% to group revenue, while footwear businesses faced challenging conditions. Furniture, appliances and electronics, held through the JD Group, increased turnover by 7.2% to R5 billion. Building grew turnover by 1.5% to R4 billion, but its operating profit slumped 67% to R42 million.
While directors are cautiously optimistic in terms of outlook, Walker says that in the next 12 months “we could see a proper collapse in credit books” as consumers are just too stretched. “This credit book is just too high for the current marketplace,” he said.