South Africa’s tough retail environment ate into Mr Price earnings over the past year, as consumers kept a firm hold on their wallets due to the current economic climate.
The group on Tuesday reported a decrease of 10.4% in its diluted headline earnings for the year to 1 April 2017 compared to the previous year.
Mr Price’s poor year corresponded with competitors Truworths, Woolworths and Foschini’s weak sales numbers, highlighting the struggles of the sector.
“This was the group’s first earnings decrease in 16 years during a very difficult trading period,” said CEO Stuart Bird.
Total revenue rose 0.7% to R19.8bn, with retail sales decreasing 0.5% to R18.6bn.
The results were not unexpected, as the Durban-based retailer’s pre-Christmas performance had been dismal. Mr Price attributed the losses at the time due to last year’s unseasonably warm winter as well as promotional markdowns by competitors to clear stock. Foreign retailers such as H&M and Cotton On also ate into the retailer’s market share.
Despite its retail woes Mr Price remained cash generative, providing a good return on average equity to shareholders. Free cash flow increased 131% to R1.8bn and cash resources at period end were R1.8bn. The annual dividend per share stayed at 667c, with the final dividend of 438.8c per share up 4.7%.
Annual dividends of the group have not declined in the last 31 years.
The group said its cash-based business model has enabled it to maintain its dividend track record. It also used the model to fund capital expenditure of R2bn in the last two years to build the necessary infrastructure to support growth plans.
The no-frills retailer said the year proved to be exceptionally challenging for the retail sector.
“Consumer confidence remained low as a result of the poor state of the local economy and a lack of faith in the current political leadership’s ability to set high standards of governance and deliver inclusive growth.”
It also blamed the Cabinet reshuffle and credit ratings downgrades for causing exchange rate volatility, which led to higher prices the consumer ultimately had to absorb.
“As a result, the retail environment has become more competitive, with any growth in a stagnant market coming from increased market share,” Mr Price said.
“This has led to retailers in our sector increasing their promotional activity to drive sales and manage stock levels.”
The merchandise gross profit margin decreased by 1.3% to 40.6%, mainly due to higher markdowns in MRP Apparel, the group’s largest chain. The apparel division, which accounts for around 70% of group sales, has struggled to attract sales.
However Mr Price’s sales growth in the fourth quarter improved, buoyed by sales in the Easter school holidays. Local online sales also continued to perform well and were 13.0% higher than last year.
MRP Sport increased its sales by 7.7% to R1.4bn, performing strongly in the first half with sales gaining 13.3%.
Mr Price singled out MRP Apparel and Miladys as its underperforming units, but added that the new financial year presented new hope, with the best sales performances coming from these two units.
MRP Apparel’s performance, with a decline in operating profits, was an especial cause for concern with sales of R10.9bn 1.7% lower. In the first quarter its product offerings did not resonate with customers, Mr Price said.
Miladys sales of R1.3bn were 5.3% lower. Operating profit increased in the second half, but fell on an annual basis despite a higher gross profit percentage and good cost control.
Although there was limited overhead growth below the inflation rate, it was not sufficient to counter the decline in sales and gross profit.
The retailer said any improvement in the consumer environment is likely to be gradual. Its recovery plans centres on regaining its lost market share, which it believes is the most significant near-term opportunity.
Mr Price’s share price jumped 5.28% to R153.91 at 11:20 on the JSE.
By Yolandi Groenewald for Fin24