EasyAssetManagement takes us through a thorough analysis of Mr Price, a household name in South Africa, synonymous with trendy fashion at affordable prices. But beyond the brand and value proposition, Mr Price is a complex business operating in a dynamic retail landscape. This deep dive analysis will take you beyond the surface, examining Mr Price's recent performance, future plans, and the potential opportunities and challenges that lie ahead.
MRP Group's sales growth has dipped recently, dropping from 9.9% in Q3 2024 to 4.4% in Q1 2025. However, there are positive signs on the horizon. Management indicated strong trading in June 2024, potentially reaching around 20% growth. This upswing might be linked to the early arrival of a cold South African winter. Similar positive trends were reported by other retailers like TFG and WHL.
Analysts are cautious about whether June's momentum will last throughout winter, but they see potential for improvement. The current forecast for fiscal year 2025 is 6.5% growth, and analysts believe the period from June 2024 to March 2025 could land somewhere between 6.5% and 7.0% growth. This suggests a potential recovery from the recent slowdown.
MRP Apparel saw some positive growth in the fourth quarter (Q4), with sales increasing by 5.5% excluding the discontinued Specialised Stores (S88) division. However, this growth wasn't industry-wide. TFG Africa reported a more modest 5.1% increase, while Pepco Group (Pep/Ackermans) enjoyed a stronger 7.2% sales jump for the January-March 2024 period (Q1 2024).
Looking beyond the quarter, early signs point towards a potential retail slowdown. Sales figures for April and May (post-quarter trading) show a decline across the board. MRP sales dropped to 4.4%, TFG Africa's sales dipped into negative territory at -2.0%, and Pep/Ackermans also reported a slowdown.
While not as pronounced, the Homeware division of MRP also seems to be experiencing a slight sales uptick, reaching 2.4% in Q4, though this growth is still considered weak.
Mr Price has unveiled its first-ever group and segmental targets for gross profit margin (GPM) and operating margin. These targets prioritize achievability over overly ambitious projections.
The GPM target sits comfortably within a 40-42% range, aligning well with the company's historical average of 41.4% over the past 14 years (FY 2010-2024). This is impressive considering the inclusion of lower-margin businesses like Power Fashion, Studio 88, and Yuppiechef.
Similarly, the operating expense (opex) margin target stays grounded at less than 28%, closely mirroring their pre-IFRS cost ratio of 27.9%. This conservative approach should allow the company to maintain a healthy sales growth rate of 7.5% annually, compounded (CAGR), from FY 2024 to FY 2027 (estimated).
However, the EBIT margin target of 13-15% falls short of the pre-IFRS 16 average of 17% for the period FY 2010-2020. This can be attributed to the recent acquisition of lower-margin businesses like Power Fashion, Studio 88, and Yuppiechef. These acquisitions currently operate at an EBIT margin of around 9-10% and contribute to roughly 29% of the group's total retail sales.
While Mr Price unveiled achievable group-level margin targets, a closer look reveals some adjustments within individual segments.
Here's the breakdown for the next three years:
- Apparel: This segment's EBIT margin is expected to land at the lower end of the initial guidance range, settling around 16.1%.
- Home: EBIT margin is also being revised downwards, with a forecast of 11% to 12.5%.
- Cellular: Anticipated to be around 10%.
Despite these adjustments, Mr Price's Financial Services (FS) segment continues to perform well. In FY 24, FS delivered EBIT of R662 million, reflecting a 12.7% increase compared to the previous year's R588 million. This strong contribution from FS is expected to remain elevated, especially if interest rates stay above 10% over the medium term (MT).
An interesting detail to note is MRP's historical reliance on interest income. This segment has likely been a "silent contributor" to earnings before interest, tax, depreciation, and amortization (EBITDA) and headline earnings (HE) over the years. In FY 24, interest income accounted for a significant 25.2% of their books, and the average has been around 21.5% for the past ten years. In simpler terms, higher interest rates translate to a boost in income for MRP, while their well-managed bad debts ensure healthy EBIT, ultimately supporting the group's headline earnings per share (HEPS).
Mr Price seems well-positioned to capture a larger slice of the market in the near future. Their focus on trendy clothing at affordable prices, along with their cash-based sales model, aligns well with the current economic climate. However, ongoing disruptions at ports and in global supply chains are likely to pose challenges for the entire industry.
Financially, Mr Price appears attractive. They're currently trading at a 12.6x price-to-earnings ratio (P/E) based on a 12-month forward estimate, according to Bloomberg consensus. This represents a significant discount of 23.4% compared to their historical 10-year average forward P/E of 16.5x.
Despite the positive outlook, there are some potential risks to consider:
- Edgars' Comeback: Edgars, a competitor, might regain lost market share and return to growth. Their strategy of improved sourcing and competitive pricing could attract customers from various brands, including MRP.
- Slow Economic Recovery: If job growth and access to credit remain sluggish, MRP might not achieve the anticipated level of interest income from their customer base. Additionally, rising bad debts could erode any potential income gains.
- Online Disruption: The rise of new and increasingly popular online retailers could threaten MRP's Apparel business by capturing market share.
Overall, while Mr Price has a good opportunity to capitalize on current market trends, they'll need to navigate these potential challenges to ensure sustainable growth.
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