Mr Price share price bounces back after transparency on what went wrong
Retailer lost big on its bet on fashion and had to cut prices drastically to move its excess stock
Mr Price lost big on its bet on fashion and had to slash prices to get rid of excess stock.
The retailer moved away from its successful strategy of selling basic everyday “core” clothing items and put a greater percentage of money and store space into higher-priced fashion items that did not sell.
Clothing sales were down 1.3% year on year to R5.8bn, and after-tax profit fell 10.2% to R1.1bn, the company said.
But Mr Price Sport grew revenue 12.2% to R775m and Miladys did well with 8.1% growth in sales up to R764m.
Excluding Mr Price’s clothing division, overall revenue and retail sales grew 7.3% and 6.1% respectively.
Despite the results, the share price shot up 11.25% to R183.51, its best level since July 25, after CEO Mark Blair’s detailed explanation of what went wrong.
Mr Price had warned investors about the excess stock issues in May at its AGM.
In a presentation, Blair explained that in 2018 Mr Price had 15% more items than the winter before and this led to too many different types of clothes but not enough of the best sellers. So many small quantities of varied items also made shops appeared cluttered, he said.
Mr Price also did not have enough entry level priced stock and he said competitors offered better value in a tough market.
Old Mutual Fund analyst Meryl Pick said investors were pleased with “the fact Mr Price could pinpoint and explain very well what went wrong. At least that gives people confidence from here.”
She said: “It was quite a detailed response and I appreciate they know what went wrong. Under the new CEO, “Mr Price was getting better at communicating with investors”.
Mr Price said it had returned to selling more basic clothing, at low prices with a smaller percentage of fashionable trendy items. Its sales were up in August and September.
One of the reasons for excess stock and losses, said Electus equity analyst Damon Buss was Mr Price’s decision to shift to “direct sourcing”, instead of using suppliers. This means when they get fashion calls wrong they are left with the excess stock.
He said previously they used local suppliers who they could return non-selling clothing to.
There is also always a risk in SA that buyers predict fashion trends incorrectly because they order from China five or six months in advance. Buss said: “The second issue for local retailers is the limited local manufacturing most have, hence they don’t have the ability to quickly respond to the trends that are working.”
By contrast, TFG is using local factories in the Cape to get popular sellers back on shelves within 46 days, its CEO Graham Choice told Business Day recently.
Buss said TFG “are the best placed in SA given they have their own manufacturing facilities in SA and have been shifting to a quick response model over the past few years”.
Pick said investors were also pleased that Mr Price managed their costs quite well, which made up for huge discounts on clothing sales. Their other brands exceeded expectations a bit. Pick said investors were pleased that Mr Price said explicitly it would not invest offshore.
“They have a strong balance sheet and want to grow. There has been a trend for SA retailers to go and buy offshore because of limited growth locally. On the whole it has proven to be a bad investment,” she said.
Woolworths’ purchase of Australian clothing retailer David Jones was a huge failure that resulted in huge write-offs while Truworths is struggling with its UK shoe retailer Office.