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The Mr Price Group is a self-titled “fashion value” retailer, offering apparel, homeware and sportswear predominantly to the South African retail market.
The business consists of outlet brands MRP, Miladys, MRP Sport, MRP Home and Sheet Street. In terms of sales MRP accounts for 59% of the group’s total sales, MRP Home 19%, Sheet Street 8%, Miladys 8% and MRP Sport 6% thereof.
The group now boasts 1 200 stores across its divisions of which 108 (9%) are outside of South Africa.
Fundamentals
The share is priced for growth on a current price-to-earnings ratio (P/E) of 18.5 times (forward P/E 17). The company has returned a historical dividend yield of 3.35% and produced an astounding and market-leading return on equity (ROE) of 47% and return on assets (ROA) of 47.91%.
A market capitalisation in excess of R50bn sees the company entrenched in blue-chip territory after having been a mid-cap counter for a number of years.
Results
In what has been a difficult economic climate, the group has managed to post another robust set of full-year results for the period ending 31 March 2016.
Mr Price has managed to increase floor space through net increase of 31 stores (45 opened, 14 closed) while expanding 26 of its existing stores. Revenue increased by 8% over the period while adjusted operating profit increased by 15% with a higher operating margin of 18.2%.
Headline earnings per share increased by 13% despite a relatively soft first half for 2016, and the company has managed to produce double-digit headline earnings growth every year for more than five years.
Cash sales increased over the period by 9%, while credit sales grew by a marginal 2% in the 2016 financial year. The soft credit sales growth can in part be attributed to the more stringent regulations employed in this department, but unlike most of the group’s competitors, Mr Price relies heavily on cash sales, which amount to around 80% of total sales.
Strong cash sales and cash flow generation remain among one of the reasons the Mr Price Group might be able to fair better than its credit retailing counterparts should a rising interest rate and more challenging economic environment ensue going forward. While credit sales in general are expected to moderate at current lower levels of growth, the group’s diminished dependency in this aspect of sales perhaps stands it in better stead than its peers.
The investment case
The ROE figure nearing 50% shows an envious level of profitability for the group relative to shareholder equity. This is furthered by Mr Price’s ability to generate strong cash flows as the company continues to prove its inherent ability to sell fashionable items at well-received pricing points. The company’s management has continued to show its operationally efficient prowess as cost controls have consistently been maintained while volumes have consistently been increasing.
The group has also started rolling out its business model in Australia, which provides both a potential for growth and risk to the business. The measured approach with only two stores launched already and a MRP Home-type store coming soon suggests that the capex spend should be marginal while the group tests its models in the new jurisdiction.
While the dependence on the South African business remains the most significant to group earnings, we feel that the Mr Price Group’s strategy, which sees it targeting the middle LSMs, is proving robust. This is helping the company through a difficult phase in the economic and business cycle. The fact that the group is not heavily dependent on credit sales in a rising interest rate environment perhaps adds an element of safety to earnings yet to be realised.
Shaun Murison is a market analyst at IG.
This article originally appeared in the 30 June edition of finweek. Buy and download the magazine here.
