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Pepkor's "defensive" positioning in the value and discount markets of South Africa and Africa proved to be a competitive advantage in an environment where high unemployment and slow economic growth constrained consumer spending, says its CEO, Leon Lourens.
This defensive business model is based on the fact that Pepkor operates more than 15 household brands, including Pep Stores, Ackermans, Incredible Connection, Russells and Shoe City, Lourens told Fin24 on Monday.
Pepkor, which occupies a total of 2.43 million m² of retail space and has 56 100 employees, was previously known as Steinhoff Africa Retail. It changed its name to Pepkor in August 2018 to distance itself from Steinhoff International, which has been under a cloud since December 2017 when its CEO Markus Jooste abruptly resigned amid an accounting scandal.
"Not one brand in the Pepkor group lost market share and we feel there is even more market share to gain," said Lourens, referring to the tough economic climate.
In his view, Pepkor delivered a strong set of results for the financial year up to September 30, despite a very difficult trading environment. The group generated R70bn in turnover, reflecting 9% growth on the prior year and increased operating profit by 15.6% to R7bn.
Headline earnings per share increased by 14.5% to 96.8 cents. According to Pepkor, this was significantly affected by IFRS 9 provisions not included in the prior year. These require a higher level of debtor provisioning.
On a normalised basis, headline earnings per share increased by 8.3% to 107.3 cents.
A dividend of 20.9 cents per share was declared.
Satisfied
"The fact that we could grow revenue by 9% is commendable in the current macro-economic environment. I am satisfied with what we experienced during the year. We have a defensive model which works during the toughest times," Lourens told Fin24.
"The high unemployment rate in SA affects many in our target market. Consumers have less money to spend. Therefore, we take our responsibility seriously to supply products they can afford. That is what we are focusing on."
The clothing and general merchandise segment, which includes PEP, Ackermans, PEP Africa and Speciality stores contributed 64.6% to group revenue. This segment grew market share and saw revenue grow of 6.5% to R45bn.
Expanding footprint
During the financial year, the group opened 338 new stores, expanding the group's overall footprint to 5 415 stores.
Financial services transactions, including bill payments and money transfers, increased by 41%, with 67 million of these transactions completed during the year.
The furniture, appliance and electronics segment (JD Group), which includes brands such as Russells, Bradlows and HiFi Corporation, grew revenue by 8.3% to R9.3bn. It restored the profitability in what Lourens considers to be a tough segment.
The new accounting standard, IFRS 9, which requires increased provision levels based on expected credit losses, however, resulted in an operating loss for this division of R85m. Management continues to focus on operational initiatives to improve sales performance.
The FinTech segment increased revenue by 43.9% to R7.2bn, while operating profit increased to R483m. The FLASH business completes an average of 3.2 million daily transactions in the informal market and the performance of Capfin was supported by appealing to a broader range of customers through its digital channels, according to Lourens.
Rest of Africa
Despite difficult circumstances, Lourens says he is satisfied with Pepkor's performance in the rest of Africa - where it has been operating since 1995. PEP Africa contributed 3.2% to group revenue.
Pepkor, has, however, decided to exit Zimbabwe, according to Lourens, purely because of the macro economic factors at play there. These include the currency devaluation.
"If things recover in Zimbabwe, we could always move back in again," he said.
"As for the rest of Africa, at the moment we are consolidating more than we are expanding. We learnt that there are times in Africa you speed up and times to slow down. We think it is now time to slow down."
Outlook
Lourens says that, going forward, it is very important to keep doing what Pepkor does best, namely, to ensure it offers value propositions for its customers.
"We are cautiously optimistic about the future and will look for opportunities despite challenging circumstances in the retail sector," he said. Asked about Pepkor's 'Steinhoff link', Lourens responded that Steinhoff is a big shareholder, but from an operational point of view, it has no impact or influence on Pepkor.
Steinhoff bought Pepkor, which included what was to become Pepco and Poundland, in 2015.
"Our teams continue to identify opportunities for growth and expansion such as leveraging our footprint, opening more new stores, fresh retail formats and innovative channels to serve customers," Lourens concluded.
'Boring is good'
According to Pepkor chair Jayendra Naidoo, in March load shedding resulted in 10% of trading hours being wiped out.
"The board sees it as solid results given the circumstances, actually presenting a higher quality of earnings," Naidoo said. "Despite the economic environment, we continue to invest in logistics centres and distribution chains, because we remain a growth orientated company."
Regarding governance, he said changes at board level resulted in the majority of the directors now being independent. "The risks we had to deal with in the past will not be mentioned as that was at a shareholder level. Maybe we can be seen as 'boring' now, but 'boring' is good as we can now do business."
