- The lockdown saw Mr Price's sales in April drop by 89.1%.
- Despite operational disruptions, the group is still bullish about its growth prospects.
- It intends to embark on a capital raise of 10% of its ordinary shares, which could finance acquisitions and brand expansions.
The Covid-19 lockdown created an "unprecedented disruption" in operations for retailer Mr Price, with its earnings taking a knock. However, the retailer is quite bullish about future growth prospects and intends to embark on a capital raise of up to 10% of the company's ordinary shares to bolster its financial flexibility.
The Durban-based retailer on Thursday said it was not yet possible to quantify the economic impact of the Covid-19 on its businesses, as potential disruptions and uncertainty are still persistent challenges. But amid the uncertainty it is still looking to expand.
During April, when all its stores were closed, Mr Price sales dropped by a steep 89.1%. It's annual results to end-March show headline earnings per share falling 10.4%.
Despite the impact of the pandemic, "...plans are well advanced in identifying organic growth opportunities, which may be augmented by acquisitions," Mr Price said.
"The board and management are of the view that anticipated market conditions will allow strong companies to capitalise on growth opportunities whilst maintaining financial flexibility. The capital raise remains subject to shareholder approval.
But what opportunities could Mr Price possibly find during a time when the world economy is in recession?
Retail analyst Syd Vianello explained that the group is really intent on creating financial flexibility. This could be leveraged off for growth either by acquisition or a brand extension. Expanding the brand into other areas does not necessarily have to be limited to expanding existing brands or stores.
"I think they are looking at broadening the brand into extensions- into other product categories. They have got such a powerful brand," Vianello said. There are so many possibilities for Mr Price to expand, he added. He even toyed with examples of a Mr Price Gyms or Mr Price Petrol Station as hypothetical options.
"The point is when you have got such a powerful brand, you can do brand extensions. And they need capital to do that," Vianello said.
Woolworths is another major clothing retailer which in the past diversified its product categories to include food. The food division particularly has been a consistent source of growing revenue streams for the retailer, whose clothing divisions have been rocked by economic challenges.
In terms of acquisitions, Mr Price has said that the intention of its capital raise is not to acquire Jet, a subsidiary of struggling retailer Edcon. A business rescue process for Edcon is currently underway, creditors this week voted in favour of a plan.
Unable to trade for five weeks while the full lockdown was enforced, the group's cash reserves declined by R2 billion. These levels have since bounced back, with the easing of lockdown restrictions, leaving the retailer in a financially sound position to support current operations, according to its report.
Vianello also noted that despite the drop in cash, Mr Price has managed to build up cash again. This means that the group is not in dire need to raise more money. The business did not enter the pandemic with debt, like counterparts Pepkor and Foschini, for example, he pointed out.
"They do not need to raise the money. There is no need to expand the business existing either. But to look to brand extension or potentially an acquisition, then they believe they need the capital," Vianello said.
Mr Price is embarking on a R300 million expense reduction, as part of a cash preservation initiative, this includes a 23% reduction in budgeted capex for the 2021 financial year. Furthermore, no final dividend was declared as part of its cash preservation strategy.
Pent up demand
The easing of lockdown restrictions from 1 May saw retail sales pick up by 12% (from 1 May to 20 June). Mr Price attributes this to pent up consumer demand. "Pent up demand for apparel in May shifted to homewares in June, as lockdown restrictions on merchandise permitted to be sold were fully lifted," it said.
Vianello said that when the reality of retrenchments sets in or the lack of salary increases, then "things will not be the same" in terms of consumer demand.
Online sales in particular have grown strongly, by 90.1% over the period. "It is still to be seen whether this is a permanent step change in consumer behaviour," the group noted. Vianello said that online retail has been a growing trend even before Covid-19. He said it is also possible for the group to use the capital raise to further develop this offering.