Cash-strapped consumers drive Pepkor’s low-cost retail profits up… and up

29 May 2022

Pepkor CEO Leon Lourens says the 19.1% growth in operating profit to R5.7-billion and an 80.5% increase in headline earnings over the past two years point to the group’s defensive business model.

Pepkor, which owns household brands Pep, Ackermans, Tekkie Town, The Building Company and Incredible Connection, spent R88-million in the six months to end March, rebuilding stores that were damaged or destroyed in last July’s looting. The retailer was one of the worst affected by the riots, taking hits on 549 stores.

Riaan Hanekom, Pepkor’s chief financial officer, however, notes that that capital expenditure of R88-million was settled as part of a Sasria insurance claim. The company has seen a massive growth spurt and recovery in the six months to end March, with R4.1-billion cash generation.

Total investment in Brazilian retailer Avenida was R2.8-billion, giving Pepkor an 87% stake. Pepkor’s capital investment is getting back to pre-Covid levels, at 2.1% of revenue, of which R660-million was spent on stores and R201-million on a distribution centre in Hammarsdale, KwaZulu-Natal. The centre is expected to be completed in the next six to eight months. In the past two years, the company has held off slightly on capex spending to maintain a stronger cash reserve.

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New stores

Chief executive Leon Lourens says the 19.1% growth in operating profit to R5.7-billion and an 80.5% increase in headline earnings over the past two years point to the group’s defensive business model. With a retail footprint of more than 5,500 stores on the continent, 25% of Pep stores trade where there are no other clothing stores.

“We opened 144 new stores and we’re on track to surpass this number in the second half of the year with an additional 205 new stores. Taking a three-year view, Pepkor opened 830 new stores, which also plays a big role in sustaining job creation in South Africa. We strongly believe this illustrates the organic growth opportunities that still exist,” Lourens says.

The gap in price between a basket of goods in Pep compared with other retailers is 26%. The company’s Paxi courier service is now delivering 11,000 parcels a day and he sees a “lot of opportunity to expand”.

The clothing and general merchandise segment was the largest contributor to group revenue at 65.7%. In the furniture, appliances and electronics category, sales increased by 8.1% in the six-month period and more than 25.8% over a two-year period.

Concern

Lourens noted that global supply chain issues persisted during the period, driven by numerous global events and an overhang from the Covid-19 pandemic. Severe flooding in KwaZulu-Natal in April extensively damaged one of Pep’s distribution centres. Although contingency plans were executed to redirect stock flows through Pep’s unaffected distribution facilities in Johannesburg and Cape Town, service levels were affected.

Looking ahead, Lourens says management is concerned about how rising inflation and increasing levels of unemployment will further affect consumers.

“While global supply chain uncertainties persist, shipping costs appear to have stabilised and may trend downwards. As a group, we’re optimistic about the rest of the year as trade continues to normalise,” he says. BM/DM

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New stores

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