Departure of CFO ‘inevitable’ as Mr Price counts its costs

Just a month after Mr Price reported a financial bruising, the retail group has announced the departure of its chief financial officer, Mark Stirton.

Mr Price did not reveal why Stirton stepped down, saying only that the decision was made on mutually agreed terms and that he will remain with the group until March 2024 “to facilitate a comprehensive handover of his duties”. 

Stirton served in the position for almost five years. During his tenure, which was punctuated by an economy-bashing pandemic and capped off by a cost-of-living crisis, the group’s share price fell 32%. 

In the year ended 31 March 2023 Stirton, as well as Mr Price chief executive Mark Blair, saw significant declines in their remuneration, with the retailer reporting that it failed to meet its financial objectives.

Ron Klipen, portfolio manager at Cratos Asset Management, said Stirton’s departure was not surprising given Mr Price’s failure to meet market expectations. The change in senior management signals that the group faces major difficulties both on the macro front and from a sectoral point of view, he said.

The retailer also looks to be losing market share in some of its operations. “You’ve got competition entering the market. Look at Pick n Pay clothing. Though it’s still small, competitors like that appear to be taking some market share away from Mr Price in apparel.”  

Major competitors, such as the Pepkor Group, have also reported major headwinds, Klipen noted. “Against the backdrop of  weak spending, as a result of financially stretched consumers, priority spend has been towards food and beverages, resulting in reduced spend on apparel. So management changes are inevitable.”

The apparel market has proven hard to crack, with Woolworths having a difficult time getting its clothing business right. The Foschini Group’s share price is only marginally higher than it was a decade ago, while Truworths’ share price has slipped almost 15% in that period.

Meanwhile, smaller competitors have emerged. In the 2023 financial year, Pick n Pay clothing opened 59 standalone stores, after having experienced somewhat of a resurgence. Earlier this year, Shoprite opened its first standalone clothing store under its new fashion brand, UNIQ.

“There appears to be a change in the market for apparel, with more and more competition, with consumer spending really constrained on the back of a very low growth in the South African economy,” Klipen said.

In Mr Price’s integrated report, released at the end of June, Stirton noted that South Africa’s retail landscape over the financial year was fiercely contested amid tumultuous economic conditions. The landscape, the report later noted, has changed fundamentally since the pandemic, because competition has intensified and digital adoption has increased.

“New apparel and homeware retail challengers emerged, combined with the resurgence of older retail names who carry strong brand equity in the hearts and minds of South African consumers,” Stirton said.

Mr Price reported a disappointing 5.4% increase in earnings before interest, taxes, depreciation and amortisation, which it attributed to the effect of load-shedding. Headline earnings per share dropped by 6%. 

Mr Price’s financial performance may have been worse were it not for its acquisition of fashion and footwear retailer Studio 88, which, according to Stirton, buoyed the business during the second half of the year.

He said retail conditions are expected to remain challenging, particularly for the first half of the 2024 financial year. He added that the group’s current performance is regarded as transitory, not structural.

Off the back of a considerably lower inflation print in June, the South African Reserve Bank’s monetary policy committee held the prime lending rate at 11.75% following 10 consecutive hikes. Despite this change in fate, some analysts believe there will still be a long wait before interest rates begin to fall from a 14-year high.

With consumer confidence hitting historic lows, retailers have struggled. In May, retail trade sales fell further than expected, by 1.4% year-on-year, following April’s 1.8% slide. May was marked by a painful 50 basis point interest rate hike, which brought the cost of borrowing into the restrictive terrain in which it remains.

In a more recent trading update, covering the 13 weeks ended 1 July 2023, Mr Price reported increased momentum in its retail sales, largely as a result of Studio 88’s inclusion. 

But the trading update noted that this growth will not directly translate into gross and operating profit growth, because of higher markdowns and the fact that Studio 88 has a lower margin structure than the core business. Higher markdowns suggest Mr Price has been off the mark with its fashion decisions.

The trading update suggested that the retail landscape will continue to be tough, noting that South Africa’s growth will probably remain muted for the remainder of 2023. Disposable income, it noted, is only anticipated to meaningfully improve in 2024, as inflation eases further and interest rates retreat.

Prior to it falling on tough times, Mr Price made people a lot of money, said Makwe Masilela, of Makwe Fund Managers. In 2018, the group’s share price came close to R300, nearly double its current value.

Masilela agreed that increased competition has made it far more difficult for Mr Price to maintain a solid footing. Like other South African apparel retailers, Mr Price has also not always got its fashion mix quite right, he added.

That said, as economic strain starts to subside — and as the group’s broader reach through Studio 88 and Yuppiechef pays off — Mr Price could forge a path towards better growth, Masilela noted.

Although economic conditions have had a big part in the lacklustre performance of clothing retailers, management blunders have also had an effect. “Some of the troubles are the result of management decisions — whether it be that they have overspent buying into something new, or taking too much time to expand, or expanding in the wrong way,” Masilela said.

“Generally they have done okay. But, at the end of the day, there are people who are making the decisions …. The likes of Mr Price, Woolworths and Foschini have people making decisions. So it is always important, when you are looking at a company, to also scrutinise their management.”