Costs give Mr Price a headache

• Group says it cannot simply pass on the costs to customers as it has to keep prices low despite rising cotton prices and soaring shipping rates

Mr Price has warned of rising input costs, even as it kept prices down, growing market share in its clothing division for 19 months in a row. The group, which owns Mr Price Home, Miladys and Yuppie Chef, released a healthy set of half-year results with revenue up 15.7%.

Mr Price has warned of rising input costs, even as it kept prices down, growing market share in its clothing division for 19 months in a row.

The group, which owns Mr Price Home, Miladys and Yuppie Chef, released a healthy set of half-year results, with revenue up 15.7% compared with the first half of its 2020 year before lockdown.

Mr Price CEO Mark Blair warned in a webinar of higher input costs and painted a cautious outlook, amid global supply chain disruptions and local factors such as the worst loadshedding on record.

Global cotton prices reached 10-year highs in October and shipping rates have been skyhigh since the pandemic, due to disruptions, container shortages and rising oil prices.

To date import costs have, in part, been offset by rand strength.

He said it was not simply a case of passing these costs on to consumers, as the company had to strike a delicate balance between passing costs on to protect profit margins, while also keeping prices low.

“Inflation isn’t something that you just dump in on a formula basis and add to the selling price. We can’t take these on the chin. But, obviously, we have to protect certain key price points,” he said, acknowledging consumers could not absorb all increases.

The company expects mid single-digit price inflation in its main brands in the next half.

Last week, Pepkor, owner of Ackermans, Pep, Incredible Connection and Bradlows, warned it would increase product prices from July next year in response to rising shipping costs.

Mr Price and other retailers are not alone in managing high costs that they cannot always pass on to the price-sensitive consumer.

Data from Stats SA on Thursday showed producer price inflation for final manufactured goods rose 8.1% year on year in October, the highest level since February 2016 — and up from September’s 7.8%.

To date, Mr Price has kept prices low, and in some cases cut profit margins, to keep prices in reach of the customer, Blair said.

The group’s margins also came under pressure from inventory write-offs of R151.5m from the July civil unrest, with it estimating the effect on lost sales due to closed and damaged stores at R320m.

Mr Price Apparel, however, its largest division, has gained market share for 19 consecutive months, with the group attributing this to the fact that its clothes offer both value and are more fashionable than discount competitors, highlighting the defensive nature of its business.

Headline earnings rose just over a third to R1.16bn, allowing it to raise its dividend 34.4% to 282.4c — about a R724m payout.

Supply chain disruptions and the need to create clothes more quickly in response to what trends are selling are resulting in many retailers producing more goods locally, with some, like TFG, which owns of Markham, Foschini and Totalsports, owning many of their own factories.

Blair said Mr Price preferred to have “strong relationships” with local suppliers but avoid the high costs of investing in manufacturing infrastructure. It buys almost 40% of its clothing locally.

Blair said: “We’re trying to support the SA economy. We also have to support the consumer and the demand for the type of product they want.”

Having external suppliers, he said, gives them a strategic advantage and a lot of agility.

“I don’t have to invest in manufacturing infrastructure at all, which means that we don’t really have to worry about some of the potential risks that come with that, such as electricity disruptions, input costs and labour issues.”

While not having to deal with the issues themselves, he said they did consider their suppliers’ concerns.

Mr Price is well stocked for the holiday season and has negotiated good shipping rates until mid-June, even though these have been very high.

It has a R3.9bn cash pile, even after recently buying Power Fashion and Yuppiechef.

Blair said it often investigated acquisition but the strength in this area was knowing when not to invest in a company that did not fit with the group’s culture.

There has been speculation that Mr Price was the party that made a recent bid for investment company Long4Life, which owns Sorbet, Sportsmans Warehouse and Outdoor Warehouse.

Blair would say only that Mr Price was looking at an acquisition in the niche apparel space, and possibly in a new sector.

Civil unrest in KwaZulu-Natal and parts of Gauteng in July resulted in the looting of 111 of the group’s 1,592 stores, or about 7%. Most affected was its discount chain Power Fashion.

Mr Price said it expects 96 of the 111 looted stores to be operational by the end of November.

The remaining 15 stores should be opened during its 2023 year, which begins in April, due to extensive structural damage.

Mr Price shares rose the most in nearly two months on Thursday, up 3.95% to R 196.