Investors Report: Mr. Price Group The Mr. Price Group is a fast growing retail group that has caught the eye of many investors not only in South Africa but across Africa as a whole. However, its status does not always necessarily mean that it is a good quality investment.
Annual Financial Statements are designed to aid investors to make informed decisions about their investment. In this report, I will analyze the Mr. Price Group Annual Financial Statements for the year ended March 2011.The main financial statements I will analyze are Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity and the Statement of Cash Flows to get useful ratios. Financial Statements are numbers that need to be interpreted into useful information that will highlight the Mr.
Price’s financial strengths and areas of financial uncertainties. Mainly we seek to find how much debt there is, how much is the group actually making. However, in order to give a robust analysis we need to look beyond the statements and into the internal and external environment for threats and potential gains.A brief overview at Mr. Price Group as a whole.
The Group is a retail business consisting of the Apparel (Mr. Price Apparel, Mr. Price Sport ;amp; Milady’s) and the Home Chains (Mr. Price Home & Sheet Street). Its operations are in Botswana, Namibia, Lesotho and Swaziland. The entity celebrated its 25th year anniversary in 2011 since it started in 1985.
The Apparel chain consists mainly of the entity has a well defined mission statement, “To add value to our customers live and worth to our partners whilst caring for the community and environment. The Group aims to maintain sustainability which is a core factor known as ‘going concern’ when analyzing an entity for investing. The entity has the vision statement, ‘To be a top performing international retailer to keep it aligned with its long term prosperity goal. They claim passion to be engine that drives them which created by the golden rule of respect, trust, communication and recognition between employers and employees, customers and suppliers. Mr.
Price focuses on targeting trendy 16-24 year olds throughout Africa as well as anyone looking to add a hint of modern design to their home.It looks to meet its customer needs and to enhance the brand thus creating a greater market share. Mr. Price employs over 20 000 employees and a steering towards employment equity with 91. 6% black employees and 65. 2% being females.
It gets its staff motivated as well keeping them in line the entity’s vision through the Mr. Price Group Employees Share Investment Trust(facilitates purchase of share) and The Red Cap Foundation(skills development). It also recognizes and rewards employees on exceptional contributions to the company through cash incentives and awards such as the Mr.Price Group Medallion and the Running man award for long service Assessment of Management The Board of Directors is in compliance with the King III principles and practices. The Chairman of the Board is Mr.
AE McAuthur who was the former CEO his independence is questionable but the Group highlights its reasons for not complying with prescribed guidelines It has the following Committees; The Audit Committee, The Risk and Sustainability Committee, The Remunerations and Audit Committee.The standard of accountability to investors is important and thus it is important to have independent directors whose backgrounds have bee reviewed to understand them better. The Board composition of independent directors satisfies this requirement. The current CEO of Mr. Price Group is Stuart Bird CA (SA). He has managed the core apparel chain for seven years and has been serving the Group for 17 years before his current position.
The CFO is Mark Blair CA (SA) and has served the group for the past 5 years. This is a good because the executive management is run by educated individuals.However, it can also be a risk area because the top two executives are both from the accounting stream and have a common strategic thinking path. The main question investors ask about management is whether it is keeping in line with the company’s goals and aiming at carrying the business forward. Investors look at whether management are expanding capacity, introducing new products, investing to raise margins and rationalizing underperforming area. Management has added R49 815 000 to Property, Plant and Equipment, in addition to that trading space increased by 0.
% with 52 store closures offsetting expansion and 27 new store openings. The Group has also completed country researches in Nigeria, Ghana and Angola for prospective markets to penetrate into. Management are keeping focus on its vision to become an international retailer and planning R2. 8 billion on capital expenditure over the next 7 years. The implementation of the Reggold principles has improved margins by having lower markdowns and higher stock outs as a result of having efficient merchandise planning and supply chain.However, the Home chain has been underperforming and instead of cutting down its operations management invested in improving the margins.
The investment gave a positive return with a positive increase in market share of 19. 3%, sales and other income by 29% and operating income by 29%. Nevertheless, the decisions that management makes are exposed to some degree of risk in all entities. Mr. Price Group operates on a cash policy and extents little or no credit to its customers.
This has many advantages such as strong cash flows to fund investment, it is capable of paying out large cash dividends to shareholders, it is less affected by cyclical economic changes ( in bad times customers tend to use more cash than debt and no outstanding customer debt to collect. ) This however it may be a risk area because cash operations are vulnerable to robberies and employee theft. The fact that the group wants to mitigate reliance on debt it restricts the company’s capital investments. Like all other company, Mr.Price Group is at risk with direct and indirect market risk such as primary interest rates and foreign currency rates.
It also faces credit risk from customers (Milady’s, Sheet Street and Mr. Price Money) but has a controlled risk approach and has its credit portfolio being the top performing in the industry. It has applied statistical techniques; principles form credit bureaus and application scorecards from internal data. In an aim to mitigate risk the Risk and Sustainability Committee is engaging with PriceWaterHouse Coopers in designing an enterprise-wide risk framework. Financial AnalysisRatio| 2010%| 2011%| Interpretation | 1.
Profitability | | | | Return on Net Worth| 42. 2| 32. 5| Shareholders earned 9. 7% which was due to an increase in sales as total debt decreased by R163 595 therefore does not inflate net worth. | Return on Average Shareholders’ equity | 46.
0| 35. 6| | Return on Capital Employed| 63. 6| 42. 6| Management was able to increase earnings on capital that it employed and again it is higher than the rate the entity is borrowing which is what investors are looking for| Return on operating Assets| 63. 8| 52.
4| This measures the use of assets o get earnings and it shows a positive increase of 11. 4%. Both net income and total assets increased but net income increased by a higher percentage of 52% whilst assets increased by only 2. 96%| | | | | Productivity Ratio’s| | | | Net asset %| 4. 5| 4.
5| | Gross Margin %| 41. 9| 39. 9| This ratio has increased by 2%, an acceptable change. It measures gross income as a percentage of sales. cost of sales have increased accordingly, the correct pricing strategies are being adopted and industrial competition is still more or less on the same level| Operating Margin %| 13.
| 10. 5| This ratio measures operating expenses to sales. Operating margin increased by 2. 9% which means operating expenses increased proportionately with the increased sales. | | | | | Solvency and Liquidity ratios| | | | Quick Ratio| 2.
5| 2. 2| It increased by 0. 3 and is larger than which is a good indicator as the company can rely more its currents assets other than the sale of inventory to cover current debt. It Also reflects a positive increase in current assets| Current Ratio| 1. 8| 1.
5| It has also increased by the 0. indicating that there is an increase current assets as well| Inventory Turn| 6. 6| 5. 9| The Group sold inventory as a higher rate than the previous year as its turnover increased by 1. 7. Inventory was replaced every 55 days compared to every 61 days in 2010| Total Liabilities to Shareholder equity | 0.
6| 0. 7| | | | | | Share Performance | Cents | Cents | | Headline earnings| 418. 9| 276. 9| Increased by 142 cents and have had a compounding growth of 21. 0 % in the last 5 years. A good thing for the investor| Dilute Headline| 388.
8| 263. 0| Increased by 125 cents and a compounding growth of 20. % in the last 5 years| Divedends| 252. 0| 173. 0| Dividends have increased by 79 cents since 2010 and a compounding growth of 25.
5% in the last 5 years| | | | | After my analysis of the 2011 financial I feel that Mr. Price is a good investment. However, the 2011 year might have inflated returns as there was an International event, The 2010 FIFA World Cup hosted in June 2010 that promoted sales as both locals and foreigners had the ‘spending edge’. Due to this I have also took a look at the above ratio over a five year period and it confirmed Mr.Price’s ratios above which have been on a steady incline for example sales and operating activities had by 15. 6% and 21.
5%(compound growth) respectively in the last 5years. Therefore the ratios are not once-off calculations. Mr. Price is without doubt an attractive investment that has a well-defined direction and stick to their vision. It continues to grow at an exceptional rate in its industry. Management is making sound decision about the company and is keen to see the business grow.
Investors can put their trust in management as they have the same goals.