Mr. Price trading update surprises to the upside

This morning we received a trading update from Mr Price which looked very good at the face.


"Basic earnings per share ("EPS") and headline earnings per share ("HEPS") of Mr Price for the 52 weeks ended 30 March 2013, the results of which are expected to be released on SENS before the end of May 2013, are likely to be higher than the previous corresponding period by more than 20%. A range cannot be accurately estimated at this stage and shareholders are advised that a further trading statement will be issued in due course to provide earnings forecast ranges for EPS and HEPS as required by the JSE Listings Requirements."


Great, but remember that slow sales update they released at the beginning of the year? It said that sales growth for the third quarter had only grown 10%, 4.4% on a same store basis. They did however mention that the fourth quarter was starting off a lot better and that gross profit margins had increased. But how have they managed such strong earnings growth if sales are slowing? Let's take a deeper look.

An important factor to consider is how well the first half of the year went for the company. Headline earnings per share for the first six months of the year were up 35%. This was achieved on the back of a 13.9% growth in sales. The difference between the two is because of better tax rates, increase in margin, the extra return of their cash reserves and interest earned from credit sales. The last factor is the most significant for Mr Price in my opinion. A company that does most of its sales through cash but is growing its credit book can grow earnings much faster than sales. It is a huge benefit for being a cash retailer opposed to the likes of Truworths who already have a massive book. Cashbuild also sit in this advantageous position.


Going back to the update, with 35% earnings growth in the first half, anything less than 20% for the full year would mean a shocking second half. I know this message is coming across slightly negative but I wouldn't look too much into this announcement until further details are released. At least it is open ended to the upside. What it has reminded me of however is the fact that cash retailers have a great fullback in the form of credit sales if the management feel the time is right. Coincidently Mr Price attributed their slow third quarter to the fact that they had purposefully slowed their credit sales. It sits in their hands.