Further strategic progress, underpinned by strong financial position
The fast-growing pan-European variety discount retailer, Pepco Group, owner of the PEPCO and Dealz brands in Europe and Poundland in the United Kingdom (UK), today reports a summary of its interim results for the six months to the end of March 2020.
Pre-Covid-19 Performance – 5 Months to February 2020
- Group revenue increased 14.4% driven by continued expansion of the PEPCO brand in Central Europe (CE)
- Positive like-for-like (LFL) revenue growth in all brands including PEPCO at 8.1% and Poundland & Dealz at 2.2%
- PBT of €116m represents 21.8% year-on-year growth reflecting the benefit of continued cost leverage
Six Months to March 2020
- Revenue growth of 9.7% from space expansion in PEPCO & Dealz brands plus positive LFL growth
- PBT of €89m reflects Covid-19 (Covid) impact in March with significantly reduced store trading footprint and footfall
- Group balance sheet remains strong with net debt of €478m, representing 1.5x last twelve months EBITDA
- Revenue returning to pre-Covid levels with 99% of group stores now trading, although LFLs remain negative
- The Group’s financial position remains strong with positive cash resources in excess of €400m at 13th June 2020
- Store opening programme continued, delivering strong returns on invested capital
- 150 net new stores opened in the period with PEPCO opening stores in 10 of its 11 trading territories
- Expansion of Dealz brand continued in Poland and Spain; stores trading at the end of March increased 60% to 85
- Closing store portfolio of 2,844 (FY19: 2473) represents a year on year increase of 15.0%
- Operating cost reduction continues in Poundland led by successful lease renegotiations in 76 stores
Commenting on the results, Andy Bond, CEO Pepco Group, said:
“It is pleasing to report continued strong operational, strategic and financial progress made by all parts of the Pepco Group before the impact of Covid. We continued our store expansion programme, delivered compelling like-for-like sales growth and converted sales to profit, while at the same time investing in infrastructure and maintaining our price leadership position within the European discount variety retailing sector.
When Covid impacted, the Group reacted quickly, protecting both our teams throughout the supply chain and our customers in our stores while protecting our cash position. Our actions ensured we had sufficient liquidity to operate through this wave of the virus but also by, for example, maintaining our store expansion programme, leave us positioned strongly to thrive once we are through this period of reduced consumer demand. All of this was delivered while maintaining high levels of morale among colleagues and ensuring other stakeholders, such as our suppliers, were treated with respect and fairness when negotiating new arrangements.
Personally, and on behalf of the Board, I would like to thank every colleague across the Pepco Group who have worked tirelessly and shown enormous commitment to ensure that we continued to serve our customers in this particularly challenging period.
Looking forward, the consumer outlook remains uncertain and our plans reflect our expectation of a ‘new normal’ trading environment once we all emerge from the Covid virus. However, it is likely that consumer demand for discount retailing will increase in a period of prolonged economic uncertainty and we are extremely well placed to take advantage of this trend. We remain confident that we have the vision, the strategy and the business model to continue to deliver attractive long-term sales and profit growth.”
Our key strategic priorities delivered further strong progress, leaving us well positioned to continue to drive future growth in line with our ambition to become Europe’s largest variety discount retailer.
We maintained our store expansion programme for both the PEPCO and Dealz brands, ending the period with the Group trading from 2,844 stores, an increase of 15.0%, having opened 371 new stores in the last 12 months. PEPCO opened 126 new stores in the period with new stores opened in 10 of our 11 current territories. In addition, PEPCO upsized or relocated a further 23 stores to better represent its enhanced and expanded customer offer. Reflecting the improving economics of Dealz stores, its disciplined store roll-out continued with 32 stores opened in total, increasing the portfolio to 85, with 11 stores opening in Spain and 21 in Poland.
Poundland continued to progress its strategy to reduce operating costs, particularly store rent where a further 76 store leases were renegotiated successfully in the period with rent reductions continuing to be ahead of our 25% expectation, while enhancing the customer proposition. The period saw the successful introduction of an expanded multi-price offer in the three core categories of grocery, household and health and beauty, and the trial of a chilled and frozen offer in 30 stores. The results of each of these developments were encouraging with further multi-price categories and chilled and frozen stores to be added in the second half.
Delivering our long-term growth ambition demands continued investment in high-quality infrastructure. In the period, we completed the construction of PEPCO’s new distribution centre (DC) in Hungary, which is now fully operational. While now delayed due to the impact of Covid, the implementation of Oracle as the Group’s ERP system was, until then, progressing positively and in line with plan.
Group-wide financial performance remained strong in the five-month period to the end of February 2020, immediately prior to the impact of Covid on the Group.
Group revenue expanded by 14.0% from a combination of continued new store expansion, with 15.2% more stores trading at the end of February 2020 versus the prior year, and strong LFL growth of 5.0%. LFL trajectory improved in both PEPCO and Poundland versus that achieved in the first quarter. PEPCO LFL remained strong with cumulative growth of 8.1% (Q1: 6.6%).
Poundland & Dealz’s cumulative LFL growth of 2.2% (Q1: 1.3%), achieved in what remained a challenging retail market, benefitted from increased average transaction value driven by the recently introduced multi-price offer referred to above together with continued strong growth in the PEP&CO branded clothing category.
Group EBIT of €139m represented growth of 16.0%. PEPCO’s EBIT growth remained strong at 14.0% with the discount to revenue growth reflecting the impact of distribution inefficiencies, totalling c.€8m, being incurred in the period before the new Hungarian DC came into operation, together with ongoing investment in the infrastructure within PEPCO to support its future growth ambitions. In the period, this investment included further roll-out of SAP HR to improve its people and payroll practices, and increases to central headcount, particularly in Supply, IT and HR. EBIT growth of 15.9% in Poundland reflected the benefit of positive LFL revenue and its continued progress in reducing its operating cost base outlined above.
Immediate Impact & Management Actions
Covid impacted all brands within the Group with governmental restrictions being introduced across CE from mid-March, within Spain from 15th March, the UK from 23rd March and Ireland from 27th March.
As it did not qualify as a retailer of essential products, PEPCO was our most impacted brand. In the closing week of the quarter to the end of March, PEPCO traded from 856 (44%) of its 1,930 store footprint with the entire portfolio closed in seven countries including Czechia, Slovakia and Romania (Total: 581 stores). Trading in Poland was limited to stores outside of shopping malls while stores in Hungary were only permitted to trade between 9am and 3pm each day.
These restrictions, combined with the need for social distancing across all markets and the reluctance of some customers to venture out of their homes, meant PEPCO traded for a four-week period immediately post lockdown at c.15% of its expected sales levels.
Poundland qualifies as an “essentials” retailer and consequently experienced an initial benefit from customer stockpiling of cleaning, healthcare and food products. However, the Covid lockdown led to the temporary closure of 130 stores and the remaining c.700 stores traded through significantly reduced visitor numbers at c.60% of expected sales levels for a period of four weeks.
Recognising the significant and potentially prolonged impact on Group revenue, in addition to drawing committed bank facilities totalling €53m, immediate action was taken to reduce forward inventory commitments with cancellations and deferrals of c. €300m achieved. The monthly operating cost requirement of the business was also reduced by c.40% through appropriate reductions in discretionary expenditure and access to available government support including business rates in the UK and the Job Retention Scheme and equivalent support available in Poland and Romania.
Reflecting the strength of the Group’s cash position and the cash generative quality of the business, no reductions were made to planned capital expenditure on new or relocated stores and we remain confident of opening over 300 stores across the Group in the full financial year. However, we have delayed the opening of our new stores in Italy but still intend to launch a small trial in this exciting market opportunity in the Autumn and anticipate trading from up to 10 stores by the end of 2020.
Throughout the lockdown, we went beyond government guidelines and invested to ensure the health and safety of our colleagues and customers. We also supported our communities; Poundland rolled out Buy One Give One schemes matching in-store purchases with donations for hospitals, care homes, nurses and other key workers, and PEPCO delivered thousands of essential packages to care homes and children’s hospitals.
The significant trading constraints outlined above remained in place throughout April, before easing through May as stores re-opened across Central Europe with the Group trading from 2,880 of its 2,913 stores on 21st June. From its low point in April, absolute revenue levels increased week on week through this period to levels above our initial post-Covid expectations, though below normal levels, as our customers remain reticent about visiting busy locations, including retail stores. Our financial and operational planning is based upon revenue remaining below historical norms for the remainder of the calendar year.
From the actions described above, the Group retains significant cash resources, totalling in excess of €400m at 13th June 2020. In addition, the Group is in advanced discussions to secure further committed cash facilities of €100m.
Half Year to 31st March 2020
The Group delivered revenue growth of 9.7% and generated EBIT of €116m despite the negative Covid impact in the last few weeks of the period. Revenue growth was driven by the ongoing expansion of the Group’s PEPCO and Dealz formats and by continued LFL growth of 0.7%. In the immediate aftermath of lockdown, during the last few weeks of the period, EBIT losses were incurred due to a significant reduction in revenue, a switch in the revenue mix towards lower gross margin categories and the short delay before cost reduction actions crystallised.
- All financial results are unaudited and stated on a pre-IFRS16 basis
- All foreign currency revenues and costs are translated at the average rate for the month in which they are made
- Year-on-year revenue, LFL revenue, EBIT and PBT growth are stated on a constant currency basis
- LFL revenue growth is defined as year-on-year revenue growth for stores open beyond their trading anniversary with stores relocated in a catchment and/or upsized included within LFLs provided the enlarged store footprint is less than 50% bigger than the existing store
- The impact of IFRS16 on the Group was to reduce first half PBT by €2m before the currency impact (FX). There was a further FX reduction of €9m arising on the revaluation of the lease liability at 31st March. First half year PBT on an IFRS16 basis was therefore €78m
- EBIT and PBT are stated on an underlying basis, excluding exceptional costs associated with the potential separation of Pepco Group from the Steinhoff Group